Contributing to both Roth IRA and Traditional IRA

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inquisitive_IHB

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I've had a Roth for a few years, but had to just recently open a Traditional since my 401k from previous employer will be rolledover to IRA. In addition to the rollover, i want to contribute to the Traditional. Now, the maximum contribution for year 2008 for singles assuming qualified is $5,000 for each IRA type or both total? If i contribute $3,000 for my Roth for 2008 than i should be able to contribute $2,000 for my traditional for 2008 right? Now, if i contribute $5,000 to my Roth for 2008, can i contribute $5,000 my traditional for 2008? Thanks.
 
It's 5k total regardless of type. After rolling out your 401k, with potential losses or minimum gains based on current market, you may want to consider converting it into a ROTH to maximize future tax savings.
 
I concur. It is scary to think what taxes may look like by the time you start taking distributions on the Traditional IRA. My plan is to rollover my Traditional into a Roth over the next year or so and squeeze as much as I can while remaining under the 28% tax bracket.
 
[quote author="inquisitive" date=1239168856]I've had a Roth for a few years, but had to just recently open a Traditional since my 401k from previous employer will be rolledover to IRA. In addition to the rollover, i want to contribute to the Traditional. Now, the maximum contribution for year 2008 for singles assuming qualified is $5,000 for each IRA type or both total? If i contribute $3,000 for my Roth for 2008 than i should be able to contribute $2,000 for my traditional for 2008 right? Now, if i contribute $5,000 to my Roth for 2008, can i contribute $5,000 my traditional for 2008? Thanks.</blockquote>






Yes, you can split the IRA contributions amongst the Roth and Traditional but are limited by $5,000 in total. You have to have at least $5,000 in earned income to contribute to any IRA. Now if you were contributing to your 401k in 2008 you might not be able to deduct your contribution. <a href="http://www.irs.gov/publications/p590/ch01.html">See IRS Rules Here</a> If you can't deduct it you should do the Roth. (see income limits on Roth before you contribute) You could contribute your 2008 and 2009 contribution right now if you wish for a total of $10,000.
 
[quote author="inquisitive" date=1239168856]I've had a Roth for a few years, but had to just recently open a Traditional since my 401k from previous employer will be rolledover to IRA. In addition to the rollover, i want to contribute to the Traditional. Now, the maximum contribution for year 2008 for singles assuming qualified is $5,000 for each IRA type or both total? If i contribute $3,000 for my Roth for 2008 than i should be able to contribute $2,000 for my traditional for 2008 right? Now, if i contribute $5,000 to my Roth for 2008, can i contribute $5,000 my traditional for 2008? Thanks.</blockquote>
Maximize your ROTH IRA contributions, it's a better deal than a traditional IRA. However, the income thershold restrictions for a ROTH IRA are lower than they are for a traditional IRA. Also, there is an income thershold on the deductibility of the traditional IRA if you participate in an employer's retirement program like a 401k. As in summary, as long as you are not phased-out...contribute all of your funds into a ROTH IRA ($5,000 per year or $10,000 for tax years 2008 and 2009 if you do it before 4/15/09). Here is the pecking order of the best saving allocation



401k contributions up until your employer's matching percentage

ROTH IRA

Traditional IRA

401k contributions past your employer's matching percentage to max amount allowable

Regular savings/money market/CD
 
I like that the Roth gives me the peace of mind of knowing that if I ever have a financial emergency, I can withdraw the money I need up to my contribution amount, with ease. For those that have other retirement plans or benefits (I participate in my employer-matched 401k and I'm vested in my employer's pension plan), the Roth is a nice extra retirement option that may be helpful if true emergencies do arise (you know, like that new Range Rover you've been eyeing ;)). Of course, a retirement plan shouldn't be abused or substituted for savings/emergency accounts, but, the Roth is there if you need it. Automatic monthly contributions to the Roth out your bank account, however great or small, is a great way to put a little extra away.
 
If one can afford putting $5K in any IRA, you're probably over the income limit for tax deductible contribution, unless that doesn't matter to you.
 
I prefer to max out the 401(k) first. There a lot of sneaky phase outs to credits and deductions that increase your tax liability. By reducing your taxable income by $15K, you can get some of these back. At this level, you are not eligible for a traditional tax deductible IRA, but probably for a Roth IRA. In addition, you might get lucky and fall into a lower tax bracket as well.
 
[quote author="ocjohn" date=1240403551]I prefer to max out the 401(k) first. There a lot of sneaky phase outs to credits and deductions that increase your tax liability. By reducing your taxable income by $15K, you can get some of these back. At this level, you are not eligible for a traditional tax deductible IRA, but probably for a Roth IRA. In addition, you might get lucky and fall into a lower tax bracket as well.</blockquote>


You have it backwards. At high income levels one is not likely to be allowed to contribute to a Roth at all, but can always contribute to a traditional IRA, most likely without a tax benefit. Everyone is eligible to contribute to a traditional IRA. The deductibility of the contribution to a traditional IRA has nothing to do with the IRA itself but rather the contributor's income level.
 
There are really three types of IRAs, the tax deductible IRA, the Roth IRA, and the non tax deductible IRA. If you can participate at a retirement plan at work, the tax deductible IRA has the lowest income phase out limit of around $50K for a single tax filer, while the Roth IRA phase out is around 100K for a single. If you are not eligble to file for either of these two, you elect to contribute to the non tax deductible IRA. However, I think the Federal 15% long term capital gain tax option is better for most people at this point than paying the highest or marginal tax rate on the non tax deductible IRA in the future. I'm planning/hoping that my marginal tax bracket will not be 15% in my retirement. I would have a serious shortfall if such an occasion arose. The non tax deductible IRA is as unattractive as most annuities for me because of the taxation at marginal rates during withdrawals.
 
Go with the 401k until you get your match and contribute the rest to your Roth 401k, then Traditional is my vote. The lack of fund selection in the 401ks (not to mention the higher expenses) make it the least attractive option unless you are getting a company match.



I like the Roth since certainly of how much I have is important to me. (as opposed to a traditional where having $100k doesn't actually mean I will have $100k to spend because I still need to pay taxes).
 
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