Should You Have Money in a Roth IRA and a Traditional IRA?

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Recently, I’ve had several email questions about saving in a Roth IRA vs. a Traditional IRA.

The questions came from people who had most of their retirement savings in a Traditional IRA and were wondering if they should (1) start saving in a Roth, or (2) roll over the money in a Traditional IRA.

In my replies to those questions, I’ve said that if most of your retirement saving is in a one then you could just start saving into the other.  In other words, it is a Roth and Traditional IRA not Roth versus issue.  Why?  This would help you to diversify your investment types.  This way if there were ever any changes (like Congress changing the laws) you would have some money in both.

Note: I’m not suggesting saving 50% in one and 50% in the other.  I’m just saying that it wouldn’t hurt to save in a Roth for a few years and then in a Traditional IRA.

The recent passing of the The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 can serve as an important example.

roth and traditional IRA On December 17, 2010, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  As part of the bill, the IRA Charitable Rollover allows people who are 70-1/2 or older to transfer up to $100,000 directly from an IRA to a qualified charity.  This allowance is only for the 2010 and 2011 tax years.  In addition, contributions for the 2010 tax year can be made retroactively if made on or before January 31, 2011.  That means that you have until the 31st of January to make a contribution to count as part of your 2010 tax year.

The main point of this post is not to discuss the IRA Charitable Rollover, but to introduce its implications.  If you want to learn more, you can read more about making charitable contributions from an IRA.

If my point isn’t to discuss the Charitable Rollover, what is it?

Government changes and policies can make either the Roth or Traditional IRA even better in an instant. None of us can predict what those changes may or may not be.  As an example, as far as I can tell, the Charitable Rollover offers no benefit (other than typical charitable deductions) to people with a Roth.  They have already paid the taxes, and there is no mandatory withdrawal.

However, if I was thinking about making a large donation, I’d love to be able to do that from my Traditional IRA since I never paid taxes on it in the first place.  Notice that this only applies for 2010-2011 tax years.  However, what if in 50 years they made a similar allowance?  I’d regret the fact that I had no savings in a Traditional (because I’ve already paid taxes otherwise).

Since this opportunity is past you might want to learn about a Roth in-plan Rollover.

If this is new or confusing, you can compare the tax implications between a Roth and a Traditional IRA.

My point is simply this – you can (and possibly should) diversify how you save for retirement – Roth and Traditional IRA. If you have money in one, you might want to spend a few years contributing to the other.  This just gives more options when it comes time to start withdrawing the money.

Right now we save in a Roth because we use my Roth IRA for college savings too.

Thoughts?

Comments

    • says

      Ricky,
      I certainly believe you can. Why not read the articles for a few days to see? However, you should know my target audience is Christians and I’m not shy about the fact that being a Christian influence how I write about finance.

  1. Working Mom of 2 says

    In “The Gospel of Roth- The Good News About Roth IRA Conversions and How They Can Make You Money” by John Bledsoe it clearly states in the book that NO ANALYSIS is needed and that everyone should convert to a Roth IRA regardless of income. There is NO risk! The IRS is giving us a year to recharacterize or “undo” the conversion. This book gives the ins and outs for Roth IRAS! It really helped answer all my questions.

    • says

      Hey,
      Thanks for your comment. Thanks for sharing your opinion. However, I would mention that there are certainly cases when converting a Roth does not make sense. The clearest example is people who will be entering retirement within five years. Also, as I pointed out in this article those who only have a Roth will miss out on some benefits only eligible to the Traditional IRA.

  2. says

    Craig – I dont have that many investments (still in debt), but when I do I think I’ll focus on roth while my income still falls below the limit, then if needed I’ll put some stuff in a traditional IRA. Unfortunately, I have no idea what taxes will be like when Im getting ready to retire, so I could get stuck with high ones. (luckily wyoming doesnt tax retirement income)

  3. Ivy says

    Hi Craig, a question for you regarding missionaries who spend a good portion of their years overseas in ministry… Are there any problems that a missionary might face in setting up a Roth IRA in the United States, then leaving the country for long intervals to serve overseas, only returning for year long breaks after each service interval. Do investment companies have red flags (or allowances as they do for military) about that and which ones allow this special situation? In this particular case the missionary does have a U.S. address where they receive mail, they are not residents of the country of service (indonesia), and they only receive united states income through their U.S. mission organization. (no foreign income). We have heard of companies liquidating accounts when concerns arose over the fact that they “worked abroad.” What is your experience and what should they know? Thanks!

    • says

      Ivy,
      That is a very specific question so it would be best addressed by a professional accountant. Since I am not a certified accountant I cannot give you any helpful feedback.

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