Question for those with both Traditional and Roth IRA's

[RandySF]

Last edited Sat Feb 21, 2015, 12:06 AM - Edit history (1)

I am not going to ask for advice, but I would lie to ask those of you who hold both Traditional and Roth IRA's whether you contribute to just one or both in a given year. Do you alternate?

[csziggy]

1. My husband has both

Before he retired, he had money taken out of his paychecks to be put into the 401K - a major advantage since the company he worked for matched his contributions up to a certain percentage. At the end of each year we'd figure out how much we could afford to contribute to his Roth. Many years it wasn't anything, which is why his Roth has only half what his 401K has in it. I wish we'd been able to set up regular contributions to his Roth the same way we did his 401K but we just couldn't do it with the budget.

If your employer does matching, put more into the 401k to maximize how much you can get out of them. Regular contributions, taken out of your paycheck before you get it, are the most painless way to contribute. That's the only advice I can or will give.

[A HERETIC I AM]

2. I do not have both, but from a practical point of view, it depends.

If one contributes to a 401(k) then there is no real advantage to contributing to a traditional IRA. One advantage to IRA contributions in the absence of a 401(k) is the contributions, with some exceptions are deductible, that is they lower your adjusted gross income, therefore your tax burden - same with a 401(k).

If you had no 401(k) and your aim was to lower your tax burden, then the majority of the annual allowable maximum should go into a traditional IRA and a smaller percentage into the Roth. If lowering your tax burden isn't a priority, then place the majority into the Roth.

See this IRS page for more detail on limits and deductability.;

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

[RandySF]

3. I do have a 401(k) but no match

Actually, it's a 457(b) because I'm a public employee. I wound up with both a traditional and a Roth because one of them is actually a rollover from a previous job's 457. I don't quite have the budget do fully contribute at home and with the Roth, so lately I've been prioritizing the Roth (while leaving the traditional alone), especially since there's no match at work.

[A HERETIC I AM]

4. Even though there is no match, you have a much higher annual limit with your employers plan.

Forgive me if I say things you are already aware of, but perhaps then for the edification of others!

Even though your employer doesn't match, you still are gaining the advantage of pre-tax contributions, plus the amount you can contribute to your 457(b) plan is considerably higher than the annual IRA limits.

If you currently have a 457 plan and are contributing to it, in your case the old advisor in me (!) would say to just place any extra you can afford into the Roth. The only way I would change that is if the investment options in the 457 sucked so badly that the investment freedom a Roth offers makes more sense.

You may be aware that the rules governing 457(b) plans and 401(k) plans are VERY similar.

Unfortunately I have to hit the road in a while, or I would do some reading for you and get you a more complete answer. Suffice to say that on the surface, it seems you are on the right track. There are a few ins and outs, so to speak (does your wife also participate in an employer plan, for instance) that come into play, but for the most part, it is always wisest to take advantage of employer plans even if they don't match. The money is gone in a sort of painless way, it reduces your tax burden and as long as you look at the statements and make appropriate changes occasionally, those plans tend to work well. Place any extra you can afford into a Roth and you're good!

Hope that helps a little.