Today’s retirement investors have a broad variety of account and investment options in that they can choose the path that will best suit their needs. Some may browse their retirement plan options and assume that it would make sense to hold only one account. For example, when reviewing the numerous benefits of Traditional IRAs and Roth IRAs, you may think it prudent to choose one account type over the other. But could it make sense to hold a Traditional IRA and a Roth IRA at the same time?
Below we’ll explore a few possible benefits to holding both account types simultaneously.
Tax Benefits Now and Later
With a Traditional IRA, your contributions can be deducted from your income for tax purposes. So, if you earn $50,000 in a given year and contribute $5,000 to your Traditional IRA, you’ll only have to pay taxes on $45,000. You can then invest your $5,000, the earnings from which will be equally tax deferred. Taxes would only be due on these account holdings upon distribution (withdrawal) from the Traditional IRA, hopefully at a point in retirement when you are in a lower income tax bracket.
Meanwhile, a Roth IRA does not feature tax-deductible contributions, but qualified withdrawals can be completely tax free. This being the case, a $5,000 Roth IRA contribution would mean having to pay taxes on your full $50,000 income. However, if your $5,000 deposit grows to $25,000 by the time you reach retirement, a qualified distribution of that entire balance would carry zero tax implications.
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