Today’s retirement investors have a broad variety of account and investment options. Some may browse their retirement plan options and assume that it would make sense to hold only one account. For example, when comparing Traditional IRAs to Roth IRAs, you may feel inclined to choose only one. But could it make sense to hold a Traditional IRA and a Roth IRA at the same time?
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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 from the Traditional IRA. This would hopefully occur 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.
So why hold both accounts?
Holding both a Traditional IRA and a Roth IRA could enable you to enjoy a tax deduction this year by contributing to the former and collect tax-free gains down the road with the latter. In other words, your Traditional IRA can provide a tax benefit in the near term while your Roth IRA provides another tax benefit in the long term.
It is important to note that, as of the 2021 tax year, you may contribute up to $6,000 to a Traditional or Roth IRA if you’re age 50 or below. You may contribute up to $7,000 if you’re age 50 or above. This is a cumulative limit, meaning you may contribute a total of either $6,000 or $7,000 between the two accounts. Therefore, you could contribute $3,000/$3,500 (or any split of your choosing) to each account.
Buy-And-Hold vs. Cash-Producing Assets
It may be worth thinking about how particular asset types may interact with certain account types. For example, buy-and-hold investments like precious metals tend to be something you buy and hold in the hope it will increase in value over the long term. You may find such an asset more conducive to a Traditional IRA, as distributions would be taxable but could be muted given the more conservative potential rate of account growth. In the meantime, you can continue to receive tax deductions by making Traditional IRA contributions every year.
On the other hand, you may discover that cash-producing assets like rental real estate could be better situated in a Roth IRA. With regular cash flow comes the opportunity to grow your account very quickly. By the time you retire, your account balance may have ballooned to the point that tax-free distributions would be a major financial advantage.
Conduct Your Due Diligence
NDTCO does not provide investment advice, but we proudly support you in implementing the self-directed strategies of your choosing. Consult with your financial team to determine whether holding multiple tax-advantaged accounts will meet your investment needs.
Please don’t hesitate to give us a call at 877-742-1270 or send us a message through the Client Portal if you have questions or concerns.