Money Girl Q&A: Should I Have Both Traditional and Roth Retirement Accounts?
Is having a traditional and a Roth retirement account a good idea? Money Girl discusses the benefits of having both.
Laura Adams, MBA
Question. My workplace now offers a Roth 401(k) account. I’ve heard that having both a traditional and a Roth retirement account is a good idea. Do you agree?
Answer. Unlike a Roth IRA, there are no income limits for making contributions to a Roth 401(k) or 403(b). That makes it easy for employees to have a Roth retirement account, when it’s offered by an employer.
With a Roth, you must pay tax on the money you invest now—but never pay another penny of tax when you withdraw it at retirement. On the other hand, with a traditional account, you skip paying tax on money you invest now. However, you eventually must pay Uncle Sam on your original contributions and their earnings when you make withdrawals during retirement.
The bottom line is that a Roth gives you the potential to pay less tax now than what you might be charged in the future. And a traditional retirement account allows you save money now by postponing taxes until the future.
Still confused? Well, since everyone’s situation is different and we don’t have a tax rate crystal ball, there’s no way to know for sure which option is best.
However, good investing is about diversification. Having tax-free income from a Roth, in addition to taxable income from a traditional retirement account during retirement, is a great way to hedge your future tax liability. So I recommend having both traditional and Roth retirement accounts, when possible.
For 2013, your combined contribution limit to a workplace retirement plan is $17,500. For example, you could contribute $10,000 to a traditional 401(k) and $7,500 to a Roth 401(k).
Other Links You Might Like:
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Your Guide to the Roth IRA, Part 1
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.