By Denise Appleby, Appleby, CISP, CRC, CRPS, CRSP, APA
Many taxpayers agree that contributing to an IRA is an excellent way to help fund a retirement nest egg. However, choosing which of the two IRAs to fund is challenging for most. This difficulty is partly due to the many factors that should be considered. The following are some of these factors.
Eligibility for an IRA Contribution
You can contribute to a traditional IRA if you have eligible compensation for the year, such as W-2 wages or self-employment income.
This income requirement also applies to a Roth IRA. Still, you may only make a regular Roth IRA contribution if your modified adjusted gross income (MAGI) is within specific amounts based on your tax filing status.
MAGI Limit for a Roth IRA Contribution
If you have eligible income, you may make a regular contribution to a Roth IRA, providing your MAGI does not exceed the amounts indicated in the following table.
| 2024 MAGI limits for contributing to a Roth IRA | ||
| Tax Filing Status | MAGI | Allowed contribution |
| a. All taxpayers other b. or c. below | $146,000 or less | 100% |
| $146,000 to $161,000 | Partial | |
| $161,000 or more | None | |
| b. Married taxpayers filing a joint return or taxpayers filing as a qualifying widow(er) | $230,000 or less | 100% |
| $230,000 to $240,000 | Partial | |
| $240,000 or more | None | |
| c. Married individual filing a separate return | Less than $10,000 | Partial |
| $10,000 or more | None | |
Read: How the Backdoor Roth IRA Contribution Works : The Advisor version
Deductibility for Traditional IRA Contribution
A Traditional IRA contribution is fully deductible if you are not covered under an employer-sponsored retirement plan, such as a pension or 401(k) plan, or if you are not married to someone who is. If you are covered under an employer-sponsored retirement plan or married to someone who is, your eligibility to deduct a contribution to a Traditional IRA is based on your tax filing status and MAGI, as indicated in the table below.
The MAGI limits that apply to each tax-filing status are as follows:
| 2024 MAGI limits for deducting contributions to Traditional IRAs | ||
| Tax Filing Status | MAGI | Allowed deduction |
| a. Single individuals and heads of household who are active participants in a qualified plan/employer plan | $77,000 or less | 100% |
| $77,000 to $87,000 | Partial | |
| $87,000 or more | None | |
| b. Married couples filing jointly if the spouse who makes the IRA contribution is an active participant | $123,000 or less | 100% |
| $123,000 to $143,000 | Partial | |
| $143,000 or more | None | |
| c. IRA contributor who is not an active participant and is married to someone who is an active participant, | $230,000 or less | 100% |
| $230,000 to $240,000 | Partial | |
| $240,000 or more | None | |
| d. a married individual filing a separate return who is an active participant | Less than $10,000 | Partial |
| $10,000 or more | None | |
When Eligible For Both a Roth IRA Contribution and a Deduction
If you are eligible to make a Roth IRA contribution and eligible to deduct a Traditional IRA contribution, you should then determine which is more suitable for your financial profile. The answer depends on several factors, which include the following:
- Affordability: Consider whether you can afford to give up the tax deduction now in exchange for tax-free growth. Taking a tax deduction for an IRA contribution reduces the immediate financial impact of the contribution by offsetting the contribution with the deduction. However, earnings that accrue in a Traditional IRA are subject to income tax when withdrawn. On the other hand, while a contribution to a Roth IRA is not deductible, the earnings can be tax-free if certain requirements are met,
- Taxes: Consideration should also be given as to which option could result in the least amount of income tax owed, which largely depends on whether your tax bracket will be lower when making the contributions vs. when the withdrawals will be made.
Typically, an individual in a higher tax bracket during retirement will find it more tax-efficient to fund a Roth IRA instead of a Traditional IRA, as this would result in a lower amount of taxes being paid. To make a realistic determination, an analysis, including the current and projected tax rates during retirement, should be done.
- Estate Planning: If the objective is to leave tax-free assets to beneficiaries, and you prefer to forego the tax deduction regardless of which is more tax efficient, a Roth IRA would be the more suitable choice.
Choose Both
If you are eligible to make a Roth IRA contribution and also eligible to deduct a Traditional IRA contribution but are unsure which type of IRA is more suitable, you can enjoy the benefits of both IRAs by splitting your contribution between them. Care should be taken to ensure that the aggregate contributions do not exceed the limit in effect for the year.
Let Your Advisor Help You Choose
Other factors should be considered to determine which of the two types of IRAs is more suitable for you. Your financial advisor and your tax advisor can help you to identify the factors that should be considered based on your financial profile and estate planning needs.
