Question: My son, who is 23 years old and single, contributed the maximum $18,000 to his Roth 401(k) at work in 2016. His employer matched $9,000. Can he also make a tax-deductible contribution to an IRA?
Even if your son is eligible to deduct traditional IRA contributions, he may want to contribute to a Roth IRA instead. He can’t deduct Roth IRA contributions (his Roth 401(k) contributions are also after taxes), but the money grows tax-free for retirement, and he can withdraw his contributions without penalty or taxes at any age. Because he's young and his income is likely to increase over time, pushing him into a higher tax bracket, the benefit of tax-free growth in the Roth IRA is likely to beat out the benefit of receiving a tax deduction for traditional IRA contributions now.
"Our studies have shown that, especially for younger investors, the Roth results in significantly more after-tax money during retirement than a traditional IRA," says Keith McGurrin, a certified financial planner with T. Rowe Price. "It is also true that if tax rates increase in the future, the Roth will be beneficial." Plus, Roths have no required minimum distributions after you turn 70 ½.
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You can contribute the full $5,500 to a Roth IRA for 2016 if your modified adjusted gross income was less than $117,000 if single, or $184,000 if married filing jointly. The amount you may contribute gradually phases out until your income reaches $132,000 if single, or $194,000 if married filing jointly (the income limits increase slightly for 2017 contributions -- see What You Need to Know About Making IRA and 401(k) Contributions in 2017). For more information about the benefits of a Roth IRA and how to get started, see Why You Need a Roth IRA.
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