Individual retirement accounts can offer a tax-advantaged way to save and grow your money for your later years. A traditional IRA offers the benefit of tax-deductible contributions, while a Roth IRA allows for tax-free withdrawals in retirement.
When deciding which type of IRA to contribute to, one question you might have is: how many IRAs should I open? Technically, it’s possible to have multiple IRAs, but there are a few rules to know about using this strategy to save for retirement. If you think you might need more hands-on guidance as you navigate your IRA decisions, consider enlisting the help of a trusted financial advisor.
How Many IRAs Does the IRS Allow?
The IRS doesn’t cap the number of IRAs any individual can have open at once time. It’s possible then to have multiple IRAs for retirement savings.
For example, if you’re self-employed, you might have a SEP IRA, which allows you to make contributions as both an employer and an employee. The government treats a SEP IRA as a traditional IRA for tax purposes. But you could also have a Roth IRA open as well if you meet income eligibility requirements.
For 2019, single filers and those claiming head of household status can make the full annual contribution to a Roth IRA if their modified adjusted gross income is less than $122,000. The modified AGI limit for making a full contribution to a Roth is $193,000 for married couples who file a joint return. Couples fililng separate returns can make a reduced contribution to a Roth IRA only if their individual modified adjusted gross income is less than $10,000.
Even if you’re not self-employed, you could still open both a traditional and a Roth IRA, or have multiple IRAs of either one. For instance, you might already have an IRA but decide to open a self-directed IRA to expand your investment horizons. Self-directed IRAs are offered by brokerage firms and they allow you to invest beyond stocks, mutual funds or bonds. For example, you could use a self-directed IRA to invest in real estate or private market securities.
Benefits of Opening Multiple IRAs
One of the chief reasons to consider opening multiple IRAs is to increase diversification in your portfolio. Diversification manages risk in your investments and avoids overweighting your portfolio too heavily in any one direction.
Having multiple IRAs also makes sense if you want to employ different investment strategies, says Michael W. Landsberg, principal and chief investment officer at Landsberg Bennett Private Wealth Management in Punta Gorda, Florida. For instance, you may have one IRA in which you pursue a passive investment strategy through indexing while another IRA is designed for actively managed funds.
Landsberg says investing in multiple IRAs is also something to consider if you’d like to have different beneficiaries for your retirement accounts. You may want to earmark funds in one IRA for your spouse, then set up additional IRAs that each of your children could inherit.
Required minimum distributions, or RMDs, can also play a part in your decision whether to have one or more IRAs. RMDs are associated with traditional IRAs; people age 70.5 or older must begin taking distributions from their account. Life expectancy and the value of your account determine those distributions. Failure to take RMDs on schedule can result in a tax penalty of up to 50% of the amount you were required to withdraw.
It’s a strategy that Landsberg’s firm employs when necessary. “We’ll use another IRA to hold cash for future RMDs, so if we’re rebalancing or putting aside profits after a good run in the market, we park it inside another IRA which doesn’t have any market risk,” he says.
Having multiple IRAs can also help with managing other aspects of your tax liability in retirement. With a traditional IRA, it’s possible to get an up front deduction on your contributions, which could be valuable during your peak earning years. But, you’re not avoiding tax on those contributions or earnings, only delaying it until retirement. Having a Roth IRA that you can make tax-free withdrawals from could help offset the taxable withdrawals associated with a traditional IRA.
And, if you need to withdraw money from your IRA prior to age 59.5, you’d be able to withdraw your Roth IRA contributions without triggering a penalty or income tax. The only catch is that your Roth IRA must be open at least five years to withdraw contributions without a tax penalty. You could withdraw money from a traditional IRA early but unless an exception applies, you’d face both the 10% early withdrawal penalty and regular income tax on the distribution.
Multiple IRAs Doesn’t Mean Unlimited Contributions
For 2019, the maximum contribution allowed to either a traditional IRA or a Roth IRA is $6,000. The limit tops out at $7,000 when you factor in the $1,000 additional catch-up contribution allowed for savers aged 50 and older.
The most important thing to know about having multiple IRAs is that this is an aggregate limit, not an individual one. In other words, the total amount you contribute across all your IRAs can’t exceed the annual contribution limit.
This is necessary to prevent people from abusing IRAs to gain tax advantages unfairly. For instance, say the limit applied to individual IRAs. People could feasibly open multiple traditional IRAs and max out each one up to the point that they’d be able to reduce their taxable income to zero using their deductible contributions. Or, they could funnel thousands of dollars a year into multiple IRAs and not have to pay a dime of tax on withdrawals in retirement.
The Takeaway: Should You Have Multiple IRAs?
The answer to this question largely depends on your investment goals. If you’re looking for tax diversification, you’re interested in naming multiple beneficiaries or you want to explore investment options in a self-directed IRA that your current IRA doesn’t offer, then it could be a good strategy to employ.
On the other hand, there are some downsides to consider. For one thing, having multiple IRAs could mean paying more in investment and management fees. This is particularly relevant if your accounts are held at different brokerages. It may be possible to minimize the bite taken by fees by holding multiple IRAs at the same brokerage. That can also make it easier to manage your asset allocation in each account and rebalance them accordingly. Rebalancing is important for maintaining diversification and managing risk.
Finally, consider what you can contribute to an IRA each year. If you’re unable to meet the annual contribution limit right now, you may be better off focusing on how to get to max out your current account before adding more IRAs into the mix.
Tips for Managing Individual Retirement Accounts
- One of the first steps in managing multiple IRAs (or a single IRA) strategically is having clear retirement goals and knowing what you need to save. Regularly running the numbers through a retirement calculator can help you determine if you’re on track with your IRA investments or if you need to adjust your strategy.
- Next, consider working with a financial advisor if you need help fine-tuning your asset allocation or understanding the tax rules for investing through a self-directed IRA. An advisor can offer guidance on how to maximize your investment dollars across one or more IRAs. If you don’t yet have an advisor, consider using SmartAsset’s financial adivsor matching tool to find one. After answering a few brief questions, you’ll be given recommendations for up to three advisors in your local area.
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