A Roth IRA (individual retirement account) is a retirement savings account that allows you to make contributions using after-tax dollars. Once you invest money into your Roth IRA, your funds grow tax-free, and when you withdraw it in retirement, you don’t have to pay any taxes. Given these benefits, you may be wondering if you can open multiple Roth IRAs to maximize your returns. We’ll go over how many IRAs you can have and the pros and cons of having more than one.
- You can have multiple IRAs, but you still need to follow contribution limits across all accounts.
- Some benefits of having several IRAs include tax diversification, portfolio diversification, flexibility on withdrawals, additional insurance coverage, and simplified estate planning. Some drawbacks include extra paperwork, added complexity, and more fees.
- We will go over a few things to keep in mind if you decide to open multiple IRAs, including required minimum distributions, rules for spousal vs. non-spousal beneficiaries, age requirements, and more.
How Many IRAs Can You Have?
There are no limits to how many IRAs you can have. If you want, you could own several Roth IRAs, SEP IRAs, and traditional IRAs. But, keep in mind that you will still be subject to the annual maximum contribution limits, which is $6,000 per year to an IRA for 2022. If you are over 50 years old, you can contribute an extra $1,000 for a total of $7,000 as a catch-up contribution.
That means you cannot try to game the system by opening multiple IRAs and maxing out each account you have open. Instead, if you open more than one IRA, you would split the contributions between the accounts with a combined contribution limit of $6,000. Note that contribution limits do not apply if you decide to do an IRA rollover, which is when you transfer money from a former employer’s retirement plan, such as a 401(k), to an individual account.
To contribute to an IRA, you need to have eligible compensation. That includes wages, salary, or self-employment income for the year you contribute. Income sources from pensions, annuities, interest, dividends, and rentals do not apply.
Traditional IRA vs. Roth IRA
There are many different types of individual retirement accounts, or IRAs, available. The two most common are the Traditional IRA and the Roth IRA. The difference between these two has to do with their tax treatment.
- The Traditional IRA is a tax-deferred account that gives you an upfront tax deduction. That means that your contributions are tax-deductible in the year they get made, but your withdrawals will be taxed as income when you retire.
- The Roth IRA is a tax-exempt account. That means that your contributions are not deductible in the year they get made, but your withdrawals will be tax-free when you retire.
Depending on your financial situation, it may make sense to own multiple IRAs as each has its advantages. Because Roth IRAs offer tax-free distributions, it may be a good idea to add funds to them while you are in a lower tax bracket. Alternatively, if you are in a higher tax bracket and want to bring your current taxable income down, a Traditional IRA may be better for you.
Benefits of Having Multiple IRAs
Having more than one IRA can help you minimize taxes and gain access to more investment options. Some benefits of having multiple IRAs include:
Tax diversification: With a traditional IRA, you get an immediate tax deduction by postponing what you owe to the IRS until you start withdrawing your funds from the account after you retire. On the other hand, with a Roth IRA, qualified withdrawals are tax-free, so you do not get double-taxed for your gains like you would in individual brokerage accounts. By contributing to both types of IRAs, you can take advantage of the different tax benefits that each provides.
Portfolio diversification: Splitting your contributions across multiple IRAs can give you exposure to different investment opportunities and strategies. For example, you could open an IRA with a robo-advisor who manages your portfolio at a low cost and another IRA at a brokerage that allows you to handpick individual stocks to create a diversified portfolio.
Flexibility on withdrawals: Traditional and Roth IRAs have different rules about withdrawals that you can benefit from. A Roth IRA allows contributions (but not growth from investments) to get withdrawn at any time without penalties for any reason. Traditional IRAs have penalties for early withdrawals before age 59 1/2, though they may make exceptions depending on the circumstances. Traditional IRAs also require you to start withdrawing money from the account at age 72, while a Roth IRA does not have required minimum withdrawals.
More insurance coverage: In the unlikely event of a bank or brokerage failure, your funds are insured by the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC). You are covered up to a maximum of $500,000 by the SIPC and $250,000 by the FDIC for a single account at each institution. That means if you have two Roth IRAs at the same SIPC-insured institution, you would only qualify for $500,000 in coverage. But, if you have a Roth and a traditional IRA at the same institution, they would be considered separately insured accounts with $500,000 in coverage for each one.
Simplified estate planning: If you want to name multiple beneficiaries to your IRAs, it may be easier on your heirs if you list each of them as the primary beneficiary on separate IRA accounts instead of naming a primary and multiple contingent beneficiaries on the same account. With this method, there will be less tension when estates get settled, and it is clear how much each person should get.
Disadvantages of Multiple IRAs
With multiple IRAs, there is bound to be more work involved. Some of the cons include:
Extra paperwork: When you have multiple accounts, you will have to deal with various tax forms, service changes and updates, privacy policies, etc. Each account will have its own disclosure forms, investment options, and tax policies.
More complexity in your retirement planning: To balance the right amount of risk vs. reward in your portfolio, you need to find the right asset allocation for your retirement planning. When you distribute your assets across several different accounts, it becomes harder to monitor progress and rebalance your portfolio mix to ensure you are sufficiently diversified.
Account and investment fees: Depending on which firms you open your IRAs with, you may end up paying various account fees. It’s important to be mindful of the fees and whether they are eating into your long-term investment returns and eroding your earnings over time.
8 Things to Keep in Mind
1. Cash Contributions Only
When you make regular contributions to your IRA, it must be made in cash (including checks) and not in securities. One exception is when you roll over securities, such as a 401(k) into your IRA.
2. Required Minimum Distributions
If you have a traditional IRA, you must begin taking required minimum distributions (RMDs) from the account by April 1 following the year you turn 72 years old. RMDs act as a safeguard against individuals who use these accounts to avoid paying taxes. To determine your minimum amount distributed, divide your retirement account’s prior year-end fair market value (FMV) by your life expectancy.
If you have multiple traditional IRAs, you can combine the total RMD amounts for each account and pick and choose which accounts you want to withdraw from. For example, if each account holds different investments, you can choose to liquidate the investments in one IRA over another.
3. Rules For Spousal vs. Non-Spousal Beneficiaries
One of the benefits of having an IRA is the ability to transfer your investments directly to your spousal beneficiaries. When a spouse inherits an IRA, they can either claim the inherited IRA as their own or make it a beneficiary-designated IRA. With the former option, a spouse can make new contributions to the account and control distributions. Alternatively, if they decide to make it a beneficiary-designated IRA, they can withdraw money before age 59 1/2 without paying any penalties.
On the other hand, non-spousal beneficiaries, such as your children or grandchildren, cannot inherit IRAs as their own or add to them. Instead, they must liquidate the account within five years of the owner’s death or distribute the funds over their life expectancies.
4. Spousal Contributions
If your spouse does not have any income, you can make contributions on their behalf through spousal IRA contributions. Your spouse will need to have their own IRA account, but this will allow your family to double the funds set aside for retirement. To open a spousal account, you must be married and file a joint tax return with your spouse. Additionally, you need to have eligible compensation to contribute to the account, and the total contribution cannot exceed your taxable compensation reported on the joint tax return.
5. IRA Rollovers and Transfers
Moving accounts from one financial institution to another is quite common. When I first started investing, I opened Roth IRA accounts with two different brokerages. Once that became too hard to manage, I consolidated my accounts by transferring the investments to a central account and closing the other one. If you decide to maintain the same IRA account with another institution, you can choose to transfer or roll over your assets.
If you transfer your assets from one institution to another, then the transactions may be reported to the IRS. Plus, you may need to pay fees depending on what charges the firm has. For example, when I transferred my assets from my TD Ameritrade account to Fidelity, I was charged a transfer fee because I did not meet their portfolio minimum at that time to get the fee waived. I negotiated with Fidelity to cover the costs by calling and speaking to a representative about the transfer fee I was promised prior to making the switch.
With a rollover, you transfer the assets from one account to another (trustee-to-trustee) and rollover the funds within 60 days. For example, you can rollover an employer-sponsored 401(k) into a traditional IRA, which may preserve some of the plan benefits. Alternatively, you can rollover your IRA assets to a 401(k) if you want to shelter the funds from RMDs. Be sure to speak to financial institutions on both ends of a transfer to understand the tax implications as account rollovers and transfers are reported the IRS and you have to file special tax documents to report the rollover and the manner in which it was done.
6. Managed Accounts
If you want someone to manage your IRA accounts professionally, you can give your financial advisor written authorization to make investment decisions on your behalf. Typically, you will get charged a flat fee, but a quality investment advisor can help you build a custom portfolio that adjusts for changes in your financial situation or the economy.
7. Investment Options
The IRS limits the types of investments you can hold in an IRA, but your financial institution may apply additional restrictions. For example, some mutual fund companies do not allow clients to hold individual stocks in their IRAs, while others may not allow the holding of gold and silver coins or crypto. If you want to hold alternative assets, it may be worthwhile to open up a SDIRA (Self-Directed IRA).
8. Age Requirements
There are no age limits to making contributions to IRAs. As long as you have earned income, such as a salary or wages, you can contribute to an IRA. If you are a teenager making money, you can start contributing to an IRA early and let compound interest create a money-printing machine down the line.
On the opposite side of the spectrum, senior citizens can keep contributing to IRAs as long as they have earned income thanks to the passage of the SECURE Act in 2019. If you want to eventually pass down your wealth as an inheritance down the line, IRAs are an excellent way to do this.
The Bottom Line
There are no limits to how many IRA accounts you can have, but you need to follow contribution limits across all your accounts. Depending on your financial strategy and retirement planning, having multiple IRAs can give you more options for taxes, investments, and withdrawals. However, managing several accounts can be a hassle and adds additional complexity to your retirement planning. Take some time to understand your financial situation to determine how many IRA accounts you should have.