Saving for retirement is an investment in yourself. Ideally, you should be socking away money from every paycheck into a retirement account that will pay out once you're retired. One of the most common ways to save for retirement is with a Roth IRA. Some people find that they would be better served by having multiple Roth IRA accounts. Having multiple Roth IRA accounts is perfectly legal, but the total contribution you put into both accounts still cannot exceed the federally set annual contribution limits.
It is legal for you to have multiple Roth IRA accounts, but your annual allowed contribution does not increase for having multiple accounts.
Utilizing Roth IRAs
A Roth IRA is a type of individual retirement savings arrangement as defined by the Internal Revenue Code. The federal government regulates these types of savings and details restrictions regarding the deposit limit and tax burden of Roth IRA accounts. The main distinction of Roth IRA accounts that makes them different from something such as a general savings account is that while you are technically permitted to withdraw money from a Roth IRA at any time, specific tax rules apply.
When you put money into a Roth IRA account, you have already paid taxes on that money, meaning you can withdraw money from your Roth IRA and not have to pay taxes on it again. Additionally, earnings made on the Roth IRA may be "qualified," meaning that they are not taxable when you withdraw the money. In order to be qualified, you must have been making contributions to the IRA for at least five years and be at least 59½. You also may make a qualified deduction if you are taking out the funds to put toward the purchase of your first home or have become disabled.
If you take the money out of a Roth IRA before it is qualified, you will have to pay an additional 10 percent tax on the earnings of your Roth IRA unless you are eligible for a special exception. Additionally, Roth IRA contributions are subject to an annual limit. For 2019, that limit is $6,000. People over 50 can contribute a total of $7,000.
Pros of Multiple Roth IRAs
Many people choose to use multiple Roth IRA accounts for the same reason someone might choose to have multiple bank accounts. You can save for different things in two different accounts or with two different Roth IRA providers, if desired. For example, you might have one Roth IRA dedicated to general retirement savings and one Roth IRA dedicated to retirement travel.
Likewise, because Roth IRA accounts are invested, having more than one account can allow you to diversify your portfolio. If you have two Roth IRA accounts, you might lessen the risk that your total investment performs poorly.
Additionally, some people choose to use multiple Roth IRA accounts to divide up monies that might be left to children. For example, if you have two children, you might choose to contribute to two IRA accounts to keep potential inheritances separate.
Cons of Multiple Roth IRAs
Although it is perfectly acceptable to have more than one Roth IRA, there can be downsides to maintaining multiple accounts. Using one account might be a simpler, more convenient option. Multiple accounts mean that you are paying multiple sets of fees to each company that is holding your Roth IRA accounts, and you will be subject to double the amount of work at tax time when you have to contend with entering data from multiple accounts.
Additionally, it is important to remember that no matter how many Roth IRA accounts you have open, the total limit you contribute to them, in total, cannot exceed $6,000. This relatively low limit means that it might be worth it to keep your retirement savings in a single Roth IRA unless you have a specific circumstance that will benefit from dividing up your investments.
Bea is a personal finance and legal writer based in Texas.