Traditional IRAs are one of the best ways to save for retirement because they're tax-deferred. Tax deferral means your income grows tax-free within the individual retirement account, and you're not required to pay taxes on the rate of return so you get compounding of your investment over time. In view of these benefits, you might consider opening multiple IRAs. While this is certainly possible, a better question to ask is, should you have two or more different IRA accounts? The answer to that question is complicated and depends on your retirement goals.
What Is a Traditional IRA?
There are two types of IRA: the traditional IRA and the Roth IRA. The major difference between them is whether you fund the account with pre-tax or post-tax income. With a traditional IRA, every dollar you deposit is tax deductible. So, if you earned $50,000 and contributed $5,000 to your traditional IRA, your taxable income would be reduced to $45,000. The money is allowed to grow tax-free inside the account, and any gains you make from interest and investments, when added to the account, are also free of tax. You only pay tax when you start pulling cash out of the account at retirement.
What Is a Roth IRA?
Roth IRAs are funded with post-tax income so you don't get a tax deduction for your contributions – in the above example, your taxable income would still be $50,000. Earnings on investments within the account are not subject to income tax, however, and you do not include them as income on your tax return. The main tax advantage kicks in at retirement. Since you funded the Roth with post-tax income, any withdrawals you make will be tax-free as long as they are qualified distributions.
How Many IRAs Can You Have?
The short answer is: you can have as many IRAs as you want. There are no restrictions at all on the number of IRAs that you hold and contribute to. You can divvy up your retirement savings between a bunch of traditional IRAs, Roth IRAs, or a combination of the two. It's entirely up to you.
While this might seem laborious, there are many situations when it can be advantageous to own different IRAs:
Splitting the tax benefits of a traditional versus Roth IRA
A traditional IRA gives you a tax deduction now while you are earning, while a Roth gives you tax deductions when you take money out in retirement. Many people choose to open one of each account and split their contributions between the two. This gives you the best of both worlds: a partial tax deduction now while you are working and some tax-free income in retirement.
Keeping track of your investments
An IRA is not an investment; it's a place to hold all your investments. One reason to own several IRAs is to ring-fence you various investments in separate accounts so you can keep track of their performance. For instance, you could keep your certificates of deposit in one IRA, your stocks in a second account and your bonds in a third. Keeping everything separate means you can see exactly what's happening with each investment – information that's tricky to find when you lump all the investment returns together in one account.
Investment in alternative assets
While it's possible to invest your IRA funds in alternative assets like real estate or gold, regular brokerage firms do not generally work in these markets. Rather, you would need to open a self-directed plan that empowers you to make your own investment decisions. If you wish to diversify into these special investments, you'd likely want a second IRA.
Estate planning considerations
If you inherit an IRA from a relative who is not your spouse, you are not permitted to place those assets into your own IRA. Rather, you will keep the inherited IRA open and transfer it into your name. This will give you a second IRA account while preserving some valuable tax benefits. On the subject of estate planning, you may choose to open multiple IRAs and list a different beneficiary for each one – for example, one account for each of your children. This lets you personalize how much you give to each beneficiary and the type of investments they'll receive.
Does the Contribution Limit Apply to Each IRA?
If you're planning to open two IRAs to get around the annual contribution limit, think again. The IRS is very clear that you can only put a certain amount of money into your IRAs each year, and this number is a total limit – it spans across any and all IRAs you might have. Having multiple IRAs does not mean you can contribute the maximum to each account.
As long as you have enough earned income, you can contribute $5,500 per year to IRAs in 2018. If you're aged 50 or over, you can contribute $6,500 a year. So, if you contribute $3,500 to a traditional IRA, you may contribute a maximum of $2,000 to another traditional IRA or a Roth IRA in that tax year. It's a good idea to use an online Roth estimator to help you figure out how much you should be contributing to a traditional vs. Roth IRA to make sure you're getting the best Roth rates.
For the 2019 tax year, the contribution limits will go up by $500 to $6,000 and $7,000, respectively.
What Are the Drawbacks of Opening Multiple IRA Accounts?
Every time you open another IRA, the administrator will typically charge a set-up fee. It is a small expense in the grand scheme of things, but the costs rack up if you're maintaining several accounts. More significantly, you'll likely have to put a minimum dollar amount in the account when you open it. If you don't have much savings, you may not be able to fund another IRA.
Two accounts require twice the managing, so bear this in mind if you're time-strapped. It is important to keep a close eye on your IRAs to make sure they are being wisely invested; otherwise, you may fall short of your wealth goals at retirement. If it's easier for you to keep everything in one IRA, then it's fine to consolidate your savings. At any point, you can combine your accounts through a tax-free rollover, which gives you flexibility if you change your mind about owning multiple accounts.
You Still Have to Qualify
To open a traditional IRA, you or your spouse must have taxable income such as wages from a job or self-employment income. You cannot open a new IRA once you reach the age of 70 1/2.
With a Roth IRA, you must meet certain income requirements in order to make contributions. For 2018, your modified adjusted gross income must be $120,000 or less if you are single or married filing separately or $189,000 or less if you are married filing jointly. You can make partial contributions when you earn slightly more than these limits. When your income hits $199,000 (joint) or $135,000 (single), you cannot contribute anything at all.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.