In estate planning, one common tactic individuals consider to avoid probate is adding their children…
Few people actually plan to have multiple IRAs, but it happens, usually after starting a new job, when it’s easier just to open a new IRA rather than deal with a rollover.
Traditional IRA, Roth, SEP, spousal—there’s no legal limit to the number of Individual Retirement Accounts (IRAs) that you can own. The limit is how much you can contribute per year and how much time and patience you have to manage many different accounts.
A Nerd Wallet article simply asks, “Can You Have Multiple IRAs?” The article notes that increasing the number of IRAs you own doesn’t necessarily increase the amount you can contribute annually. Let’s look at the pros and cons of having multiple IRAs.
Having multiple IRAs can help you fine-tune your tax strategy and gain access to more investment choices and increased account insurance. Different types of IRAs give you different tax breaks. A traditional IRA gives you an immediate tax deduction, letting you delay what you owe the IRS, until you begin withdrawing your savings from the account in retirement. With a Roth IRA, there’s no upfront tax break on contributions, but qualified withdrawals are tax-free.
Having IRAs at multiple financial firms can give you a choice of different types of investments and even different investing strategies.
The main drawback of multiple IRAs is the hassle. Think about double (or quintuple) the paperwork. While it’s easier than ever to monitor and manage your money online, having multiple accounts means dealing with multiple tax forms, notices of service changes/updates, privacy policies and other disclosures.
When your assets are spread across multiple accounts, monitoring performance and rebalancing the overall mix to maintain a coherent investment strategy is more involved.
For most people, the right number of IRAs is at least two: a Roth and traditional IRA, in addition to a workplace retirement plan, if you’ve got one.
The Roth IRA gives you the most flexibility both before you retire (tax- and penalty-free withdrawals of contributions) and in retirement (tax-free distributions and no required minimum withdrawals). If you qualify to contribute to a Roth IRA, it’s worth having one.
The traditional IRA may prompt you to save more, because of the upfront tax deduction. You may find that you have more investment options and more control over fees, compared to a 401(k) from prior employers. Don’t forget to roll the money from any plan funded by pretax dollars into a traditional IRA, which treats taxes the same way.
The most important part: start saving early for retirement and put money into an IRA on a regular basis, even if you can only put away a small amount.
Reference: Nerd Wallet (February 26, 2019) “Can You Have Multiple IRAs?”