Can you have multiple IRAs? Yes, but like all investment decisions, investors should learn all about the pros and cons associated with decisions before making a choice. Here’s everything investors need to know about having multiple IRAs.
In this article:
- Can You Open Multiple IRAs?
- Why Traditional and Roth IRAs are Popular Choices for Multiple IRAs
- Advantages of Having Multiple IRAs
- Disadvantages of Multiple IRAs
- Contribution Limits
Can You Have Multiple IRAs? | Advantages and Disadvantages
Can You Open Multiple IRAs?
Under the law, investors can have multiple IRAs of different types, including Roth, Traditional, spousal, and SEP IRAs (e.g. Roth and Traditional). They can also own multiple IRAs of the same kind (e.g. multiple Roth IRAs) with one or several financial institutions.
Why Traditional and Roth IRAs are Popular Choices for Multiple IRAs
Many investors consider having at least two IRAs, usually a Traditional IRA and a Roth IRA, on top of a workplace retirement plan, many investors maintain both IRAs for a couple of reasons:
Roth IRA Benefits
Roth IRAs give optimal flexibility for:
- Pre-retirement distributions — no taxes and penalties
- Post-retirement distributions — no taxes on distributions and no minimum required distributions
Traditional IRA Benefits
- A Traditional IRA can be a wise investment option for when up-front tax deductions make saving more money more beneficial. It’s also a wise investment option for funds coming from old workplace retirement plans.
- Investors who have a Traditional IRA can access a larger number of investment options compared to a 401(k). They can also exercise greater control over the fees they’ll have to pay.
- Investors can also ensure they won’t get unexpected bills from the IRS when they roll over money from a pre-tax dollar-funded plan to a Traditional IRA. This is because Traditional IRAs treat taxes the same way pre-tax dollar-funded plans do.
Advantages of Having Multiple IRAs
Owning multiple IRAs can provide opportunities for coming up with effective tax-minimization strategies, for accessing more investment options, and for optimizing account insurance. Some of the benefits owning multiple IRAs can provide include:
Investors can enjoy different tax breaks through different kinds of IRAs.
- A Traditional IRA can provide immediate tax deductions. It allows investors to pay taxes on income used to fund this IRA, only when they start withdrawing in retirement.
- Roth IRAs don’t provide immediate tax deductions on income used to fund contributions. However, investors don’t have to pay any taxes when they make qualified distributions from Roth IRAs.
Investors can access different kinds of investments with different IRAs in multiple financial institutions using different investment strategies.
An investor who wants most of their retirement investments managed professionally can set aside a portion to invest in stocks personally.
- IRA #1: This investor can open an IRA with an automated, low-cost portfolio management firm, such as a robo-advisor.
- IRA #2: The same investor can also open a second IRA with a discount stock brokerage firm that offers online stock trading.
Other possible scenarios:
- The same investor can also do the same but with just one financial institution.
- If a financial institution offers both, the investor can split investible funds between a system-managed account and a personally-managed IRA.
Aside from taxing contributions differently, Traditional and Roth IRAs also tax pre-retirement and in-retirement distributions in different ways.
- Roth IRA Distributions — Contributions for Roth IRAs (not the earnings portion) can be distributed any time for any reason with neither taxes nor penalties.
- Traditional IRA Distributions — Traditional IRAs allow penalty-free pre-retirement distributions only under specific circumstances. Also, compared to Roth IRAs, Traditional IRAs compel account owners to take mandatory minimum distributions after turning 70 ½ years old.
Greater Investments and Cash Insurance Coverage
In the event that IRA-holding financial institutions fail, the Securities Investor Protection Corporation (SPIC) and the Federal Deposit Insurance Corporation (FDIC) can cover investors’ losses up to a certain amount.
The SIPC and the FDIC’s maximum coverages are $500,000 and $250,000 respectively for every individual account holder in a failed financial institution.
However, investors can use multiple IRAs to get more insurance coverage for their funds. Specifically, investors can double their SIPC insurance coverage by opening Traditional and Roth IRA accounts with the same institution.
- If investors open two IRAs of the same kind in the same SIPC-covered financial institution, the maximum coverage is just $500,000.
- If the funds are split between a Roth and a Traditional IRA in the same institution, the total coverage increases to $1,000,000.
This is because the SIPC consider Roth and Traditional IRAs as separately-insured entities, each with a maximum coverage of $500,000. That can effectively double investors’ investment insurance coverage.
Lower Risk for Beneficiary Squabbles
Investors are required to name beneficiaries when opening IRAs. While IRAs allow multiple beneficiaries (a primary and contingent beneficiary), opening an IRA for each beneficiary alone can greatly reduce the possibility of squabbles among them after the account holder has passed away.
Disadvantages of Multiple IRAs
While having multiple IRAs offers several benefits, it’s still not a perfect IRA strategy. Some of the possible disadvantages of having multiple IRAs that are worth considering include:
Multiple Drafts of Paperwork
Unfortunately, investors can’t escape bureaucracy and red tape when dealing with retirement accounts. While the advent of the Internet and online transacting has made it much easier to manage IRA accounts, multiple IRAs mean multiple forms, policies, and other paperwork.
More Complex to Manage
When it comes to retirement investing, investors try to strike a balance between their portfolio’s risks and rewards. With multiple IRA accounts come more investment assets to monitor and manage, which will require more complex investment management strategies.
Potentially Lower Returns
It’s normal for investors to pay more attention to accounts that have higher balances and leave smaller-balance accounts alone. However, taking one’s eyes off any retirement savings account, regardless of the size, may result in sub-par returns for that account.
When account and investment fees are considered, the earning power of retirement accounts with sub-par returns may erode over the long term. That’s why it’s important for investors to always be on top of every IRA account regardless of the size.
While investors can invest in as many IRAs as they want, they are still limited in one very important aspect. They can only directly contribute a specific amount of money to their IRAs.
Investors below 50 can only contribute a maximum of $6,000 annually for Traditional and Roth IRAs combined, beginning 2019. For investors 50 years and older, the 2019 limit is $7,000.
A workaround to this limit is an IRA rollover. Increasing one’s IRA contributions through a rollover won’t be subject to the annual contribution limits.
IRA Rollover Definition: Transferring funds from a retirement plan with a previous employer to an IRA
Having multiple IRAs can be a very good way for investors to ramp up their retirement investing results. They just need to make sure they’re aware of the potential challenges that come with doing so and are prepared to handle them.
Do you think you’ll benefit from having multiple IRAs? What are your hesitations about it? Share your thoughts with us in the comments section below.