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Can you have multiple IRAs? Yes. Having multiple IRAs can help you better protect and grow your retirement savings for a variety of reasons.
The majority of people will probably benefit more from having at least two IRAs—one traditional and one Roth—than from not having any. However, there are some situations where owning a single IRA might be a better option.
Understanding the Benefits and Considerations of Diversifying Your Retirement Savings
Individual Retirement Accounts (IRAs) offer a powerful tool for building a secure financial future. With the ability to grow your money tax-free and enjoy tax-free withdrawals in retirement, Roth IRAs have become increasingly popular. But when it comes to managing your retirement savings, a question arises: should you have multiple Roth IRAs?
This guide delves into the intricacies of this decision, exploring the benefits and drawbacks of diversifying your Roth IRA holdings. By understanding the nuances of multiple Roth IRAs, you can make an informed choice that aligns with your individual financial goals and risk tolerance.
Key Takeaways:
- The IRS allows individuals to have an unlimited number of Roth IRAs.
- Annual contribution limits apply to all Roth IRAs combined, not individual accounts.
- Multiple Roth IRAs offer diversification benefits, including investment options and beneficiary designations.
- Managing multiple accounts can be more complex and potentially incur higher fees.
- Carefully weigh the pros and cons before deciding on multiple Roth IRAs.
Understanding the Rules of Multiple Roth IRAs
The Internal Revenue Service (IRS) does not restrict the number of Roth IRAs an individual can open. This means you can have multiple Roth IRAs with different financial institutions, each offering unique investment options and benefits. However, it’s crucial to remember that annual contribution limits apply to the total contributions across all your Roth IRAs, not individual accounts.
For 2023, the annual contribution limit for Roth IRAs is $6,500 ($7,500 for individuals aged 50 or older). This means you can contribute a maximum of $6,500 across all your Roth IRAs combined, regardless of the number of accounts you have.
Benefits of Having Multiple Roth IRAs
There are several potential benefits to having multiple Roth IRAs:
- Investment Diversification: Multiple Roth IRAs allow you to diversify your investments across different financial institutions and asset classes. This can help mitigate risk and potentially enhance returns.
- Tax Diversification: You can combine a traditional IRA with a Roth IRA to enjoy a mix of tax benefits. Traditional IRA contributions are tax-deductible, while Roth IRA withdrawals are tax-free.
- Beneficiary Flexibility: Each Roth IRA can have a designated beneficiary, allowing you to distribute your assets according to your specific wishes.
- Withdrawal Flexibility: Unlike traditional IRAs, Roth IRAs allow you to withdraw your original contributions without penalty after a five-year holding period. This provides greater flexibility in accessing your funds.
- Increased Account Insurance: The Securities Investor Protection Corporation (SIPC) insures up to $500,000 per account. Having multiple Roth IRAs can increase your overall coverage, providing an added layer of security.
Drawbacks of Having Multiple Roth IRAs
While multiple Roth IRAs offer several advantages, there are also potential drawbacks to consider:
- Increased Paperwork and Complexity: Managing multiple accounts requires keeping track of more paperwork, earnings, and potential losses. This can be time-consuming and overwhelming for some individuals.
- Portfolio Maintenance: Monitoring and rebalancing multiple accounts can be challenging, ensuring your assets are aligned with your financial goals and risk tolerance.
- Potential for Higher Fees: Some financial institutions charge annual account maintenance fees, trade and transaction fees, and other expenses. These fees can chip away at your account’s growth over time.
Is it Worth Having Multiple Roth IRAs?
The decision of whether or not to have multiple Roth IRAs is a personal one that depends on your individual circumstances. Consider the following factors when making your choice:
- Age and Income: Younger individuals with higher incomes may benefit from contributing to a Roth IRA early to maximize tax-free growth.
- Retirement Savings Goals: If you have ambitious retirement savings goals, multiple Roth IRAs can help you reach your target faster.
- Risk Tolerance: Diversifying your investments across multiple Roth IRAs can help mitigate risk, which may be appealing to risk-averse individuals.
- Time Commitment: Managing multiple accounts requires more time and effort. If you have limited time, a single Roth IRA may be more manageable.
When Does it Make Sense to Have Multiple Roth IRAs?
There are specific situations where having multiple Roth IRAs can be particularly advantageous:
- Investment Diversification: If the investment options offered by one financial institution are limited, opening a second Roth IRA with another provider can expand your investment choices.
- Beneficiary Planning: If you plan to leave your Roth IRA to multiple beneficiaries, opening separate accounts can simplify the distribution process.
Having multiple Roth IRAs can offer valuable benefits, including diversification, tax advantages, and flexibility. However, it’s crucial to carefully weigh the potential drawbacks, such as increased complexity and fees, before making a decision. By understanding your individual financial goals and risk tolerance, you can determine if multiple Roth IRAs are the right choice for you.
Remember, consulting with a qualified financial advisor can provide valuable guidance in navigating your Roth IRA options and developing a personalized retirement savings plan.
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Increased Protection Against Financial Institution Failure
Your IRA assets will be covered by FDIC or SIPC insurance, depending on the kind of organization that manages your account and how you invest the funds inside your IRA.
Up to $250,000 is protected by FDIC insurance for all of your retirement accounts held at a single bank. If you had a traditional IRA and a Roth IRA with the same bank, your total coverage would be $250,000. You would have coverage of $250,000 for each of your two accounts, or a total of $500,000, if your traditional and Roth IRAs were held at different banks.
Additionally, some cash deposits kept in certain brokerage firms’ IRAs are protected by FDIC insurance. For instance, even within IRAs, cash balances in Fidelity’s FDIC Insured Deposit Sweep Program are covered by the FDIC.
If your IRA balances are higher than these, investing in multiple institutions should safeguard a larger portion of your funds.
For IRAs kept at credit unions, the National Credit Union Association offers comparable protection.
SIPC insurance covers up to $500,000 in investments per person, per account type, and per institution if your IRA custodian is a brokerage like Fidelity, Vanguard, or Schwab. If the value of your investments decreases, this insurance does not shield you. It only protects you if the brokerage fails.
If you have an IRA at a brokerage and part of your IRA balance is cash, what happens? SIPC will only cover up to $250,000 (not $500,000) in cash on deposit for the purchase of securities.
Can You Own Multiple Roth IRAs? (Ask the CFP®)
FAQ
Is it better to have 2 Roth IRAs or one?
Should I combine my Roth IRAs?
What is the 5 year rule for Roth IRA?
What is the downside of a Roth IRA?
Can you have multiple IRAs?
You can even own multiples of the same kind of IRA, meaning you can have multiple Roth IRAs, SEP IRAs and traditional IRAs. That said, increasing your number of IRAs doesn’t necessarily increase the amount you can contribute annually. For Roth IRAs and traditional IRAs, that’s $7,000 in 2024 ($8,000 if age 50 or older).
Can I contribute to a Roth IRA and a traditional IRA?
Yes, you can contribute to both a Roth IRA and a Traditional IRA. However, the total contribution to all your IRAs cannot exceed the annual limits set by the IRS. 3 For instance, in 2023, the total contribution limit is $6,500 for individuals under 50, and $7,500 for those who are 50 or older. You don’t want to be taxed on excess IRA contributions.
Should you have multiple Roth IRAs?
“Multiple Roth IRAs makes sense in cases where you want to separate the beneficiaries of those accounts,” explained Certified Financial Planner Brandon Opre to The Balance via email. Unless the beneficiary is the account holder’s spouse, Roth IRAs are typically converted to inherited IRAs before passing to the beneficiary.
How much can a Roth IRA contribute?
Roth IRAs have a $6,000 annual contribution limit (plus an extra $1,000 if you’re age 50 or older), and you can invest the funds in any stocks or bonds supported by the institution where you open the account. There’s no limit to how many Roth IRAs you can have, but opening multiple accounts won’t change the annual contribution limit.