Can You Have Multiple IRAs?

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Can You Have Multiple IRAs?

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Can you have multiple IRAs? Yes. There are many reasons why having more than one IRA could help you better protect or grow your retirement savings.

For most people, having at least two IRAs -- one traditional, one Roth -- will likely have more advantages than drawbacks. But in a few circumstances, having a single IRA could be a better choice.

There is no limit on the number of IRAs you can have. There is, however, a limit on how much you can contribute to IRAs each year. It's fine to have more than one IRA as long as you don't exceed annual contribution limits.

There's technically nothing stopping you from opening a new IRA with a new company every year, although managing all of your accounts, passwords, balances and paperwork makes this a very impractical choice.

In 2023, you can contribute up to the lesser of your total earned income or $6,500 to a Roth IRA, a traditional IRA or a combination of both. If you're 50 or older, you can also make catch-up contributions of up to $1,000 more than the annual limit for a total of $7,500 across all your IRA accounts.

Suppose Jasmine, age 55, has both a Roth IRA and a traditional IRA. Here are some examples of how she could allocate her contributions to each account.

Having multiple IRAs can have several advantages, as long as you're willing to manage them all.

Depending on the type of institution that serves as your IRA custodian and how you invest the money within your IRA, your account assets will be protected by FDIC or SIPC insurance.

FDIC insurance protects up to $250,000 across all of your retirement accounts at a single bank. If you had both a Roth IRA and a traditional IRA at the same bank, you would have $250,000 in total coverage. If you had your Roth IRA at a different bank than your traditional IRA, you would have $250,000 in coverage for each account, or $500,000 total.

FDIC insurance also protects certain cash deposits held in IRAs at certain brokerage firms. For example, cash balances in Fidelity's FDIC Insured Deposit Sweep Program get FDIC coverage even within IRAs.

If your IRAs exceed these limits, then spreading your assets across more than one institution should protect more of your money.

The National Credit Union Association provides similar protection for IRAs held at credit unions.

If your IRA custodian is a brokerage such as Fidelity, Vanguard or Schwab, SIPC insurance protects up to $500,000 in investments per person, per account type, per institution. This insurance does not protect you if your investments lose value. It only protects you if the brokerage fails.

What happens when you have an IRA at a brokerage, but some of your IRA balance is held as cash? SIPC covers cash on deposit to purchase securities for up to $250,000, not $500,000.

While we all hope that the people we love have our best interests at heart, that's not always the case.

Relatives can be faced with addictions or circumstances that lead them to make very bad choices. It is all too common for people to lose everything in a retirement account because their relative found the account information written down somewhere or saved to a computer, or they were able to call in and impersonate the true account owner well enough to transfer money out.

Holding money in multiple retirement accounts is one easy way to make sure that your nephew battling addiction can't wipe out everything with one well-timed login and transfer.

Institutions can freeze your accounts due to potential fraud or suspicious activity. While everything usually works out in the end, you may find yourself unable to access funds for an extended period of time. Having multiple accounts in retirement helps safeguard against this.

If your account's suspicious activity turns out to be fraud from being hacked, having another source of retirement funds at a different financial institution could be a godsend. Not every account has strong fraud protections.

It's a good idea to check your financial institution's asset guarantee policy, because you may not be eligible for reimbursement of hacking losses if you haven't taken certain security measures like using strong passwords and protecting your account information.

Maybe you want to see how well a robo-advisor or professional human advisor can manage some of your retirement money, but you also want to keep managing some yourself. Having more than one IRA will make this easier.

If you want to hold certain investments -- like real estate -- that many financial institutions don't allow within an IRA, you might want to keep your existing IRA where it is but open a self-directed IRA at a financial institution that gives you more asset classes to choose from.

No one knows exactly what their tax brackets will be when they retire or what their income will be when they start taking distributions from their IRAs. However, we know that Roth IRAs are taxed differently than traditional IRAs.

If you want to hedge your bets about future tax liability, you might want to keep some of your money in a traditional IRA and some in a Roth IRA.

Roth IRAs don't have required minimum distributions (RMDs) during the owner's lifetime. Traditional IRAs do.

Most people won't have the luxury of barely touching their IRAs to cover their living expenses in retirement. But for those who expect to have multiple sources of income that more than cover their needs and wants, having a Roth IRA in addition to a traditional IRA might make sense -- assuming there's some benefit to maintaining a traditional IRA.

If nothing else, you might want to have multiple IRAs for laddered traditional-to-Roth conversions. This way, you wouldn't incur a huge income tax bill in a single year by converting the entire balance of a traditional IRA to a Roth IRA at once.

If you still have money in an IRA when you die, the account will pass to your estate or to specific beneficiaries you have named through "transfer on death" designations with the financial institution that holds your account.

Let's say your adult child David inherits your traditional IRA. He would have 10 years to sell all the investments and move the money to a non-retirement account. To minimize his tax bill, David would need to do significant planning around which investments to sell and when, as well as how much to withdraw each year.

Meanwhile, your adult child Isabella inherits your Roth IRA. She would have 10 years to withdraw all the funds -- but they'd all be tax free, and she'd be spared the tax planning David endured.

If you don't want your kids arguing over which of them you loved more, a better idea might be to leave each account 50/50 to both kids, or have a single IRA that you leave 50/50 to each beneficiary. (But if you want to be simultaneously generous and vindictive, now you have another arrow in your quiver.)

You can take an early withdrawal from a Roth IRA without paying income tax or incurring penalties when you withdraw contributions, not earnings. But if you take a withdrawal before age 59½ from a traditional IRA, you will owe income tax and you may also owe penalties.

If you have money in each type of account, then you have more flexibility around which account to take money from.

If you have no money in any traditional IRAs, you can use a traditional IRA account solely as a vehicle to fund a backdoor Roth IRA in years when your income is too high to contribute to a Roth directly.

You must have both a traditional IRA and a Roth IRA to use this strategy. However, if you have assets in your traditional IRA, the backdoor Roth strategy gets more complicated and can be costly.

While there are more advantages than disadvantages to having multiple IRAs, many of the advantages may not apply to your situation. The biggest disadvantage of having multiple IRAs is how much more complex it makes your financial life. You'll have more passwords to keep track of, more balances to check and more paperwork to file each year.

Some people like to optimize their finances. Other people just want their finances to be good enough. If you don't want to keep track of multiple IRAs, just choose between a traditional and a Roth IRA, put your money at a financially sound institution and be done with it.

Simplicity can be especially important if you have cognitive challenges -- which are more likely to occur as you age. If you're planning on having a relative help you manage finances, they'll likely appreciate having fewer accounts to manage rather than several with multiple institutions.

The more accounts you have, the harder it is to stay on top of what's happening in each one -- no matter how mentally sharp you are.

If you're trying to manage many IRAs, it will be harder to correctly calculate RMDs. RMDs are based on traditional IRA account balances. If you forget to include an account or calculate your RMD based on an incorrect balance you'll owe steep 25% penalties on what you should have taken out.

It's not hard to find a custodian that lets you maintain an IRA for free these days. But sometimes you have to meet a certain threshold or take a certain action -- like agree to electronic delivery of statements -- to avoid an annual charge.

Also, many accounts and investment types charge lower expense ratios to people who own more shares. Consolidating IRAs could make it easier to meet the minimum investment for the less expensive share class.

Unless you're using a portfolio management app that shows your aggregate IRA balances and holdings in a single place, it can be hard to calculate your overall asset allocation.

The result? You could end up with too much exposure to stocks when your goal is to be more conservative, or not enough exposure to stocks when your goal is to be more aggressive. It could also be trickier to decide what to buy and sell when you want to rebalance your portfolio.

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