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Can you have more than one IRA? If yes, is it a good idea? You’ll find the answers here. The goal is to address all your concerns regarding investing strategies in an IRA account so that you can enjoy old age in the best possible way.
What is an IRA account?
If you’re looking to plan for your financial future post-retirement, you have options outside of an employer-sponsored 401(k) plan. A smart way to boost your retirement savings is through individual retirement accounts (IRAs).
There are different types of IRA – each IRA offers a specific contribution limit, withdrawal rules, and eligibility criteria. Whichever type you choose you invest in, you must consult with a financial advisor or tax professional to understand which one is most suitable for your specific financial situation and goals.
Which are the types of accounts you can invest in?
- Traditional IRA: This account allows individuals to contribute pre-tax income, and the earnings grow tax-deferred until withdrawal. Contributions may be tax deductible depending on income and participation in employer-sponsored retirement plans. Earlier, the maximum age for traditional IRA contributions was capped at 70½ years old. However, once the SECURE Act (Setting Every Community Up for Retirement Enhancement ) went into effect in December of 2019, there’s no cap on the maximum age limit.
- Roth IRA: This is funded with after-tax income, meaning contributing to a Roth IRA is with money that has already been taxed. The earnings in a Roth IRA and qualified withdrawals in retirement are tax-free. But, there are income limitations for eligibility.
- SEP IRAs: Simplified Employee Pension (SEP) IRA is for self-employed individuals and small business owners. It allows contributions to be made by both the employer and the employee. Contributions are tax-deductible and grow tax deferred until withdrawal.
- SIMPLE IRA: Savings Incentive Match Plan for Employees (SIMPLE) IRA is available to small businesses with 100 or fewer employees. Both employers and employees can contribute, and contributions are tax-deductible. Withdrawals are taxed as regular income.
- Self-Directed IRA: This IRA allows individuals to have more control over their investments. It allows for a wider range of investment options beyond traditional stocks and bonds, such as real estate, private equity, and precious metals. However, self-directed IRAs have stricter regulations and may require specialized custodians.
Traditional vs Roth IRA
Roth and Traditional IRAs are both retirement savings accounts that offer tax advantages, but they differ in terms of when you pay taxes on the contributions and withdrawals. Here are the key differences between Roth IRAs and Traditional IRAs.
Key Differences Traditional IRA Roth IRA Tax Treatment of Contribution Contributions are tax-deductible when they are made. You can reduce your taxable income by the amount contributed Contributions are not tax-deductible. You contribute with already-taxed money Tax Treatment of Withdrawals Withdrawals are generally taxed as ordinary income in the year of the withdrawal. This means that you will owe taxes on both the contributions and any earnings when you withdraw the funds in retirement Qualified withdrawals are tax-free. To qualify, the Roth IRA must have been open for at least five years, and you must be at least 59½ years old. Since you contribute with after-tax dollars, you can withdraw your contributions at any time without taxes or penalties Required Minimum Distributions (RMDs) Starting at age 72 (as of 2021), you are required to take minimum distributions from your account. The amount you must withdraw is subject to income tax. It is based on your life expectancy and the account balance Does not require minimum distributions during your lifetime. You have the flexibility to leave the funds in the account and let them continue to grow tax-free Eligibility and Contribution Limits There are no income limits for contributing, but there are annual contribution limits set by the IRS. For 2021 and 2022, the maximum contribution limit is $6,000 (or $7,000 if you are age 50 or older) There are income limits for contributing. In 2021 and 2022, eligibility phases out for single filers with a modified adjusted gross income (MAGI) above $140,000 (or $208,000 for married couples filing jointly)
Before we answer the question, can you have more than one IRA, let’s burst some myths about investing in such an account.
Misconceptions regarding IRAs
You can use contributions to an IRA for investments that have the potential to foster the growth of your money. That way, you can ensure that you have a greater chance of achieving your goals and potentially even reaching them earlier than expected.
But, before you invest in an IRA, you need to understand its implications. The first step is to burst a few misconceptions that people have about IRAs.
Myth #1 IRA is an investment not an account
The truth is IRA is a type of account. However, it can apply to a single certificate of deposit (as in the case of an IRA CD in a bank) or to a brokerage account with options such as CDs, stocks, bonds, mutual funds, and ETFs.
Myth #2 One can not contribute to a 401(k) and an IRA
The truth is, you can contribute to both in the same year. However, there is a caveat on which type of IRA you can have simultaneously. Any individual who earns taxable income has the opportunity to make contributions to a traditional IRA. However, if you or your spouse are participating in a workplace retirement plan, such as a 401(k), and your income surpasses a specific threshold, the deductibility of your traditional IRA contribution might be restricted.
In contrast, a Roth IRA allows you to contribute with after-tax money, which means the contribution is not tax-deductible. Nonetheless, your funds can grow without federal taxes, and when you withdraw the money in retirement, it remains tax-free.
Eligibility to contribute to a Roth IRA is not contingent upon participation in a retirement plan at your workplace, whether by you or your spouse. As long as your modified adjusted gross income (MAGI) falls below the annual limit and you have taxable compensation that matches or exceeds your desired contribution, you are eligible to make contributions to a Roth IRA.
Myth #3 One can not withdraw IRA money until 59½ of age
While it is true that there is a 10% early withdrawal penalty levied on withdrawals taken from an IRA before age 59½, there are some options for penalty-free withdrawals before retirement.
The 10% penalty may not apply if your reason for an early withdrawal is any of the following:
- You’re a qualified first-time home buyer and require money up to $10,000
- You need money to pay for your higher education expenses
- There is an urgent need to pay health insurance premiums and you’re unemployed
- You have a total and permanent disability
- If there are withdrawals by beneficiaries of an inherited IRA
- If you have a qualified birth or adoption distribution
Myth # 4 There is no requirement for a beneficiary designation on retirement accounts
Ensuring that your beneficiaries (whether in IRAs, workplace savings plans, insurance policies, or brokerage accounts) are accurately listed can offer reassurance that you’re taking every possible step to secure your future and the well-being of your loved ones. Your beneficiaries are a critical part of your estate planning. And, making sure that the information is correct will help to keep your life savings in safe hands.
And now for the final misconception.
Myth # 5 You can only invest in one type of IRA
The truth is, if you’re eligible, you can contribute to a Roth IRA and a traditional IRA. It’s important to understand that the annual contribution limit for traditional and Roth IRAs is a combined amount. Whether you have a traditional IRA, a Roth IRA, or both, the maximum total contribution you can make across all your IRAs remains the same. The contribution limits this year are:
- $6,500 for those less than the age of 50
- $7,500 for people who are 50 years of age or older
Remember that you have the option to contribute to an IRA for the previous year until the tax-filing deadline for that specific tax year. This flexibility allows you to make two contributions in a single calendar year, although they will be attributed to two separate tax years.
What are the advantages of multiple IRA accounts?
Having multiple IRAs can offer several advantages for individuals who want to diversify their retirement savings and optimize their financial strategies. Here are some advantages of having multiple IRA accounts:
- Tax planning: By having different types of IRAs, such as Traditional IRA, Roth IRA, or SEP IRA, you can strategically manage your tax liabilities in retirement.
- Contribution flexibility: Each type of IRA has its own contribution limits and eligibility requirements. By having multiple IRAs, you can maximize your retirement savings by contributing to different accounts. For example, if you have a Traditional IRA and a Roth IRA, you can contribute up to the limit for each account, effectively increasing your overall contribution potential.
- Investment diversification: Different IRA accounts allow you to invest in a wide range of assets. By having multiple IRAs, you can diversify your investment portfolio across various accounts. For instance, you can invest in stocks, bonds, mutual funds, real estate, or alternative investments through different IRA accounts. This can help mitigate your risk.
- Inherited IRA management: If you inherit an IRA from someone, having multiple IRA accounts can provide more options for managing the inherited funds. You can establish separate inherited IRAs for different beneficiaries or roll over the inherited funds into your existing IRAs based on your needs and objectives.
- Required Minimum Distributions (RMDs): Once you reach a certain age (currently 72 years old for Traditional IRAs), you should take annual minimum distributions from your Traditional IRA accounts. By having multiple Traditional IRAs, you can calculate the RMDs separately for each account. This can be advantageous if you want to keep certain assets invested for longer periods while taking distributions from other accounts.
- Estate planning: Multiple IRA accounts can be useful in creating estate plan strategies. For example, you can name different beneficiaries for each account, tailor the distribution of assets to specific individuals, or utilize various estate planning techniques to minimize taxes or facilitate wealth transfer.
What are the disadvantages of having multiple IRA accounts?
One significant drawback is the potential for increased complexity and administrative burden. Managing multiple IRA accounts requires keeping track of various contributions, distributions, and tax reporting for each account separately, which can be time-consuming and potentially confusing.
Additionally, having multiple accounts might result in higher administrative fees and expenses, as each account typically incurs its own set of charges.
Is there an option to combine IRA accounts?
But here’s another way to deal with the disadvantages of multiple IRAs. You can opt for an “IRA rollover”. It refers to the process of consolidating retirement accounts. This involves transferring funds from various accounts into a single existing IRA account or opening a new account. So, your investments are easier to manage, there are lesser fees, and the process is easier for the beneficiaries.
Saving and growing your money for the future can be done through individual retirement accounts, which provide tax-advantaged savings. A traditional IRA allows tax-deductible contributions, while a Roth IRA permits tax-free withdrawals during retirement. Now, you know the answer to ‘Can you have more than one IRA’. While there is no restriction on the number of IRAs you can have, there are limits on annual contributions.
When deciding whether to open multiple IRAs, it may be beneficial to consult a trusted financial advisor. It’s important to understand the account features, contribution details, and the terms and conditions. Only then can you ensure that your savings align with your financial goals.
Read more: How to prepare your home for aging in place