Individual retirement accounts have great features. One of the most important features of your IRA is the fact that you can hold and contribute to more than one IRA at a time.
There is no limit to the number of IRAs that a person can own. You can divide your retirement savings over a number of different accounts. While this might seem unnecessary, there are situations when it can be helpful to own multiple IRAs.
Owning multiple IRAs
Your investment broker should give you the option of opening extra IRAs. Most brokers typically charge a small fee for setting up each additional account and that’s it. Once your new account is set up, you should not have to pay anything extra compared to what you are paying now on your investments. Your broker would likely require that you keep a minimum IRA balance so you will need to have at least that much in each account.
Owning multiple IRAs will not increase the amount you can contribute to your retirement plans every year. The annual contribution limit, currently $5,500 if you are younger than 50 and $6,500 if you are 50 or older, stays the same. Your combined contributions into the multiple accounts can not exceed the annual limit. Even though multiple IRAs do not increase what you can invest per year, there are still some benefits.
Benefits of multiple accounts
One reason to own multiple IRAs is to help keep track of your different investments and their performance. For example, you could keep your stocks in one IRA, your bonds in another, and your real estate in a third. This would easily let you see what is going on with each investment. If you have everything lumped into one account, you may overlook important performance information.
You may also be forced to open a separate account if you would like to invest in alternative assets. Regular brokerage firms do not allow investments in alternative assets like precious metals, real estate, or business partnerships for their IRAs. If you would like to invest some money in these assets, you will need to open a self-directed IRA. If you are happy with your broker for your traditional investments, then opening up an extra self-directed IRA would allow you to do both.
Separate IRAs can also be very helpful if you are investing in real estate or other alternative assets where it is necessary to pay for expenses. You are required to pay for these expenses out of the funds in the IRA that holds the asset. By keeping your properties in a separate self-directed IRA, you know where to take out money to pay these bills.
Finally, you may want multiple accounts so you can split the tax benefits of a Traditional IRA and Roth IRA. The Traditional IRA gives you a tax deduction now while you are working, whereas the Roth is better for taxes when you take money out in retirement. If you are eligible to contribute to both accounts, you could open one of each and divide you annual contributions between the two. That way you would get a partial deduction now while still earning some tax-free income in retirement.
Drawbacks
Every new IRA will charge an initial set up fee. It is a small expense but still one more cost. In addition, every IRA will have a minimum balance requirement. If you have just started investing and do not have a large amount of savings, you may not have enough money to open multiple accounts.
Finally, every new IRA is one more account that needs managing. It is important to pay attention to all of your IRAs to assure they are being properly invested. It may be easier for tracking purposes for you to keep everything in one IRA. At any point, extra accounts can be combined through rollover, giving flexibility for any change of mind.
While opening multiple IRAs takes some extra work, in the right situations it can be helpful. By keeping this information in mind, you can decide whether it is worth the effort to set up an additional IRA.
