Can You Have Multiple IRAs? Limitations and Benefits
Individual Retirement Accounts (IRAs) are a great way to save and invest for retirement. One of the biggest advantages of IRAs is that they are tax-advantaged accounts. It may either allow for tax-deductible contributions like that of traditional IRAs or it may allow tax-free withdrawals during retirement as a Roth IRA does.
Does the IRS Allow Having Multiple IRAs?
Yes, the IRS does not set a limit as to how many IRAs a person can have. This means that a person is allowed to have as many IRAs as they want so they can save up better for the future. For instance, an employee is given the freedom to open both a traditional IRA and a Roth IRA at the same time or they may also opt to have multiple of the same type of IRA. Before opening a new IRA, you should make sure that you have taken full advantage of your current IRA account(s) first since opening a second IRA may create unnecessary complexity.
Limitations of Handling Multiple IRAs
Even though the IRS does not set a limit as to how many IRAs a person can have, it is important to note that total contributions made to all the IRAs maintained should still be within the prescribed annual maximum contribution limit. Having multiple IRAs does not mean each type of account has a set limit you can max out separately from the others.
IRA Contribution Limits
For 2022, the total yearly contribution to both traditional and Roth IRAs combined should not exceed $6,000 for those who are under the age of 50. This was the same contribution limit in 2021. For those who are 50 and above, the total annual contribution to both traditional and Roth IRA combined is $7,000. The $1,000 difference in the limits is treated as a catch-up contribution. In effect, if you are considering handling multiple IRAs, you can only contribute to a total of $6,000 for both your traditional IRA and Roth IRA combined. You can choose to split the total contribution limit between the two accounts at $3,000 each or distribute the amount strategically between the two at your own choice as long as you do not exceed the given limit.
Benefits of Having Multiple IRAs
While having multiple IRAs may have its limits, you can actually derive several benefits from it also.
Another benefit of handling multiple IRAs is the freedom it gives people. Having more than one IRA account allows employees with multiple sources of income to qualify for higher contributions in each respective IRA account they have opened. For example, someone who earns their living through two different jobs may want to handle both traditional IRAs as well as Roth IRAs according to their status instead of lumping the two incomes together.
Diverse Management of Funds
You can divide your IRA funds between several banks or brokerage companies to avoid concentrating all of them within one institution. Having IRA accounts with separate financial institutions could lead to a healthy exposure of various asset classes and multiple investment philosophies. Additionally, you may discover that one financial institution charges significantly higher fees than the other.
Implementation of Different Investment Strategies
When you have multiple IRAs, you can opt to invest in different strategies for each IRA account. You will have the option to either be passive or active in your strategies. Such strategies may include the following:
- Entering into long term investment plans
- Investing in dividend stocks or bonds
- Acquiring mutual funds or index funds
Additionally, if you would like to have one IRA holding more aggressive investments, while the other is more conservative, breaking them out into two separate IRAs can be a helpful way to keep track of performance.
Spreading Out Different Beneficiaries per Account
Multiple IRAs will allow you to choose multiple beneficiaries for each type of IRA account. This is particularly beneficial in the event that you no longer have your spouse with you anymore and want to leave some of your IRA funds to your children instead.
Penalty-Free Early Withdrawal
This is only applicable to Roth IRAs given that they have been established for more than five years. This is a real advantage especially when you need to withdraw money before reaching the age of 59 1/2 years which is not possible when you only have the traditional IRA unless you are willing to suffer the charges for early withdrawal.
Strategizing Tax Liabilities
Having both a traditional IRA and Roth IRA allows for some creative flexibility upon withdrawal. If you only have a traditional IRA, you may incur a large tax liability upon retirement. But if you have assets in both types of IRAs, you can offset taxes incurred by withdrawing from the traditional IRA with the tax-free withdrawals of a Roth IRA. A finance professional can help you make savvy decisions to minimize tax liability.
The Bottom Line
Having multiple IRAs is not something new and can actually give you more benefits than limitations provided that they are treated like individual accounts. It will allow people to diversify their portfolios while giving them more freedom when investing their money or preparing for retirement. It can also be a way to offset tax liabilities and is one of the best ways to handle the different IRA accounts. However, there are limits as well. You will not be able to contribute more than $6,000 each year for both your traditional IRA and Roth IRA combined. In addition, it may cause confusion between multiple beneficiaries per account which can only worsen if you have multiple accounts with different account managers. Also having many IRA accounts can lead to higher maintenance fees as well as management costs which would eat into your savings over time. For these reasons, it is recommended that you seek guidance from a financial advisor before opening any new type of IRA account.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.