How Many IRA Can You Have?
Updated: Dec 15, 2020
Planning one's retirement accounts can be a lengthy process because there are so many variables to consider. There are many retirement plan options, and each of these has its own merits and demerits. An IRA is a great option, and having multiple of these accounts can seem like a favorable alternative. Learn more about having multiple IRAs and other related retirement personal finance considerations.
The Importance of Saving for Retirement
Most people spend a greater part of their lives working before they eventually retire. During this time, it is important to think about the retirement period and make financial plans about how you are going to maintain and fund your lifestyle. Having the ability to take care of your own financial needs, whether working or retired, is a great advantage. It gives greater control and confidence to be in charge of one's finances and money. To find oneself in this position when retirement comes, much planning and discipline must have been involved over the years.
What Is an IRA?
Before exploring what holding a single or multiple IRA accounts is, it is important to first understand this. IRA stands for Individual Retirement Arrangement. These are supplemental retirement savings accounts that offer the holder a preferred tax structure. There are different types of IRAs, the key difference being if and when tax is incurred.
Traditional IRAs have tax-deferred, and in Roth IRAs, the investment growth is tax-free. The third type of IRA is the SEP, which stands for Simplified Employee Pension. A fourth type is the spousal IRA. These final two options are going to be discussed a little further down.
What Are the Contribution Limits for Roth and Traditional IRAs?
Knowing what the contribution limits are for a retirement savings plan is vital for planning purposes. The IRS regulates the maximum amount that you can contribute to these accounts, and the current limit was put in place for 2020/2021. For both the traditional and the Roth IRAs, the maximum contribution is $6,000 per IRA beneficiary. You can make contributions towards an additional catch-up of $1,000 if you are over 50 years.
There is, therefore, a limit to how much you can contribute to an IRA. It is impossible for those 50 years and under to contribute more than $6,000 in one of the IRA accounts and those over 50 years to exceed $7,000 total.
Can You Lose All Your Money in an IRA?
With every form of investment, it is always important to know the risk and fees associated with it—the greater the risk, the greater the opportunity to make a great return. If investing in retirement, the risk must not be so high as to put your retirement funds at risk of being wiped out altogether.
Withdrawing from an IRA
Retirement plan distributions are the withdrawals that are made from the account. They apply to qualified retirement plans such as a 401(k) and a traditional IRA, and certain rules apply. There are required minimum expectations during the lifetime of the account holder to avoid fees.
It is common for people to start withdrawing funds from their qualified retirement accounts as soon as they retire so that they have retirement income to live off of. Until they reach their required beginning date (RBD), the withdrawal money is up to them.
Once that date is passed, the account holder is penalized by fees when they do not pay the minimum annual withdrawals. The tax fees for this can be quite high. It is therefore crucial that a traditional IRA account holder be familiar with the required minimum distributions.
In a traditional IRA, the required distribution money starts when the owner of the plan turns 70 ½ years. (You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA or retirement plan account when you reach age 72, 70 ½ if you reach 70 ½ before January 1, 2020)Their age and the amount in the account are the two factors that determine the required distributions. The aggregate value of all traditional IRA accounts is used to find the IRA distribution amount. It is up to the investor to decide how much they want to distribute from each of their IRA accounts, if at all. Therefore, the investor has the freedom to take distributions from a single account or liquidate those accounts that are not performing well. In a Roth IRA account, these are not required.
The SEP Individual Retirement Account
In this retirement savings plan, the employer sets up the account. The employer can be a company or a self-employed person. A SEP IRA's advantages are that it is easy to set up, the administration costs are low, and the employer can decide how much to contribute every year. The main benefit of this plan over the standard options is that the annual contribution limits are higher. In essence, a SEP is similar to a traditional IRA, with the distinguishing factor being that this account can receive employer contributions, and these are vested immediately.
To participate in a SEP plan, the individual must be 21 years or above. The account can either be set up by a corporation, a partnership, or a sole proprietor or self-employed person. It is the employers rather than the employees who make IRA contributions into the retirement accounts. Still, the employee does have some decision-making powers as determined by the plan's trustee. To set up the plan, the employee must have been working at the company for at least 3 years out of the previous 5 years. They must also have earned at least $600 of income from their employer in the current year.
The Spousal Individual Retirement Account
When you and your spouse are looking at investment options, then the spousal IRA may be the best option to consider. It is suitable for cases when a couple is looking to create two separate retirements and improve the family's wealth. It is applicable when one spouse has an income, and the other does not.
In normal cases, to contribute to an IRA, there must be some earned income. In married couples, however, the working spouse is permitted to contribute to the spousal IRA for their non-working spouse up until the stipulated contribution limit.
A spousal IRA can either be a Roth or a traditional plan. It is beneficial because it ensures that both spouses have individual retirement accounts. The contribution limits of this option as of 2020/2021 is the lesser of $6,000 per year, with an additional $1,000 allowed if you're age 50 or older and the earned income for the year.
Knowing your filing status is important. With the spousal IRA, it is necessary to file a joint return each year. This IRA may seem like a joint account, but it is not, and the source of the income remains the income of the working spouse. A couple cannot use a spousal IRA when they do not file a joint tax return. Following the right requirements for your filing status is crucial for compliance.
Can You Have More than One IRA?
Yes, you may hold several IRAs. The Internal Revenue Service (IRS) has no restrictions on how many of these investment accounts an individual can hold. There is a limit to how much you can contribute to a Roth or traditional IRA, as mentioned earlier, so having multiple IRAs allows individuals to increase their investment amounts.
It is possible to have multiple Roth and multiple traditional IRA account and a combination of both. There are benefits to holding more than a single IRA. The first is tax diversification. In the traditional option, there is an immediate tax deduction. Only when you eventually start withdrawing from the account is when you expect to pay the taxes owed. In a Roth IRA, contributions do not get an upfront tax break, but investors enjoy tax-free qualified withdrawals.
Another benefit of having multiple accounts is investment diversification. A main principles of wise investing of money is not putting all your eggs in a single basket. Investing in a single type of stock, for example, can help you win big or lose big when the stock of that company has a massive surge or dip. Instead, it is advisable to invest in a diversified basket of options. In this way, the overall risk you face on losing your investment amounts is significantly reduced.
The next benefit of having several IRAs is the flexibility it offers on your withdrawals. The tax for traditional and Roth IRA plans are handled differently, as already mentioned. They also have different rules about withdrawals before and after the account holder retires. By understanding these guidelines and navigating between these guidelines, a holder of multiple accounts can enjoy far greater flexibility on their account withdrawals.
If you contribute to a Roth IRA, these contributions can be withdrawn without tax-free and without penalty fees for any reason. There is less wiggle room with traditional IRAs, but they allow for early withdrawals from people under the age of 59½ years without any penalty fees in certain cases. After the age of 72, withdrawals are compulsory. In Roth IRAs, there is no such restriction or limit.
The next reason why someone should consider having more than one IRA is that there is greater insurance coverage for cash and investments. Nobody wants to think about the possibility that the firm, a bank, or broker handling their investments may go under, but it does happen at times. SIPC and FDIC insurance on investment and deposit accounts are there to cover the losses you might incur should this happen. The usual cap for SIPC coverage is $500,000, while for FDIC coverage, it is $250,000. These caps apply to a single account holder at a single institution. Having multiple accounts at different institutions increases your potential coverage amount.
The final benefit of having multiple IRAs comes when writing a will and carrying out estate planning. When an IRA is set up, it is possible to name account beneficiaries. More than one beneficiary may be named, and these are the primary beneficiary and the contingency. These could be any one of the holder's choosing, such as a spouse, a child, or another relation. Doing this may create complex situations, so having separate IRA accounts, each with its own beneficiary, can simplify the process of estate planning and mitigate any potential disagreements between multiple beneficiaries of a single account.
Can I have an IRA and a 401k?
Once again, it is possible and often recommended to have more than one investment account. You can have an IRA and a 401(k) at the same time. Doing this allows them to enjoy the best of both worlds because each account offers some unique advantages. Additionally, holding both accounts also allows you to increase their contribution limits and, ultimately, their retirement benefits.
If someone has both an IRA and a 401(k) or is considering opening both, they are going to be faced with a question of which of these to start contributing to. The latter retirement plans are sponsored and initiated by the employer, with IRAs are opened by an individual using either the bank or a broker. The benefit of a 401(k) over an IRA is that it allows for greater annual contributions. An IRA's benefit over the other retirement plan is that there are more options of what you may place in your basket of investments. It is important to find out how long the company can hold your 401k before you decide to leave as well.
To decide which account to invest in first, you must look at whether or not the employer offers matching contributions towards the employer-sponsored retirement plan. If they do, investing in this option may be a better option to maximum the matching investment gains. Once that is done, the rest of the year's investment money can be put towards the IRA contribution.
When the employer does not match the employee contributions towards the employer-sponsored retirement plan, it may be better to contribute towards the IRA first and use the various investment opportunities offered. Once they have maxed out their IRA accounts, they can choose to invest in extra IRAs or 401(k). In this way, they can use the pre-tax benefits of the latter.
Choosing the Right Type of IRA
Financial decisions such as where to invest money, how much to contribute to retirement plans, how to achieve the financial position desired in five years, and how many IRAs to open are not small decisions. They are best made after careful thought and evaluation of the current financial status. You may find that talking to a personal finance expert can significantly impact how you handle your money, grow tax exemptions, reduce fees when you contribute to a Roth, or make contributions per year. Knowing that your income exceeds or is within certain tax breaks allows you to calculate your taxable compensation and ensure your annual contribution towards your traditional IRA or Roth IRA each year is to your maximum benefits right now, in five years, when you are age 50, age 59, and when you eventually retire.
The key factors to consider when deciding which type of IRA retirement account to open include tax breaks, tax benefits, income per year, and whether or not your spouse has income in the case of married couples. As far as tax and managing the overall investment plan, there are some other important things to note. Having multiple IRAs means that more calculations and decisions are needed to decide the total contributions to make per year and the IRA contributions for each of the individual retirement accounts. Self-directed tax-free savings account from a financial institution is another option that allows you to contribute money towards your retirement, limit fees and taxes, and may increase your total benefits in the long run when combined with other investment opportunities.
As far as tax, the modified adjusted gross income (MAGI) and is the total household's adjusted gross income once interest from tax-exemptions and some deductions have been added. It is a very significant metric, and it can used to see if you can contribute towards a Roth or not. It also shows whether you can subtract IRA contributions. The MAGI number factors in the eligibility for several types of tax and income credits and benefits.
In summary, many advantages come with opening multiple IRAs, and the IRS does not place a little on these. Whether a normal traditional or Roth IRA, a SEP IRA, or opening a retirement account for one's spouse, all of these options help to diversify the retirement plan and gain benefits as far as taxable compensation. Managing financial firm fees, tax considerations, and making contributions to multiple IRAs are all part of gaining tax and revenue benefits. It is also helpful to know one's modified adjusted gross income.
Contact different experienced investment firms Pittsburgh offers if you wish to learn more about investing in an IRA.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawal prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% penalty tax. Limitations and restrictions may apply.
The information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.