As you travel along your investment journey have you found yourself wondering "Can I have multiple IRAs?" An IRA might be the right vehicle for your retirement savings goals. But there are a few different types available. So as you explore the options, you might also be wondering how many IRAs can you have.
In this article we will discuss different types of IRA options and answer questions such as "Can I have more than one IRA?" and if so "How many IRAs can I have?"
What is an IRA?
First things first, what is an IRA? An IRA, or individual retirement account, offers a vehicle for retirement savers to build their funds in a tax-advantaged way. Although different IRAs offer different tax advantages, each offers the right solution for different retirement savers.
You cannot take funds out of your IRA without a penalty until you are 59.5 years old. If you take out the funds early, you will have to pay a 10% penalty on top of your income tax obligations.
There are some ways to avoid the penalty by pulling out funds only for specific circumstances. For example, first-time homebuyers can pull out up to $10,000 towards their home purchase from their IRA without an early distribution penalty.
Here’s a breakdown of the different types of IRAs.
A traditional IRA allows savers to make contributions that may be tax-deductible. With that, the funds you invest in your traditional IRA will be from your pre-tax income.
As you build your retirement nest egg, this tax advantage can allow you to grow your funds more quickly without a headwind of taxes holding you back. But keep in mind that you’ll have to pay regular income tax when you withdraw the funds.
A Roth IRA is another popular option. The contributions you make into this IRA are not tax-deductible. However, the qualified distributions will not be taxed as income. So, a Roth IRA is a good option if you want to get the obligation of paying taxes taken care of upfront.
Although the traditional and Roth IRAs are among the more popular options, there are other IRAs specifically designed for self-employed individuals.
The SEP-IRA (Self-Employed Individual Retirement Account)
The SEP-IRA allows you to contribute up to 25% of your income. But there is a maximum of $61,000 for 2022 to keep in mind.
The SIMPLE IRA
Additionally, the SIMPLE IRA (Savings Incentive Match Plan for Employees) allows small business owners to contribute to their own and their employees’ retirement savings.
If you are self-employed, I highly recommend checking out our full article about self-employed retirement account options.
How many IRAs can you have?
As you can see, there are many kinds of IRAs available. So, it makes sense to be asking yourself "How many IRAs can I have?"
Ultimately, there is no limit to the number of accounts you have open. However, there is a limit on how much you can contribute in total to all of your IRAs each year.
So to answer your burning question of "Can I have multiple IRAs?" Yes, you absolutely can. But if you have more than one IRA, you’ll need to keep a careful eye on the contributions you make to each.
IRA contribution limits
If you invest in multiple IRAs, the total amount of money you can contribute to both accounts can't exceed the annual limit of $6,000 ($7,000 if 50 or older). The IRS might penalize you with a 6% excessive contribution penalty if you exceed this amount.
Keep in mind that the contribution limits change every year. The $6,000 limit is current for 2022. But you’ll need to regularly check the contribution limits for IRAs each year to ensure you aren’t going over the limit.
So, you could have a traditional IRA and a Roth IRA. But you’ll only be able to contribute a combined total of $6,000 in 2022. Can you have more than one Roth IRA? Absolutely! But again, you’ll only be able to contribute a combined total of $6,000 in 2022.
Reasons to have more than one IRA
So, now that we covered the question "How many IRAs can you have," let's dig into reasons why you would want to have multiple IRAS. There are a few reasons why having more than one IRA is a good idea.
Opening different types of IRAs leads to a diverse tax strategy. Instead of putting all of your eggs in one tax basket, you can make some contributions with pre-tax funds and other contributions with post-tax funds.
When you make your withdrawals, you’ll have different tax obligations with each type of account.
Flexibility for withdrawals
With different kinds of IRAs, there are different withdrawal rules. As you approach retirement age, having the flexibility of these different rules could help to make your retirement funds work better for you.
For example, a Roth IRA will allow you to pull out your contributions penalty-free at any time. But that’s usually not the case with a traditional IRA unless you meet certain requirements.
Reasons to stick with one IRA
Instead of asking yourself, "How many IRA accounts can I have?" Maybe the question should be, "What is the right number of IRAs for my situation?"
Here are some reasons to stick with one IRA.
As with many retirement accounts, there is a bit of paperwork involved in setting up an IRA of any kind. Although it may not take too long to complete the paperwork, it must be done correctly to avoid any possible errors.
And let’s be honest, no one likes the idea of adding more paperwork to their to-do list.
Layers of complexity
Beyond the initial paperwork, you’ll need to keep track of your contributions to multiple IRAs on an annual basis. If you accidentally contribute more than you should, the IRS will levy a 6% tax on any excess contributions.
With that, you’ll have to keep a close eye on your contributions across several accounts. Keeping up with the additional complexity can get tedious after a while.
How many IRAs should you have?
When asking "How many IRA accounts can I have?", it is likely best to reframe the question and ask "How many IRAs should I have?" In theory, you can open an unlimited number of IRAs. But in reality, keeping up with multiple IRAs might not be the best use of your time.
In most cases, it is likely best to keep things simple and stick to one IRA. But every retirement plan has its own unique nuances. As you build your retirement plan, consider what mix of accounts will work best for your unique situation.