Individual retirement accounts (IRAs) can be set up in several ways and each offers distinct tax benefits. You can have multiple IRAs if you wish. The Internal Revenue Service does not restrict how many IRAs you have as long as you do not exceed the annual contribution limits. Having multiply IRAs can benefit you with your investment strategy as well as help you save money at tax time.
Cumulative Contribution Limits
The Internal Revenue Service limits the amount you can contribute each year to your IRA accounts. This is limit is cumulative and applies per person, not per account. The limit is also cumulative between Roth IRAs and traditional IRAs. For example, if you have two traditional IRAs and one Roth IRA, and you contribute the maximum to the first IRA, you cannot make additional contributions to the other IRAs.
Different Investment Types
Having several different IRAs, even if they are of the same type, allows you to diversify your portfolio and protect against investments that perform poorly. For example, you might invest one of your IRAs in a high-risk, high-reward mutual fund and another in a more conservative bond fund or FDIC-insured certificates of deposit. Each IRA account may have maintenance fees, however, which can quickly add up if you have multiple IRAs.
Different IRA Types
IRA accounts can be structured in two ways: tax-deferred IRAs and Roth IRAs. Tax-deferred IRAs allow you to deduct contributions from your taxes each year, but you pay income tax when you withdraw the funds at retirement. These IRAs benefit individuals who expect to be in a lower tax bracket at retirement. Roth IRAs do the opposite and typically benefit people who expect to be in a higher tax bracket at retirement. Roth contributions are made from after-tax dollars and when you retire, withdrawals are tax-free. If you have an IRA of each type, you can contribute to either or both, depending on your tax situation in a given year. For example, if you receive a large bonus this year, it might be more advantageous for you to contribute to a traditional IRA. If your earnings are lower the following year, you may prefer to contribute more to a Roth IRA.
Required Minimum Distribution Effects
When you have multiple tax-deferred IRAs, you must calculate your required minimum distribution from each account separately. However, you can elect to take all of your minimum required distribution from just one account, or you can spread the amount over multiple accounts. For example, if you have two traditional IRAs, one requiring a minimum distribution of $7,000 and the other requiring a $10,000 distribution, you could take $17,000 from one account or spread the $17,000 between the two accounts as you choose.
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