The Pros and Cons of Opening Multiple IRAs

IRAs incentivize retirement preparations with tax advantages for investors. Most people are at least passingly familiar with some of the major IRA options, like Roth and Traditional IRAs or Individual 401ks, and each type offers different flexibilities and advantages. And while the average portfolio may only be stocked with an IRA provided by an employer, many smart investors have more than one IRA. 

The usual sweet spot is one IRA from an employer, and one additional Roth or Traditional IRA. But is this the right choice for everyone? Let’s explore some of the advantages and disadvantages of opening multiple IRAs. 

PROS 

Tax Diversification 

  • Different types of IRAs are taxed differently. By diversifying your portfolio with different types of IRAs, you can strategically increase your control over your finances. 
  • For example, Traditional IRAs can provide immediate tax deductions. 
  • This immediate deduction is often a great incentive for increased contribution to your IRA, which in turn can increase your earnings. 
  • Traditional IRAs also taxes investors on income used to fund the IRA only when they start withdrawing in retirement; this means that overall Traditional IRAs delay taxation on the investor. 
  • In contrast, Roth IRAs do not provide immediate tax deductions on income funding the IRA, but investors pay no taxes later on qualified distributions. 
  • By opening multiple accounts, investors have more control over tax distribution and diversity for greater control over personal finances. 

Flexibility on Withdrawals

  • Similarly, different types of IRAs have different rules about withdrawals before retirement. 
  • Traditional IRAs allow penalty-free, pre-retirement distributions under specific circumstances and compel account owners to take mandatory minimum distributions after turning 70 1/2 years old. 
  • Roth IRAs are somewhat more liquid and allow distribution of contributions (not earnings) anytime for any reason without taxes or penalties.
  • Deciding which option is best becomes obsolete if you have diversified your retirement planning with both. 

Potentially More Insurance Coverage

  • Your IRAs are stored in a brokerage or bank that, should it ever fail, is insured through SIPC or FDIC. 
  • Each of these typically imposes a cap on their coverage, however, and having one account or multiples of one type of account may limit you to just that capped coverage. 
  • Alternatively, bolstering your investments in more than one type of IRA can double your insurance coverage as each IRA may be considered as separate entities and therefore separately insured. 

Investment Diversification

  • Adding more investment opportunities to your portfolio diversifies your investments. 
  • You can opt for some to be professionally managed, or set online stock trading through a brokerage firm. 
  • Ultimately, diversified investments are more stable investments. 

Simplified Estate Planning

  • Retirement planning can add to your estate planning as well.
  • When opening an IRA, naming beneficiaries is part of the process.
  • And while you can name more than one beneficiary on an IRA, opening multiple IRAs enables you to distribute your beneficiaries as well, and prevent disputes over your estate. 
  • As you can see, there are many advantages to opening multiple IRAs. But that doesn’t mean there aren’t downsides to weigh into your decision.

CONS 

More Accounts Means More Work

  • For starters, more IRAs require more management. 
  • That means more tax forms, privacy notices, and policy changes. 
  • There is also a limit to what you can contribute to your IRAs, even when you have multiple IRAs. 
  • That means that opening more IRAs requires that you properly account to make sure you don’t exceed your overall contribution limit. 
  • There are no limits to the number of IRAs you have, but there are still limits to what you can contribute.

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