There is no limitation to the number of individual retirement accounts (IRAs) that you can open. It is the amount of the IRA contribution that is capped annually by the Internal Revenue Service (IRS).
This is done to limit how much workers with rich remunerations benefit from their tax advantages than the average worker and to prevent misuse of IRAs in tax evasion.
The limits are based on the type of plan, the account holder’s age, and how much the individual earns.
Types of IRAs
There are many variations of individual retirement accounts with diverse applications that we should look into so we can appreciate why one may end up with a number of IRAs.
They are subjected to an annual maximum IRA contribution limit within which you should stay regardless of the number of accounts you have. For example, in 2020 and 2021, an individual can contribute up to a maximum of $6,000 per annum to an IRA account.
If you are 50 years and above, you are allowed to contribute an extra $1,000 as a catch-up contribution, bringing your allowed annual total to $7,000.
You can’t contribute more than 100% of your compensation, so your permitted contribution can be less than $7,000 if your annual earnings fall below this figure.
You should also have an eligible source of income for every year you contribute to the IRA account, whether it is a salary, wages, or self-employment income.
A traditional IRA makes provisions for tax deductions for the years that the contributions are made. The withdrawals will be taxed at the contributor’s prevailing income tax bracket at the point of withdrawal.
These allow individuals to make contributions on behalf of their spouses who might have little or no income. The couple should be married and filing joint tax returns. Their total contributions should not exceed what they have reported in their returns as their joint income.
The spouse will open their own individual IRA because joint IRAs are not allowed. Contributing on behalf of your spouse is a nice way of doubling your retirement savings.
It can be set up at any age, provided you have eligible compensation and meet the income threshold. It doesn’t have provisions for a tax deduction as the contributions are being made, but withdrawals are tax-free after retirement. The contributor should have reached 59 ½ years and run the account for over five years to be eligible to benefit from the free withdrawals.
Roth individual retirement accounts have income limitations that cap the amount of income you are eligible to contribute. Contributions are phased out based on income tax brackets.
In 2021, for instance, you can’t contribute to a Roth IRA if you earn more than $140,000. The income phase-out range starts from $125,000. For married couples who file a joint tax return, the maximum earning to be eligible is 208,000, with the income phase-out range starting from $198,000.
The acronym stands for ‘Savings Incentive Match Plan for Employees’ It targets small businesses with less than 100 employees. It is a tax-deferred retirement savings plan supported by the US government, which provides a tax credit for employers who set up the plan with automatic enrollment.
In 2021, employees can contribute up to $13,500 annually with a retirement catch-up contribution allowance of $3,000 for those aged 50.
Simplified Employee Pension (SEP)
SEP IRA is an account that an employer or a self-employed individual can establish to meet their retirement savings needs. It allows employers to skip contributions in years when business is down. The employer can’t contribute more than 25% of the employee’s compensation or $58,000, whichever is lower.
This account allows you to make contributions both as an employer and an employee if you are the proprietor of the business.
Employer-Sponsored Retirement Plans
This is a company-sponsored retirement account into which the employee makes contributions, and the employer can also match the contribution fully or to a certain percentage.
Contribution is deducted from the employee’s pre-tax income, which means the contributor will be subjected to tax on the contribution and its earnings at the point of withdrawal.
It is beneficial to individuals who expect a drop in their tax bracket, like those close to retirement. In addition, with the tax being levied at the withdrawal phase, it is less costly and will offer an instant tax break.
The employees can choose specific investments from a list provided by their employers where their funds will be invested.
The annual contribution limit is $19,500 for workers below 50 years and $26,000 for those who have attained 50. This factors in an optional catch-up contribution of $6,500.
Should the employer elect to make a matching contribution, the limit for the total employee and employer contribution for 2021 is lower, between $58,000 or 100% of the employee’s compensation. If the employee is 50 and above, the annual limit is $64,500.
Roth 401 (k)
This is an investment savings account sponsored by the employer and funded with after-tax money up to the fund’s specified limit. Withdrawals are tax-free because the contributions have already been taxed. This makes it an ideal plan if you feel you will be in a higher tax bracket at the point of withdrawal.
The Roth IRA contribution limit for 2020 and 2021 is $19,500, with an optional catch-up contribution allowance of $6,500 for contributors over 50 years.
The withdrawal has to be a qualified distribution to enjoy these benefits, meaning it needs to comply with certain conditions. The account must have been in existence for at least five years, and the contributor must have reached 59 ½ years, or the withdrawal is necessitated by a disability like the passing away of the contributor.
This is another employer-sponsored investment account for employees of public schools and other tax-exempt organizations. Such employees include school administrators and teachers, government employees, nurses, professors, doctors, and librarians.
It operates in the same way as the 401 (k) but with fewer investment options as it mainly serves the public sector.
The employer’s matching investment has a shorter vesting period than 401 (k) plans which means the employee can receive the funds within a shorter period.
It has the same basic annual contribution limit as the 401 (k) of $19,500 for 2020 and 2021. In addition, the combination of employee and employer contribution is limited to the lesser amount between $58,000 or 100% of the employee’s most recent annual salary.
Their provision for catch-up does not require the contributor to be 50 years and above. Instead, you become eligible so long as you have worked for the same eligible employer for 15 years. The maximum catch-up contribution under a 403 (b) plan is $3,000 annually, up to a lifetime limit of $15,000.
They also have a Roth (after-tax savings) option, which requires the withdrawal to satisfy the conditions for a qualified distribution so that they are tax- and penalty-free.
Balancing Many IRAs
Roth Versus Traditional IRAs
It is almost impossible to predict what the tax rates will be a decade from now. Consequently, none of these retirement plan accounts is a sure thing. You should hedge your retirement savings by distributing them between different plans.
As an IRA owner, you can split your contribution between a traditional IRA contribution and your Roth account IRAs so long as you don’t surpass the limit for each kind of account and the individual limit. The Roth IRA, which allows you to make tax-free withdrawals, will balance off the taxable withdrawals from a traditional IRA.
Required Minimum Distributions (RMDs)
This is the minimum amount that you must withdraw from your IRA to avoid taxes and penalties. It prevents people from using retirement saving accounts to dodge taxes. It is mandatory after attaining 72 years unless you have a special arrangement and can prove you are still working for the employer making the contributions.
There are punitive penalties for not taking your RMDs on time. Having another IRA that can hold cash for future RMDs is convenient to avoid such penalties, preferably one with minimal market risks.
Multiple IRAs enable you to spread your retirement savings over different investment options so that you can balance risk and reward depending on your preference. You can have one at a stock brokerage firm specializing in quick returns and another at a mutual funds company for a stable, guaranteed return.
Upon retirement, you can roll the money over to an IRA from your employer’s plan. This way, you stand a chance at avoiding instant taxes, and the IRA provider, usually a brokerage firm or a mutual fund company, will offer a wider set of investment options for your retirement plan.
Weigh Your Options
Look for benefits such as employer matches as these give you extra money, although they may significantly raise administrative costs. Then, go through the investment plans and see which ones will give you the most value for the money at the least cost.
IRAs often have charges like annual maintenance fees, which range from $50 to $100. These will reduce your overall returns and should be considered when deciding to open multiple accounts.
Nothing is standing in your way of having as many IRAs as required. You just need to have a plan which makes the combination profitable and legal. Keep in mind that the limit is an aggregate of all your IRAs. The total amount you contribute through all your accounts is considered when assessing if you have surpassed it.