September 30, 2017

Can you have more than one Roth IRA? Should you?

Bottom line: Yes, you can have more than one Roth IRA account. However, the annual contribution of $5,500 or $6,500 if you’re 50 years or older still applies across all accounts.

You can have more than one Roth IRA account. Some find the benefits appealing. However, there are some downsides to be aware of which we’ll go over.

The IRA, or Individual Retirement Account, is also called an Individual Retirement Arrangement. The arrangement term is key and helps us think less of a single account and more of a privilege. This privilege gives you the ability to stash away a set amount for retirement with tax benefits each year, regardless of the account structure.

Rules

Like all nice things, there are rules to be aware of:

Contribution limit

The 2017 contribution limit to a Roth IRA is $5,500 if you’re under 50 years old and $6,500 if you’re 50 or older. This restriction applies across all your Roth IRA accounts, as well as any contributions to Traditional IRAs. These limits are enforced by the IRS to prevent the ability of significantly reducing taxable income.

For example, say you are 42 years and contributing the maximum allowed per tax year of $5,500. You can put all $5,500 in a single Roth IRA account, or you can put $1,000 in your Roth IRA at Fidelity, $2,500 in your Roth IRA at USAA, and the remaining $2,000 in your Vanguard Roth IRA. BUT you cannot exceed the $5,500 for the tax year.

So even though you may have multiple Roth IRA accounts, your collective contribution across these are still subject to the yearly max.

Distributions and Withdrawals

Distributions and withdrawals can be made from any of your Roth IRA accounts without affecting the other. However, any withdrawals are still subject to IRS rules, and those rules apply collectively across your accounts.

Despite Roth accounts having attractive withdrawal qualities like being able to withdraw contributions and conversions at any time, you are still subject to rules on your earnings including whether you are 59.5 years or older, have had the account for five years or more, or any other early withdrawal rules.

Ways to have multiple Roth IRA accounts

Rollovers and conversions

A rollover is taking your savings from one account provider (e.g. Fidelity) and moving it to another (e.g. Vanguard).

A conversion is taking your savings in one account type (e.g. Traditional IRA) and converting it to another account type (e.g. Roth IRA).

Both rollovers and conversions can be used for creating new Roth IRAs. If you already have a Roth IRA account or more than one, you can apply the funds to existing accounts as opposed to creating new ones.

Creating a new Roth account through your provider

You don’t have to rollover or convert funds to have a second or more Roth IRA accounts. Your brokerage provider should give you the ability to open more than one Roth IRA account along with ways to fund the account alongside your others.

Benefits

That brings us to the next point, what are the benefits and downsides to owning multiple Roth IRA accounts, particularly if you aren’t allowed to contribute more than the max?

Let’s go over the benefits.

Savings bucket

Many people treat separate accounts as distinct savings buckets. Similar to you having a separate savings account in which you stash away money for your annual trip to Hawaii, a Roth IRA account can be used for this as well. One can have a Roth IRA account for retirement savings, one for savings for travel, one for home renovation, or one for many other reasons people may piece out accounts for an expected (or unexpected) expenses.

Diversity

Your Roth IRA is a savings account provided by a financial brokerages like Vanguard, Fidelity, or USAA. The brokerages allow your contributions and earnings to be invested in securities like stocks and index funds. However, the range of investment opportunities may differ across brokerages. Splitting your Roth contributions across accounts at these institutions allow you to access and diversify your investments. If had one Roth IRA account at a single brokerage, you may not be able to otherwise.

Multiple brokerages and their benefits

Like the ability to diversify your investments, brokerages can differ significantly in other benefits: fees, customer support, web and mobile user experiences, and many more. Having multiple accounts can allow you access to the best from each brokerage.

Multiple heirs

Roth IRA accounts are particularly attractive accounts for beneficiaries like your spouse or children. Unlike a 401(k), there are no mandatory withdrawals. If you expect to have more than one beneficiary, segmenting your accounts can simplify savings and overhead for your heirs.

Donations and charity

Similar to how you can treat your Roth IRA accounts by designating them to a beneficiary, if you are planning to make donations, a Roth IRA account can be an attractive way to allocate money for charity purposes.

Horse racing

This is an advanced strategy, and one we find to be a clever way to maximize your savings per year through an IRS rule called a "recharacterization." A recharacterization allows you to undo a rollover or conversion to a Roth IRA.

The IRS also allows you to convert an investment into multiple Roth IRAs. So we can put these two rules together. The strategy is to take a piece of your Traditional IRA and convert it in one Roth IRA invested in one fund, and take another piece and convert it into a Roth IRA invested in a second, different fund.

Which one performed better? If they both went up, you can keep both and pay taxes on them. If one performed better than the other, keep the highest performer and recharacterize the loser, sending it back to your Traditional IRA account (and maximizing your gain for the “price” of one conversion).

Downsides

Multiple fees and administrative costs

We mentioned earlier despite having multiple Roth IRA accounts, you are still subject to the yearly contribution limit. You are also subject to multiple fees and possibly administrative costs for each of your brokerages. This may amount to more fees than if you had a single account and, although may be a small amount, the fees technically cut into your max contribution had you only one account.

More taxes

Brokerages are obligated to provides you a 1099-R for each Roth IRA account come tax season. You’ll receive each this form for each Roth IRA account. Some folks find the added tax preparation an unnecessary headache.

More record keeping

Contributions, withdrawals, earnings, fees and more should all be tracked. Segregating these accounts across multiple providers means access and tracking this data can be more difficult.

Can you have an IRA and a 401(k)?

Lastly, one question that often comes up: can you have an IRA (or multiple IRA accounts) and a 401(k)?

Yes, you can and, despite these both being retirement accounts, they are treated separately. Where the IRA yearly contribution limit is $5,500 (or $6,500 if you’re older), you can contribute independently to a 401(k) — and we highly encourage you to do so — up to $18,000 per tax year and $24,000 if you are 50 or older.

If you are maxing out both, your annual retirement contribution can be $23,500 or $30,500 if you’re 50 or older.