Roth IRA accounts are tax-advantaged individual retirement accounts that allow investors to save for retirement using after-tax dollars without any additional tax obligation. Roth IRA accounts have a maximum annual contribution limit of $6,000 (plus an additional $1,000 if you are age 50 or older), and you can invest funds in any stocks or bonds supported by the institution that opens the account for you.
You can own as many Roth IRA accounts as you want
There is no limit to the number of Roth IRA accounts you can open during your lifetime. Each Roth IRA account can have a different custodian (or financial institution) and different beneficiaries, and each account can hold different investments and strategies. While opening multiple Roth IRA accounts allows you to diversify your portfolio and choose how your investments are divided after your death, there are some downsides to having multiple accounts.
Disadvantages of opening multiple Roth IRA accounts
The main downside of opening multiple Roth IRA accounts is that it can become confusing. “From the IRS’s perspective, you have only one Roth IRA account, regardless of how many different Roth IRA custodians you have your money with,” said Steve Burkett, a certified financial planner at Palisade Investments, in an email to The Balance. “It doesn’t make sense to have more than one Roth IRA custodian, and that can lead to errors in tracking contributions.”
If you do not keep an accurate track of the money you have contributed to each account and when, you could face penalties for violating the 5-year rule for Roth IRAs, even if it was accidental. The rule states that you can only make qualified distributions (which are not subject to taxes or penalties) from investment earnings if the basis of the earnings has been in the account for at least five years.
Additionally, if you choose to own multiple accounts to use different investment strategies, you might accidentally overweight one strategy by investing in the wrong account.
When does it make sense to own multiple Roth IRA accounts?
If you can stay organized and keep your contributions within the annual limit, there may be situations where it makes sense to open multiple accounts.
“If different custodians offer you different types of investment strategies, that might be a reason to use multiple custodians,” said Burkett. This point particularly applies to custodians who provide specialized services. For example, if you want one Roth IRA account to be actively managed by an investment manager and the other to hold only Vanguard funds, you can open two separate accounts.
Another reason to open multiple Roth IRA accounts is to differentiate the accounts that you will leave to multiple beneficiaries. “You have multiple Roth IRA accounts in cases where you want to separate the beneficiaries of those accounts,” said certified financial planner Brandon Aubrey to The Balance via email.
If you want to leave your savings to multiple beneficiaries, opening a new account for each of them is a way to facilitate the processing. “Especially if you want to leave a Roth IRA account to a charity, you can designate one Roth IRA to go directly to the charity, and the others can go to family members or anyone else,” said Aubrey. “It helps facilitate the processing, and the investment custodian doesn’t have to worry about splitting the investments into fractions.”
Errors
Another Myth about Roth IRA Accounts
Errors made in contributions or investments in Roth IRA accounts can be very costly in the long term (through reduced investment returns) and in the short term (through penalties from the IRS). Here are some other common mistakes in Roth IRA accounts that should be avoided.
Choosing Tax-Exempt or Low-Yield Investments
The money invested in a Roth IRA grows tax-free. If you invest in municipal bonds that have tax advantages or in low-yield assets, you won’t get the best benefit from your money.
Suppose you want to diversify your portfolio by buying a high-growth stock and a bond with a 3% yield, planning to purchase one in your Roth IRA and the other in a different account. If you buy the bond in the Roth IRA, you won’t have to pay taxes on the 3% yield. If you buy the stock in the Roth IRA and it rises by 500%, you won’t have to pay taxes on this much larger increase.
Non-Qualified Withdrawals
Withdrawals from investment earnings (not from the basis) from your account can only be made if you meet strict requirements. First, the basis must have been invested for five years. Additionally, you must meet at least one of several criteria, including:
- Being at least age 59 and a half
- Being qualified for disability
- Using up to $10,000 of the funds to purchase your first home
Note: If you withdraw investment earnings that are not qualified for withdrawal, you will owe an additional 10% tax.
Excess Contributions
The annual contribution limit for a Roth IRA is $6,000 ($7,000 if you are age 50 or older), and this amount applies to your combined contributions if you open multiple accounts.
Note: If you contribute more than the annual limit, even if it was accidental, the IRS imposes a 6% penalty for each year the excess contribution remains in the account.
Not Contributing to Your Spouse’s Roth IRA
If you are married and filing jointly, both you and your spouse can contribute to your Roth IRA accounts, even if only one of you has taxable income. The total contribution for married couples filing jointly is double the amount allowed for an individual: $12,000, plus an additional $1,000 for each person aged 50 or older. As long as your joint tax return shows that you have at least this amount in taxable wages, either of you can contribute to the Roth IRA accounts in both of your names.
Frequently Asked Questions (FAQs)
When were Roth IRA accounts created?
Roth IRA accounts were confirmed by Congress through the Taxpayer Relief Act of 1997. The accounts are named after former Senator William Roth, a Republican from Delaware who sponsored the legislation that created this new type of retirement account.
How does money grow in Roth IRA accounts?
Money in a Roth IRA grows based on how it is invested. If invested in bonds, it will grow based on the income from the bonds. If invested in stocks, it will grow based on dividends and capital gains.
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Source: https://www.thebalancemoney.com/how-many-roth-iras-can-i-have-5225422
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