There are many different types of Individual Retirement Arrangements (IRAs) a person can have.
Some of these IRAs are employer-sponsored, such as the SIMPLE (Savings Incentive Match Plan for Employees) IRA or the SEP (Simplified Employee Pension) plan IRA.
There are also IRAs that any individual with an earned income can open without the need for a sponsoring employer. These are the traditional IRA and the Roth IRA.
The Internal Revenue Service (IRS) does not limit how many IRAs you can have.
For example, you can simultaneously open a traditional IRA and a Roth IRA or choose to have many IRAs of either type.
However, all these IRAs are still subject to their respective contribution limits.
Thus, even if you choose to have multiple retirement accounts, you still have to follow the annual contribution limit rules for each one.
IRA Contribution Limits 2022 & 2023
This portion of the article focuses on the limits for IRAs in which individuals can make contributions, whether or not a sponsoring employer also makes contributions.
Other IRA types, such as the SEP IRA, where only employers can contribute, have not been included.
For the tax year 2022, the IRS sets a limit of $6,000 for both traditional and Roth IRA contributions.
However, individuals 50 years old and above can contribute an additional $1,000 as a catch-up contribution, making their total contribution limit $7,000.
In 2023, there will be an increase in the traditional and Roth IRA contribution limit. The new limit is $6,500.
There is an additional catch-up contribution of $1,000 for those 50 and older, making their total contribution limit $7,000.
For SIMPLE IRA plans, the limit is $14,000 for 2022. There is a catch-up contribution of $3,000 for those aged 50 years and older, making their total contribution limit $17,000.
In 2023, the contribution limit will increase to $15,500 in 2023.
The catch-up contributions for those aged 50 years and older will also increase to $3,500, making their total contribution limit $19,000.
How Does Having Multiple IRAs Work?
Individuals with SIMPLE IRAs may max out their contribution limit, accept additional employer contributions, and maintain any number of traditional or Roth IRAs.
However, if they contribute more than the limit to all accounts combined, the IRS will charge them a 6% penalty tax.
For example, Maria, aged 26, has a SIMPLE IRA sponsored by her current employer OW Restaurant.
She also has other retirement accounts, composed of one traditional IRA and one Roth IRA, which she opened when she started earning income.
In 2022, Maria contributed the maximum of $14,000 to her SIMPLE IRA and received an additional contribution from her employer of $1,000.
In the same year, she also contributed $5,500 to her Roth IRA and $500 to her traditional IRA, for a total of $6,000.
Since the combined contribution limit of all traditional and Roth IRA accounts must not exceed $6,000 for 2022, Maria will not be charged a 6% penalty tax.
Individuals who do not have SIMPLE IRAs but instead have multiple IRAs, whether in the traditional or Roth variety, must also not exceed the contribution limit for all accounts combined.
If they miscalculate and overcontribute, they will also be charged a 6% penalty tax.
Advantages of Having Multiple IRAs
There are several advantages to having multiple IRAs:
Increases Tax Diversification
Having different types of IRAs allows you to enjoy different tax advantages. If you have a traditional IRA, you can enjoy tax-deductible contributions.
At the same time, if you have a Roth IRA, contributions may not be tax-deductible now, but withdrawals in retirement may be tax-free.
Enables Varied Investment Strategies
You can employ different investment strategies in each account. You can use one account for long-term investments and another for short-term trades.
Having separate accounts also makes managing distributions from a particular account easier without affecting other accounts.
Allows Multiple Beneficiaries
Providing for different beneficiaries is easier when you have multiple IRAs.
You may designate one account as an inheritance for your spouse, another for your children, and a third for charity.
This can help prevent disagreements about who the money should go to upon your death.
Disadvantages of Having Multiple IRAs
There are also disadvantages to opening multiple IRAs:
Increases Account and Investment Fees
Multiple IRAs can mean paying more in account fees and investment expenses.
If this is not monitored closely, it can significantly impact the performance of your retirement savings and decrease the overall return on your investments.
Requires Time-Consuming Paperwork
Managing multiple accounts will require you to track all of them separately and file separate forms for each one.
For instance, you might have to provide different information on your IRS Form 5498.
For most people, this can be a time-consuming and complicated process.
Involves Complex Management
Retirement planning may become complicated because you need to consider the different accounts and how they may be affected by changing tax rules and possible investment threats.
You may have to operate different strategies and asset allocations to get a stable return.
Should You Have Multiple IRA Accounts?
Having multiple IRAs can be advantageous in certain situations and disadvantageous in others. It all depends on your individual financial goals and retirement strategy.
If you want to enjoy different tax advantages, wish to assign multiple beneficiaries, or prefer to try various investment strategies, then having multiple IRAs might suit you.
However, having multiple IRAs might not be a good option if you do not want to deal with time-consuming paperwork, higher account fees, or a complex management process.
It is also essential to consider if you have enough money to open and maintain multiple accounts. If not, you may want to prioritize one account and focus on maximizing its contribution limit.
If you are considering multiple IRAs, you may contact a financial advisor and discuss if this is the best option for you, considering your retirement goals and current situation.
Final Thoughts
The IRS does not stipulate any limitation on the number of IRAs a person can have. However, all IRAs you open must abide by their respective annual contribution limits. If you miscalculate and overcontribute, you will be charged a 6% penalty tax. Having multiple IRAs can increase tax diversification, enable varied investment strategies, and make it easier to have multiple beneficiaries. However, it can also increase account fees and investment expenses and result in time-consuming paperwork and a complex management process.Thus, it is important to consider your individual financial goals and retirement strategy before deciding if multiple IRAs are the right choice for you.
How Many IRAs Can You Have? FAQs
Can you have multiple IRAs?
Yes, you can have multiple IRAs. The IRS does not restrict the number of IRA accounts you can open. However, each account must be subject to its respective annual contribution limits. If you miscalculate and overcontribute, you will be charged a 6% penalty tax.
Is it better to have one or multiple IRAs?
If tax diversification is important or you want to assign multiple beneficiaries, then opening multiple IRAs can be beneficial. However, one IRA may be preferable if you do not want to pay additional account fees or deal with time-consuming paperwork.
What are the advantages of having multiple IRAs?
The advantages of having multiple IRAs include increased tax diversification, the ability to apply varied investment strategies, and the simplicity of assigning multiple beneficiaries.
What are the disadvantages of having multiple IRAs?
The disadvantages of having multiple IRAs include increased account fees, time-consuming paperwork, and the complexity of managing multiple accounts.
Can you withdraw money from your IRA without penalty?
For a traditional IRA, all withdrawals before age 59 1/2 incur a 10% early withdrawal penalty. Exceptions are allowed, such as when the money is withdrawn for qualified medical expenses. In contrast, Roth IRA contributions can be withdrawn penalty-free anytime, while earnings can be withdrawn penalty-free after the account has been open for at least five years.
More from MediaFeed:
- The funny & sometimes tragic real names of celebrities
- 25 American customs that make you look like a jerk abroad
- 39 surprising things you may not know about cannabis
Like MediaFeed’s content? Be sure to follow us.
This article originally appeared on FinanceStrategists and was syndicated by MediaFeed.
Are you guilty of these IRS audit red flags?
The IRS audited close to a million tax returns in calendar year 2017. This was about .5% of the total returns filed. While this is a pretty small number of audits, being audited is no small matter for those who are subject to an IRS examination.
If the very prospect of being audited fills you with dread, it’s helpful to know some of the most common reasons audits happen.
This list of 10 red flags will hopefully help you reduce the chances of an audit — or at least be more prepared if an IRS examiner comes calling.
According to the IRS, audits usually occur because of computer screening, random selection, or because they’re conducting a related examination, such as reviewing the returns of your business partners.
Here are some of the most common reasons you might end up being audited:
sam thomas/istockphoto
Sometimes, a simple math error is enough to trigger an audit. If the information you submit to the IRS doesn’t add up, IRS computer screening is very likely to catch the error automatically.
This could lead to a simple audit where you’re asked about the discrepancy by mail and can simply correct it. Or, it could prompt the IRS to take a closer look at your entire return with a more in-depth audit.
To avoid this mistake, always double-check your math — or use an online tax filing program that will catch at least some mistakes for you.
Drazen Zigic/istockphoto
Falsely padding deductions has made the IRS list of common tax scams, and the agency has warned taxpayers against inflating their deductions to reduce taxes owed.
The IRS establishes “norms” based on sample returns. If you take so many deductions you fall outside of the norm, this is a major red flag that could come to the attention of the IRS via a computer screening.
Of course, if deductions are legitimate and you can back them up with documentation, you should claim them. But just be aware that if your deductions are very high as a percentage of income, the IRS is likely going to want to know why.
fizkes/istockphoto
When you have an employer, it’s pretty hard to cheat on your taxes because your employer reports your income and you likely have limited deductions for business.
If you’re self-employed, though, you may have income from lots of different sources — including cash income. And you have plenty of chances to deduct business expenses, not all of which the IRS will necessarily view as legitimate.
Since it’s easier to hide money that isn’t reported on a W-2 or to reduce your income with fake business expenses, the IRS is more likely to ask questions of sole proprietors and small business owners.
The IRS may also want to confirm you’ve paid taxes as you earned income, so make sure you submit quarterly estimated tax payments to avoid late payment penalties if you have non-wage income.
You can’t do much to reduce the added risk that comes from self-employment. But you should be careful to keep detailed business records so you can show that you claimed all your income and took only legitimate deductions in case an IRS auditor comes calling.
Ridofranz/istockphoto
Millionaires, and especially those making more than $10 million per year, are audited at higher rates than their counterparts who earn far less. This makes a lot of sense, as this is where the money is.
Auditing someone with a small income is likely to result in a low payoff for the IRS, even if it’s determined that taxes were underpaid. But if someone has millions or billions, there’s a far greater chance that underpayments — if they exist — will involve substantial sums.
Earning a lot of income isn’t a problem you want to correct. But, you do need to make sure you’re claiming all the funds you make and that you follow the rules for deductions and credits you claim.
Antonio_Diaz/istockphoto
You’re supposed to report all the income you receive from all our sources. When you deposit or spend a lot of cash, the IRS is going to want to know where the money came from — especially if it’s not clear on your tax returns.
Since your bank is required to report deposits over $10,000 to the government, depositing a large sum at once is especially likely to trigger an inquiry from the IRS. They’ll likely wonder where these funds came from and whether they were declared.
If you make large deposits or spend big sums, be sure to document where the cash came from — and declare all of it so you can pay the taxes you owe on it.
tommaso79/istockphoto
The earned income tax credit is supposed to help working families with limited incomes by giving them back a refund of some of the taxes they paid during the year. The EITC, as it’s called, is a costly anti-poverty program for the government, with a price tag in the billions.
Unfortunately, requirements to qualify for this credit are very stringent, and the IRS is likely going to want to make very sure that you’re entitled to it if you claim it. EITC recipients are actually more likely to be audited now than the wealthy, according to a ProPublica report. There are many reasons for this, including the fact that Congress has pressured the IRS to prevent overpayments of the credit.
You can’t do much about the increased audit risk and you should definitely claim the credit if you’re entitled to it. But be prepared for your refund to be held up for additional examination, and be sure you’re following IRS guidelines. Don’t claim the EITC if you aren’t actually eligible for it.
sam thomas/istockphoto
You aren’t the only one who reports information on your earnings — your employer does too. If the income you report doesn’t match what your employer says you earned, it’s easy for the IRS to catch the discrepancy. And the IRS is likely to want to know why the numbers don’t add up.
Double-check your earnings with your W-2 to avoid this mistake — and be sure to report any earnings you have from outside of your job, such as money from a side gig.
fizkes/istockphoto
Generosity is a good thing, and you are rewarded on your taxes for it since you can deduct charitable contributions if you itemize on your tax returns.
But you are limited in the amount you can deduct for donations. And if you donate a percentage of your income that seems unreasonably large, the IRS is probably going to want to take a close look at whether you really made the donations you’ve claimed.
The IRS may be even more suspicious if you claim a large deduction for non-cash donations, such as donating old furniture or clothing to Goodwill.
Be sure you have documentation of all donations you make and avoid inflating the value of the property you donate to make sure you don’t get into trouble with the IRS.
sam thomas/istockphoto
When you file your taxes, you have the option to claim a standard deduction instead of itemizing. The standard deduction is a set amount, which is based on your filing status. Singles have a smaller standard deduction than heads of household, qualifying widows, or married couples filing joint returns.
You have to choose the correct filing status so your standard deduction can be accurately calculated. Your filing status can also determine your tax bracket as well as whether you make too much money to be eligible for certain deductions.
It’s important you actually qualify for the filing status you claim. If you choose a filing status you don’t meet the requirements for, the IRS is likely to notice, ask questions, and require correction.
andrei_r/istockphoto
When you take money out of your retirement fund, you could be subject to a penalty if you aren’t at least 59 ½ or you don’t qualify for a hardship exemption or special withdrawal.
And regardless of your age, you’re generally taxed at your ordinary income tax rate on the money you take out of most retirement accounts.
Because many people don’t properly report withdrawals from their retirement accounts, your return is more likely to catch the eye of the IRS when you’ve dipped into tax-advantaged retirement accounts.
Drazen Zigic/istockphoto
Being audited may seem scary, but the reality is that many audits are conducted solely by mail and audits can sometimes result in a larger refund. If you follow the rules, pay your taxes on time, and keep careful documentation of your income and deductions, an audit hopefully won’t be a problem for you.
Related: 8 things you should never deduct from your taxes
This article originally appeared on FinanceBuzz.com and was syndicated by MediaFeed.org.
fizkes/istockphoto
Featured Image Credit: depositphotos.com.
