A Roth individual retirement account (IRA) is a great way to invest for retirement. Through a Roth IRA, you make contributions with money that has already been taxed and withdrawals are tax-free. While it’s possible to have more than one Roth IRA, there are some things to consider to make sure it makes sense for your retirement goals.
How Many Roth IRAs Can I Have?
There is no limitation on the number of Roth IRA accounts you can have. You could also have both a Roth and a traditional IRA. If you have more than one Roth IRA, however, you can only contribute up to the limit each year between the combined accounts.
In 2023, the contribution limit for a Roth IRA is $6,500 if you’re under 50 years of age or $7,500 if you are 50 years and older. If you have two Roth IRAs, you will have to split the contribution between the two accounts if you want to invest the maximum amount allowed.
What Are the Benefits of Having More Than One Roth IRA?
Although you can only contribute up to a certain amount each year regardless of how many Roth IRAs you have, there are some benefits to having more than one. Since both traditional and Roth IRAs are relatively easy to set up, having more than one may help you achieve your retirement goals.
Investment Portfolio Diversification
Having more than one Roth IRA may be a good option for those who want to diversify their investment portfolios. You could have a Roth IRA with one financial institution that specializes in certain types of investments, for example. You could then have a second Roth IRA that specializes in different types of investments.
Another situation where it may make sense to have more than one Roth IRA is when you want to leave your accounts to more than one beneficiary. IRAs can be passed on to beneficiaries, who are usually named when the account is set up.
If you have three beneficiaries, for example, you could have three different Roth IRAs with a different beneficiary named for each one.
Roth and traditional IRAs tax their withdrawals differently. Having both a Roth and a traditional IRA may allow you to diversify the way you pay taxes on your retirement accounts.
With a traditional IRA, contributions are made with pre-tax dollars, meaning the money you contribute hasn't yet been taxed. Then later, taxes are paid when you make withdrawals.
With a Roth IRA, contributions are made with after-tax contributions, meaning you've already paid taxes on the money you invest and therefore you don't have to pay any taxes when you make withdrawals.
What Are the Negatives of Having More Than One Roth IRA?
Before you open a second Roth IRA, it’s important to understand not just the positives, but the potential negatives and carefully consider both the pros and cons before deciding to open more than one Roth IRA.
Having multiple Roth IRAs likely means that you will pay more in fees because each account will have its own fees, which will vary depending on the provider.
For each additional Roth IRA you have, the paperwork will increase significantly. You’ll have to keep your records separate and you’ll also have to deal with more forms when filling out your taxes each year.
Complex Retirement Planning
Although Roth IRAs are easy to set up and manage, having more than one will make your retirement planning more complicated. More of your time may be required to monitor your accounts to make sure they are performing as expected.
Common Roth IRA Mistakes
Roth IRAs are not complicated, but mistakes are sometimes made with these accounts. A mistake or wrong assumption might cause you to miss out on some benefits, which could result in your account not reaching its full potential.
Assuming You Can’t Have a Roth IRA
Many people incorrectly assume they can’t open a Roth IRA because they already have a 401(k) plan through their employer. It’s possible to have both simultaneously, and each account has certain advantages to consider.
Having a 401(k) plan may allow you to take advantage of employer contribution matching (if your employer offers it). Also, 401(k) withdrawals are taxed as income while Roth IRA withdrawals are not. This allows you to diversify your tax obligation when you retire.
Not Maximizing Your Contributions
Because Roth IRAs are not sponsored by an employer, some people may inadvertently neglect to contribute to their retirement accounts or they may not contribute the full amount allowed. To maximize its potential, you should contribute as much as possible each year to your Roth IRA.
Not Taking Advantage of a Spousal IRA
Many people assume that a spouse who doesn't work can't contribute to an IRA—but this may not be true. It depends on how much the working spouse earns. A working spouse can open a spousal IRA for their non-working spouse as long as the working spouse earns enough income to cover any and all IRAs.
Not Naming a Beneficiary
If a beneficiary is not named when you set up a Roth IRA, the account will become part of the owner's estate. This could result in a complex situation if there are multiple beneficiaries of the estate. It's also important to update the beneficiary on a Roth IRA if there’s a status change, like a divorce for example.
Not Investing Your Funds
Some people set up Roth IRAs, fund them, and then leave it at that. But in addition to making sure your Roth IRA is funded each year, it's also important to check that your account is investing in something so the account will grow over time. If you aren't sure what to invest in, a financial professional can make recommendations.
Roth IRAs With Radiant Credit Union
If you’re thinking about opening an IRA, Radiant Credit Union offers both traditional and Roth IRAs. Opening an account is quick and easy. It just takes a few minutes to set one up to start investing for your future retirement needs.
Click on the following link to learn more about our IRAs.