Individual Retirement Accounts (IRAs) are designed to assist investors in saving for retirement. While some investors may prefer to open only a single account type, such as a Roth IRA or Traditional IRA, others may choose to open one of each to maximize their retirement potential.
For investors seeking answers to the question “how can I diversify?” There are no limitations on the number of IRAs that one investor can have. In certain situations, investment advisors may recommend utilizing multiple IRA accounts for various reasons.
Pros
Diversification
Each type of IRA has its own set of rules. For instance, some institutions allow investments in alternative assets like cryptocurrency and real estate with a self-directed IRA (SDIRA), whereas others limit investors to publicly traded assets like stocks, bonds, and mutual funds in a Traditional IRA.
Therefore, having multiple IRAs can help diversify a retirement portfolio. Some investors prefer to use one IRA for each asset class. For example, an investor may hold mutual funds in their Traditional IRA, stocks or bonds in their Roth IRA, and real estate or precious metals in their SDIRA. Having multiple IRAs, each with a different asset class, can help partition a portfolio, making it easier to keep track of.
Spousal IRAs
Investors can fund individual and spousal IRAs, which can be beneficial if a spouse has little to no income. In a spousal IRA situation, investors may choose to contribute the total amount for the year to an individual IRA and the same amount to a spousal IRA on their spouse’s behalf. However, this is only possible if a spouse earns a low income.
Required Minimum Distributions
When an investor turns 73, they must withdraw a certain amount from their IRA each year, which is known as a required minimum distribution (RMD). The total RMD depends on the investor’s age and the account balance.
Investors with multiple IRAs may choose which account to take distributions from while safeguarding the others from distributions and taxes. This is called tax diversification, and some individuals use this strategy when planning to leave money for family or others and do not require it for living expenses during retirement.
Cons
Contributions
Funding multiple IRAs does not necessarily mean that an investor can contribute unlimited amounts to retirement accounts. There are still restrictions on contributions, with a maximum limit of $6,500 or $7,500 (depending on age) across all accounts. Consequently, some individual accounts may not be as large when investors reach retirement age.
Fees
Many accounts come with fees, and multiple fees can erode returns, particularly for investors who are trying to spread $6,500 yearly across several accounts. Hence, it may be wise to consider the fees for each custodian or brokerage when setting up multiple IRAs.
Complexity
The more IRAs an investor funds, the more work is necessary to keep track of their performance. While some investors may enjoy the challenge or risk, others may not have the time. Therefore, investors should consider the complexity involved in holding multiple accounts before making a decision.
How to Diversify with a Self-Directed IRA
One of the best reasons to utilize multiple IRA accounts is for diversification. Savvy investors seeking further diversification can hold alternative assets in a self-directed IRA. Digital Trust makes investing in alternative investments more accessible than ever before.
Moreover, they offer a wide range of products, including cryptocurrency, real estate, LLCs, and precious metals. Investors considering multiple IRAs for diversification purposes can open an account through Digital Trust* today and learn more about funding or rolling retirement money into an SDIRA.
* Digital Trust, LLC is a custodian of self-directed accounts whose role is nondiscretionary and administrative only. The accountholder must direct all investment transactions and choose the investments for the account. Digital Trust has no responsibility or involvement in selecting any investment. Digital Trust does not provide investment, legal, tax, or financial advice. Please consult with your competent tax advisor and/or legal counsel.
