Are you an IRA hoarder?
A client of mine once had over 8 IRA's spread out at various banks and brokerage firms until I finally had an intervention.
They were clearly aware you can own more than one IRA, but it's a common question I get asked.
Let's avoid a long wind-up on this post, and answer the question right up front – you can have multiple IRA accounts, and you can have as many as you want – there is no limit.
The only real limit in regard IRA accounts is the annual contribution limit, which is $5,500, or $6,500 if you are age 50 or older. But within those limits, you can allocate your money into as many IRA accounts as you like.
But the more relevant questions are: why would you have multiple IRA accounts? Or, why would you want to?
Could having multiple IRA accounts present any problems? And you need an intervention because you're an IRA hoarder?
Those are the questions that I really want to cover in this article.
I see a lot of clients who have multiple IRA accounts, and they don't always have solid reasons why they do.
Why You Might Have Multiple IRA Accounts
It seems that people often build up multiple IRA accounts on something of a passive approach, which is to say that it seems to just happen, almost by default.
Here are some of the common reasons:
- Leaving a job. People go from job to job, and each time they leave there's an employer-sponsored retirement plan that gets rolled over into an IRA account. They may have an IRA account for each employer-sponsored plan that they leave.
- Multiple IRA types. If you have a married couple, and each has both a traditional IRA and a Roth IRA – Learn more about Roth IRA rules here- that will be two IRAs each, or four IRAs for the couple.
- Investment broker special promotions. It seems that there's always an investment broker somewhere that's offering an IRA transfer deal that’s too good to pass up. Taking advantage of those promotions, you might have $6,000 and one IRA, $12,000 in another, and $7,000 in a third. It just happens!
- Different investment vehicles. You may have one IRA account invested in certificates of deposit at your bank, another invested in a single ETF, and a third in a self-directed brokerage account. Each serves a unique purpose, and you haven’t found a compelling reason to merge the three account types into a single account.
These are just some of the reasons, and they can help to explain why individuals, and particularly married couples, might have a portfolio of IRA accounts.
Is that a good arrangement?
The Benefits of Owning Multiple IRA Accounts
There are times when having multiple IRA accounts can be a clear benefit.
Here's some examples:
SIPC or FDIC insurance limits. If you are a fixed income investor, and prefer the safety of banks, there is a $250,000 FDIC insurance limit for bank accounts. If your IRA balances are higher than this, you may need to maintain an IRA at two or more banks. The same is true of SIPC insurance. The limit is $500,000 in cash and securities per account, which includes $250,000 in cash. If your IRA balance exceeds $500,000, you might have more than one account.
You feel safer not having all of your “eggs in one basket”. Apart from either FDIC or SIPC insurance, you might just feel safer having your retirement assets spread across two or three accounts, rather than in a single account. Even though your funds are insured, the thought of bank or broker default can be unnerving in connection with something as important as your retirement savings.
Diversification into very specific investment accounts. There may be certain investment vehicles that specialize in certain investment types. For example, you may have one that's a low-cost trading account, another that's a family of funds, and still a third that invests in specific sectors, such as real estate or natural resources.
Different types of IRA accounts. As mentioned earlier, you may have a traditional IRA and a Roth IRA. And if you're self-employed, you might also have a SEP IRA. It largely depends upon personal circumstances.
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Different IRAs for different retirement purposes. As you get closer to retirement, you may decide that you want different IRAs that each serve a certain purpose. For example, you can have one IRA account that functions primarily as a source of regular income. A second account could be dedicated to growth investments so that your retirement portfolio never runs dry. Still a third IRA could function as a large emergency fund, so that you'll have an account to tap when a large expense comes up, such as an uncovered medical expense, the replacement of a car, helping your adult children or even major work to be done on your home.
Managed account vs. self-directed account. A lot of people are hybrid investors – they prefer to have most of their money professionally managed, but still want to dabble in do-it-yourself investing. Such an investor might have most of their money in a managed account, such as Betterment or Wealthfront, with a DIY account set up through E*Trade or Scottrade. It's nice to have choices!
Depending on your own personal circumstances, one or more of these could be a real benefit to your financial situation.
The Potential Problems
Despite the advantages that can be had from having multiple IRA accounts, it is possible to have too much of a good thing.
Here is where having several IRA accounts could hurt your situation:
Each IRA account as its own set of fees. If you have five IRA accounts, and each has an annual fee of $100, you're at $500 per year in fees, rather than $100 per year with a single account. That's an extra $400 a year. Over 20 or 30 years, that starts to add up to become Real Money.
Confusion. Unless you invest money on something like a full-time basis, it can be very difficult to effectively manage multiple IRA accounts. The problem will be even worse if you also have multiple taxable investment accounts. You may find yourself doing particularly well with some accounts, but very poorly on others, and maybe losing money on some.
Lack of consistent diversification. It can be tough enough to create and maintain a reliable investment allocation in one account. But if you're trying to juggle four or five it can be a certified nightmare. Think about how difficult that becomes when you're trying to rebalance your accounts? Most likely, the combination of all of your IRA accounts look more like a little bit of this, and a little bit of that, rather than a well-balanced investment portfolio.
You only have so much money to invest each year. If you have five IRA accounts, you can still contribute no more than $5,500 each year. How do you handle that? Do you fund one account each year? Or do you divide the contribution by five, and put $1,100 in each account?
Tracking issues. If you have multiple IRA accounts, it may be difficult to know at any point in time exactly how much money you have saved for retirement. Will you know if you are on track with your retirement savings? Every time you want to find out, you're going to have to do a calculation. And what happens if the market takes a big hit? How will you know how extensive the damage is to all of your accounts collectively? In addition to being a math problem, that kind of complication can make it difficult to make rational investment decisions.
So what's the answer?
Reduce Your Multiple IRA Accounts to a Manageable Level
It can make sense to have a limited number of multiple IRA accounts for specific reasons. A married couple in which each spouse has a traditional IRA and a Roth IRA would certainly justify the couple having four IRA accounts. And you can certainly make the case for having a managed account and a truly self-directed account.
But if the reasons why you have multiple IRA accounts is more because of passive accumulation (taking advantage of promotions or 401(k) rollovers) you’ve probably created a web of complication for yourself that has no real benefit.
Cut your IRA accounts down to no more than two or three per spouse, and only for the best reasons. Then consolidate the others into the most important accounts.
That will enable you to save on fees, to get better control of your investments, to properly diversify your retirement portfolio, and have a better handle on tracking your progress toward your retirement goals.