IRAs are one of the most popular vehicles for retirement saving, and with good reason. Before we get into the impressive benefits of IRAs, though, here's the scoop on how many you can contribute to in one year.
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Contribution limits apply across accounts
If you've ever been tempted to get around relatively low IRA contribution limits by opening several IRA accounts, know that it may not be particularly beneficial. While you can open as many as you like, the annual contribution limit applies to all your IRA accounts collectively.
Let's say you open a traditional IRA and a Roth IRA. Each account has an annual contribution limit of $7,000 ($8,000 if you're 50 or over).
At first glance, it may appear you can contribute $14,000 ($7,000 to each account). However, that's not the way it works. The annual contribution limit is an aggregate, meaning you can contribute only $7,000 across both accounts. Whether that's $4,000 to one and $3,000 to the other or some other combination is up to you. What's important is not surpassing the annual contribution limit for your age.
By the way, contributing to both a traditional IRA and a Roth IRA can be a wise move due to the different tax treatment for each. Traditional IRAs are taxed when you withdraw the funds, while Roth IRA withdrawals are tax-free. Depending on your tax bracket, mixing it up can be a good way to control how much you must pay in taxes after you've retired.
There's a slight catch
While you can open as many IRA accounts as you like, your contributions to a Roth IRA are subject to certain limits according to your modified adjusted gross income (MAGI):
Single filer or head of household
- MAGI less than $150,000: You can make a full contribution.
- MAGI between $150,000 and $165,000: You can make a partial contribution.
- MAGI of $165,000 or more: No contribution allowed.
Married filing jointly or qualifying widow(er)
- MAGI less than $236,000: You can make a full contribution.
- MAGI between $236,000 and $246,000: You can make a partial contribution.
- MAGI of $246,000 or more: No contribution allowed.
Married filing separately
- MAGI less than $10,000: You can make a partial contribution.
- MAGI of $10,000 or more: No contribution allowed.
Why people love their IRAs
Although contribution limits could be higher, investors appreciate IRAs for several reasons.
Flexible investment options
IRAs provide a wider range of investment options than standard employer-sponsored 401(k)s. When you open an IRA through your bank, credit union, or other financial institution, you can shop around for the lowest account fees and the greatest number of investment options.
Opportunity to control taxes
As mentioned, traditional IRA distributions are not taxed until the money is withdrawn, while Roth IRA withdrawals are tax-free in retirement. If you're looking for a way to get the best of both worlds, it makes sense to consider investing in both.
However, it all comes down to your tax bracket. If you expect to be in a lower tax bracket after retirement, you may benefit from investing in a traditional IRA when your tax burden is lower. If you believe you'll be in a higher tax bracket in retirement, a Roth IRA could be your best bet (provided you're eligible).
Thoughtful way to leave money to those you love
Leaving an IRA to your beneficiaries offers several advantages, including:
- Taxes: Depending on the type of IRA and a beneficiary's relationship to you, they may be able to withdraw funds without immediate tax implications.
- Continued growth: Funds in an inherited IRA can continue to grow tax-deferred, allowing your beneficiaries to benefit from compound growth. Although the amount of time they can leave money in the account depends on whether they're your spouse or not, an inherited IRA still allows growth.
- Probate: Because IRAs pass directly to beneficiaries, they could avoid the probate process.
- Security: Leaving an IRA to someone you love allows them to save or pay immediate expenses.
The total amount you can contribute to all your IRAs may be lower than the contribution limits allowed for other retirement accounts, and the rules may feel limiting. However, IRAs offer several benefits that other account types can't touch.
