One of the most important features of your individual retirement account (IRA) is that it's just that—an individual account. That means you can customize your investments as you see fit and take withdrawals when you want to. You can even control what happens to your IRA after you die. Of course, you're responsible for paying taxes on distributions, when required.
Read on to learn about nine other features that can help you make the most of what an IRA has to offer.
- You can have multiple traditional and Roth IRAs, but your total cash contributions can’t exceed the annual maximum allowed by the IRS.
- If you have more than one traditional IRA, you can choose from which account(s) to take your required minimum distributions (RMDs) once you turn 73.
- Anyone with earned income can contribute to a traditional IRA, regardless of age.
- There is no age limit that prohibits you from contributing to a Roth IRA, either.
- Distributions from a Roth IRA are tax free.
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1. It’s OK to Have More Than One IRA
It is possible to end up with more than one IRA for a number of reasons. Here are some examples:
- You have an existing Roth IRA and then rolled an old 401(k) into a traditional IRA.
- Your adjusted gross income (AGI) rose to the point where you were no longer eligible to contribute to your Roth IRA, so you opened a traditional IRA.
- You inherited an IRA, and you already had one of your own.
- You maintained your Roth IRA and opened a traditional IRA to take advantage of tax deductions.
You can contribute to as many IRAs as you want. However, the total amount that you can contribute to all of them is limited to the annual maximum allowed by the IRS. The annual maximum contribution for 2022 is $6,000, or $7,000 if you are age 50 or older. That limit rises to $6,500 in 2023, or $7,500 if you are age 50 or older.
For example, say that Bob, age 42, deposits $2,000 into his traditional IRA. He then can contribute no more than $4,000 to his Roth account for the same year. Keep in mind that Roth IRAs have phase-out eligibility rules based on income. That means that the amount you can contribute may be limited by how much you earn.
2. Contributions to Regular IRAs Must Be in Cash
Your regular contribution to your IRA for the year must be in cash. This limitation does not apply to securities that are rolled over, as these must generally be rolled over in kind.
3. You Don’t Have to Take RMDs From All of Your IRAs
Owners of traditional IRAs must begin taking required minimum distributions (RMD) by April 1 of the year after they turn 73 years old. The minimum amount required is determined by the balance of an IRA on Dec. 31 of the previous year plus the owner’s life expectancy. Then, for each year thereafter, the RMD must be withdrawn.
If you have multiple traditional IRAs, you don’t have to take RMDs from all of them. You can combine all of the RMD amounts for each of your IRAs and take the total from one IRA or a combination of IRAs. For example, you may prefer to liquidate certain investments in one IRA over the investments in another.
Congress raised the RMD age to 72 as part of the SECURE Act, then increased it again to 73 as part of the SECURE 2.0 Act.
4. Different Rules Govern Spousal and Non-Spousal Beneficiaries
One of the benefits of owning an IRA is the ability to transfer funds directly to beneficiaries without going through probate. Spousal beneficiaries can claim inherited IRAs as their own—a flexibility that allows a spouse to make new contributions to the inherited IRA and control distributions.
“A spouse has lots of options when they inherit an IRA,” says Jillian Nel, CFP®, CDFA, director of financial planning at Inscription Capital LLC, Houston, Texas.
“They can make it their own IRA or a beneficiary-designated IRA. The latter would occur if the spouse is under age 59½ and needs to take out money for whatever reason. A beneficiary account would avoid the 10% penalty owed on IRA distributions to owners who are under age 59½.”
Non-spousal designated beneficiaries cannot treat inherited IRAs as their own. They can’t add to them, and they must completely liquidate an account within ten years of the death of the owner (if the owner died after 2019). Non-spousal eligible designated beneficiaries are categorized differently by the IRS and have more flexible distribution options.
Generally, the distribution options available depend on the age at which the IRA owner dies. Keep this in mind if you plan to leave IRA assets to your children or grandchildren.
5. You Can Transfer or Roll Over Your IRA
Sometimes, people need or want to move their IRA accounts from one financial institution to another. If you decide to maintain the same type of IRA account with a different company, you can move the assets as a transfer or as a rollover.
With a transfer, the assets are delivered directly from one financial institution to the other, and the transactions are not reported to the IRS.
“When moving funds in your IRA, you may do a direct transfer from one financial institution to another any number of times a year. Be aware that each firm may have its own account setup and close-out fees as well as an annual fee, so be aware of these charges when making firm changes,” says Rebecca Dawson, a financial advisor in Los Angeles, Calif.
A rollover involves taking a distribution of the assets to yourself and rolling over the amount within 60 days.
“When a group retirement plan such as a 401(k) is rolled into an IRA, if the rollover is done the correct way, it can preserve some of the 401(k) plan benefits," says Kirk Chisholm, principal at Innovative Advisory Group in Lexington, Mass. "This is why it can make sense to roll the 401(k) into a rollover IRA rather than a contributory IRA.”
You may also be able to go in the other direction and roll over your IRA assets to a 401(k) plan. However, the plan must allow it and would determine whether the rollover can be done as a 60-day rollover or if the funds must be paid directly to the plan.
One reason to do this: to shelter those IRA assets from RMDs. Funds in the 401(k) where you currently work aren't subject to RMDs when you turn age 73, but money in a traditional IRA will be. Don't pay taxes on the money if you don't need to withdraw it for living expenses. Check with a tax advisor to make sure you've done the transfer in time according to IRS regulations.
Not only are contributions to a Roth IRA tax free when withdrawn later in life. So is any money earned on those contributions. The total can really add up if you start investing early.
6. Your IRA Can Be an Annuity
Your annuity can operate under the same rules as an IRA if the funding vehicle is an individual retirement annuity. One benefit is that annuity policies were designed to provide retirement income for life.
7. IRAs Can Be Managed Accounts
If you've got a lot of money in your IRA and want help managing it, here's an option. Brokerage accounts let you give your financial advisor written authorization to make investment decisions and routine transactions without notifying you first. This type of activity is allowed for IRAs, provided your broker has an agreement with you to allow such actions. A flat fee is often charged for managing the account.
“I’m a real advocate for professional management of large IRA accounts. A quality investment advisor can build a low-cost custom portfolio and monitor it for necessary changes," says Dan Danford, CFP®, founder and chief executive officer at the Family Investment Center in St. Joseph, Mo. "They can draw upon thousands of proven investment options and adjust for changes in your situation, product innovations, or changes in the economy."
"As a professional," Danford adds, "I worry when retirees have a large portfolio and seek to save money by going it alone. I’ve seen bad results too many times. For most people, it’s penny-wise and pound-foolish.”
8. Investment Options May Be Limited
The IRS limits the types of investments that can be held in an IRA. Your financial institution may have asset restrictions, as well. For example, the IRS allows some gold and silver coins but most financial institutions do not. Similarly, some mutual fund companies do not allow individual stocks to be held in their IRAs.
9. Children Can Open IRAs, Too
Anyone of any age who is paid a salary, tips, or hourly wages for their work (earned income) can contribute to a traditional IRA, including minors. This means your children can start saving for retirement as soon as they get their first job. An IRA is an excellent option for kids who earn more than they intend to spend because it allows for long-term, tax-deferred savings. It also teaches your children the value of investing at an early age.
“When you start investing outweighs how much you invest,” says Michelle Petrowski (Buonincontri), CFP®, CDFA™, a financial coach based in Anthem, Ariz. “If you have earned income, starting an IRA as a teenager, preferably a Roth IRA, is an excellent idea. It can have a significant impact on your retirement savings by harnessing the power of compounding interest.”
The tax penalty for early distributions will encourage your kids to defer taking distributions from the IRA. However, if need be, they can use the funds for college or put up to $10,000 toward their first home without penalty.
By the way, older adults can continue to contribute to Roth IRA accounts as long as they have earned income. This is an excellent account for money that will eventually pass as an inheritance.
There are no longer age limits on making contributions to traditional IRAs. Previously, seniors couldn't make IRA contributions to traditional IRAs after the age of 70½, but following the passage of the 2019 SECURE Act, contributions can now be made at any age as long as an individual has earned income.
What Is the IRA Contribution Limit?
The IRA contribution limit for 2022 is $6,000, or $7,000 if you are age 50 and older. This applies to both traditional IRAs and Roth IRAs. The limit for 2023 is $6,500, or $7,500 if you are age 50 or older.
What Is the Difference Between a Traditional IRA and a Roth IRA?
The difference between the two types of IRAs has to do with taxation. Traditional IRAs are funded with pre-tax dollars. Investors can deduct the amount they contribute from taxable income. They pay ordinary taxes on the amounts withdrawn. Roth IRAs are funded with after-tax dollars and are not taxed when withdrawn.
Can I Rollover My 401(k) Into an IRA?
Yes. If you choose to, you can roll over the 401(k) with a previous employer into an IRA. Typically, an IRA provides a wider range of investment choices than a 401(k).
The Bottom Line
IRAs have built-in flexibility. Understanding how the various features work can help you tailor your retirement savings efforts to meet your needs. If you are looking for more information on where to start, research the best brokers for IRAs.
Correction—Dec. 8, 2021: A previous version of this article stated that IRA losses are deductible. IRA losses were made nondeductible by the Tax Cuts and Jobs Act.