Congress originally authorized individual retirement accounts for people who were either self-employed, or who worked for a company that didn't offer a qualified retirement plan. Now, just about anybody who has earned income can contribute to an IRA, and you don't have to limit yourself to just one. You can have as many IRAs as you want, but there are limits to how much you can contribute.
An individual retirement account is a special type of custodial or trustee account. Only Internal Revenue Service-approved companies can act as a custodian or trustee for your IRA. Most banks, savings institutions and credit unions qualify, as do many insurance companies, investment brokerage firms and mutual fund companies. You can have an IRA with one qualified custodian, or you can divide your IRA contributions among any number of different custodians. For example, you might open an IRA with one bank in 2010, contribute to that IRA in 2011, then in 2012 open a new IRA account with a different bank while still maintaining your original IRA.
The IRS allows you to contribute to two different kinds of IRAs — traditional IRAs and Roth IRAs. Traditional IRAs give you an immediate tax deduction for your contributions, but tax your withdrawals as ordinary income. You can't take a tax deduction for contributions to a Roth IRA, but qualified withdrawals are free from federal income taxes. As your income situation changes you might want to change the type of IRA you contribute to, and you might want to keep your traditional IRA at one bank and open a Roth IRA at a different bank if it offers better terms.
Regardless of how many banks or other financial institutions you have IRAs with, you are limited in the amount of your total IRA contribution for the year. The maximum amount is adjusted by Congress from time to time; for the 2012 tax year, the maximum allowable IRA contribution was $5,000. Once you hit age 50, the max gets bumped up to $6,000.
While it is theoretically possible to have an unlimited number of IRAs with a multitude of different custodians, in practice it can be quite expensive and challenging to track. There might be maintenance fees associated with each IRA account. If you have multiple accounts, your expenses can go through the roof. It might be easier and more cost-effective to consolidate multiple accounts into a few accounts through an IRA rollover. With a rollover, you don't take possession of your retirement funds, so it does not create a taxable event.
- Creatas/Creatas/Getty Images