The federal government authorized tax-advantaged IRAs to give working people an incentive to save for their own retirements. While Congress set a limit on how much you can contribute to your IRA each year, it didn't restrict the number of accounts you can have. The advantages to having multiple IRA accounts might be overshadowed by their disadvantages.
Diversification is the bedrock of risk management tools. It's the old "don't put all your eggs in one basket" investment philosophy. Having multiple IRAs can be a form of diversification, provided you use the different accounts to invest in different securities. For example, you might have an IRA with your bank that you use to invest in certificates of deposit. You could have another IRA with your investments broker that invests in real estate investment trusts, and a third IRA with a mutual fund company.
When you open an IRA, you'll be asked to name a beneficiary for that account. While you can name a primary and contingency beneficiaries, you can avoid any potential squabbling over your assets by opening separate IRAs and naming a different beneficiary to each account.
At some stages of your life, getting an immediate tax deduction for your IRA contributions is your best option. At other times, you might be better off paying the taxes now so you can take tax-free distributions after you retire. To take advantage of both types of tax advantages you'll have to open two different types of IRAs; a traditional IRA for the tax deduction and a Roth IRA for the tax-free distributions. You can contribute to both types of IRAs in a single year, as long as you don't exceed the maximum contribution for the year.
It can be expensive owning a multitude of IRA accounts. Each separate account typically charges its own annual maintenance fee, and those fees can add up quickly. A single custodian can often give you access to a wide variety of investment products, giving you all the diversification you need. Multiple accounts means multiple accounting that you have to keep up with. Consolidating all of your retirement accounts into two or three can help reduce the amount of time it takes you to manage your money.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.