It’s entirely possible that many of you are walking around with multiple IRAs in your portfolio. This is especially true if you have worked for several employers over the years, with a retirement plan at each. As you left each employer, you may have set up a separate IRA to take the retirement plan rollovers, one at a time. You may have also taken advantage of various promotional offers, to open up accounts with different trustees.
As a result of all of that activity, you could potentially be sitting with 5, 10, or even 15 different IRAs. That may not be as harmless as it seems on the surface. Beyond having one or two IRA accounts, having multiple IRAs could be working against you.
Multiple IRA Accounts Means Multiple IRA Account Fees
IRA accounts typically have an annual fee. If you have 10 different IRAs, with an average annual fee of $25 (on the low end), then you’re paying at least $250 per year to maintain these accounts. If all of your IRA money was just sitting in just one account, you would be paying around $25 per year instead. That’s a big waste of $225 per year.
Annual fees are sometimes ignored because they are relatively small and because they are paid out of the IRA accounts themselves. But the fact that you don’t have to write a check to cover them is not necessarily an advantage.
For example, let’s say the combined value of your 10 IRAs is $100,000. Paying $250 per year in annual fees would represent one-quarter of 1% being charged to your accounts, each and every year. That means that your return on investment is effectively reduced by .25% per year a 7% average return drops to 6.75%.
That might not sound like much at all, but with compound interest, it really adds up. Consider that if you were to invest the $100,000 at 7% per year for 30 years, you would have $761,225 in the end. But if the same money were instead invested at 6.75%, you would have only $709,638 after 30 years.
The difference is $51,587, and that's not pocket change!
It Will be Harder to Create a Comprehensive Retirement Portfolio
It can be difficult to create a well-balanced retirement portfolio within a single account. So, if it's hard to do it with a single account, how much tougher will it be if you are trying to do it across several different accounts?
You'd need to have a full-blown matrix in order to know exactly what your full asset allocation is at any given time. Even if you could do that easily, rebalancing would probably still prove to be problematic.
In addition, it may not be entirely possible to achieve the desired diversification due to the fact that different accounts may have very different specializations. For example, you may have some IRA accounts held at discount brokers, and others held with mutual fund families or robo advisors. Managing the proper balance between such diverse accounts would be extremely complicated.
Multiple IRAs Complicate Your Life
If you have multiple IRAs, you will need to track several accounts on a regular basis. Whether you are tracking these accounts online or through regular paper statements, it can become overwhelming. Whatever the complications of managing a single IRA account are, it will be multiplied by the number of accounts.
You'll be responsible for greater document management and retention. Think about how difficult it would be if you got an IRS notice regarding your IRA deductions. If you had to go back and investigate statements for seven different IRAs, all the way back to 2011, to find the discrepancy, you might go crazy.
Multiple IRAs Will Mean Multiple RMDs at Age 70 1/2
With the exception of the Roth IRA, all tax-sheltered retirement plans require that you begin taking required minimum distributions, or RMDs, beginning at age 70 1/2. That means that each account must make an annual distribution that is based on your life expectancy in the year of distribution. Since your life expectancy will decline as you age, those distributions will increase each year, at least by a percentage.
Now, if you have several IRA accounts, you will be required to accept several RMDs each and every year. Those RMDs are taxable income, which is the whole reason why they are required by the IRS. In effect, turning 70 1/2 is payback time with tax-sheltered retirement plans.
Learn More About Taxes and Income Brackets
If you have eight different IRA accounts, each providing an annual taxable RMD payment to you, then you will get eight different 1099s each year. This will not only be a paperwork nightmare, but it will also complicate the job of having tax withholding and those distributions, should you decide to go that route.
Multiple IRAs Will Not Increase the Amount You Can Contribute
Perhaps the ultimate irony of having multiple IRAs is that you don’t improve your retirement savings as a result. For example, the IRA annual contribution limit is the same whether you have 15 IRA accounts or just one. You’re limited to making a total contribution of $5,500 per year (or $6,500 if you are 50 or older), no matter how many accounts you have.
So, what do you do -- make a $550 per year contribution to each of 10 accounts? Or make a single contribution of $5,500 to one of the accounts each year?
Having multiple IRA accounts also opens up the possibility of mistakenly making excessive contributions, and therefore incurring IRS penalties.
How could this happen? Because you have so many accounts, you could say, make a $5,500 contribution to one of your 12 accounts in May of 2017, for the 2017 tax year. But when filing season comes around in early 2018, you forget about the contribution that you made most likely because it’s buried in all of the paperwork from your multiple accounts. You then go ahead and make another contribution of $5,500 in April 2018, just before filing your 2017 income tax return.
It's an innocent mistake, caused by complication. And here's another factor to consider: the multiple trustees who are holding your many IRA accounts don't communicate with one another. Whatever activity takes place in one account, will not be shared with the other trustees. That means that there will be no failsafe that will prevent you from making such a mistake.
The IRS penalty on "excess IRA contributions" is a tax of 6% per year for as long as the excess remains in the IRA. Since it is entirely possible that it can take a year or more before you receive a notice from the IRS informing you of the duplicate contribution, you can easily pay 6% or more on that single excess contribution.
You Could Be Creating a Nightmare for Beneficiaries Upon Your Death
If having multiple IRA accounts will create complications for you, imagine what it will do for your beneficiaries upon your death?
Each and every account in your estate will have to be settled upon your death. If your beneficiaries handle that directly, they will spend considerable time and effort settling all of the accounts. If they turn it over to an attorney or a CPA, they'll also spend a significant amount of money.
There is another complication here as well. It's entirely possible that the various IRA accounts are spread across several states. Since every state has laws that are somewhat different from the others, you could run into special difficulties in liquidating one or more of the IRA accounts, not to mention the specific procedures required by each individual trustee.
The moral of the story here is clear: keep no more IRA accounts than is absolutely necessary. In most cases, you'll need no more than one traditional IRA and one Roth IRA. Some people may also need a rollover IRA to hold funds from a previous employer. But even that should only exist for as long as it takes to move that money either into a traditional IRA or the retirement plan of your next employer.
When it comes to IRA accounts, more isn’t better -- it’s just more. And that’s usually not good!