Individual Retirement Accounts (IRAs) provide tax-deferred growth potential and may even be tax deductible depending on your income, but withdrawals typically become taxable at retirement.
Individual Retirement Accounts (IRAs) can be opened with banks, brokerage firms and robo-advisors that each offer unique investment options for you to consider when creating one. Sometimes splitting your IRA into two accounts could prove beneficial as well.
Tax Benefits
A traditional IRA is a tax-deferred retirement savings account, meaning any contributions are tax-deductible (up to certain limits). Any investment growth within an IRA remains tax-deferred until retirement when its withdrawal will typically incur ordinary income tax rates.
Withdrawals from an Individual Retirement Account can incur early withdrawal penalties if taken before age 59 1/2, and may incur an increased tax rate depending on your income and tax bracket in retirement.
Splitting an IRA into two accounts and designating different beneficiaries may help avoid disputes after your death, as well as protecting assets from being taken over during a divorce proceeding if it becomes marital property and mixed in with joint assets.
Beneficiaries
Beneficiaries of IRA accounts have some responsibilities as beneficiaries. Starting one year after turning 73* or inheriting the account, beneficiaries of an IRA must begin taking required minimum distributions (RMDs). Another option could be rolling over funds into personal like-kind IRAs to avoid post-death family disputes that delay or even derail estate plans.
Additionally, having multiple accounts allows you to employ various investment strategies with each one. For instance, one IRA might serve as a low-cost robo-advisor while the other allows stock picking. Maintaining individual accounts doesn’t need to be hard or expensive; just make sure your custodian supports trustee-to-trustee transfers between accounts – that way money won’t need to be opened and closed regularly as you move between them! You could also ask them to split an inherited IRA.
Diversification
IRA accounts offer investments that are flexible enough to fit into any time horizon, risk preference and financial circumstance. You can invest in stock mutual funds or exchange-traded funds (ETFs) tax deferred until their eventual gains.
Investors have several options for funding their IRA accounts: stocks and bonds individually or professionally managed target date funds that manage asset allocation on your behalf, or target date/asset allocation funds that track retirement dates to adjust asset allocation accordingly. Multiple accounts could require paying additional fees when managed separately at different brokerage firms; having one-stop solutions might make life simpler when keeping track of expenses and fees and filing your taxes with multiple accounts may necessitate filling out more forms than necessary.
Ease of Administration
Maintaining multiple IRA accounts can be time consuming. You must maintain various tax documents, investment records and any fees charged by custodians who charge annual maintenance or service charges for each one.
One IRA with all your assets can make life simpler for your beneficiaries and may help prevent arguments about who receives more of its value than another beneficiary.
No matter the method you use to distribute your assets, be sure to abide by IRS rules for naming an IRA beneficiary. Failing to do so could force your heirs to pay income tax when withdrawing funds in retirement even though no taxes were levied at the time of contribution.
