The Roth IRA has become the most popular retirement account for investors seeking to shelter all future income and gains from taxation. The great news is that you can have more than one Roth IRA or Self-Directed Roth IRA, although, one is limited in terms of how much can be contributed to the plan(s) in a given tax year.
- A Roth IRA is a powerful retirement savings tool with tax-free funds during retirement
- One is permitted to have as many retirement accounts as they wish
- No matter how many plans you have, you are still required to stay under the annual contribution limits
Roth IRA History
The Relief Act of 1997 introduced the Roth IRA. The Roth IRA is an after-tax IRA which allows any US person with earned income under a set income threshold to make after-tax contributions up to $6,000 or $7,000 if at least age 50 for 2022.
So long as the Roth IRA has been opened at least five years, and you are at least age 59 1/2, all Roth IRA distributions would be tax free. Also, with a Roth IRA there are no RMDs. Unlike a traditional, pretax IRA, you never have to pull money from the plan if you don’t want to. The Roth funds can be left to someone, in full, when you pass.
In other words, if you made an investment into any capital asset, such as stocks, real estate, and even cryptos, all gains would be tax-free when you make a qualified distribution.
For example, if a 52-year-old bought a piece of real estate in 2021 and wished to sell it in 2022, after twelve months, and had over $200,000 in gains, the gains would be subject to a capital gains tax rate of 15% or 20% if the individual has income over approx. $496,000, plus a s 3.8 percent net investment tax for individuals with modified adjusted gross income over $200,000. Whereas, if the individual owned the real estate in a Roth IRA, all gains would be tax-free once the Roth owner reached age 59 1/2.
Learn More: Investing in Real Estate with a Roth IRA
Funding a Roth IRA
There are three ways one can fund a Roth IRA in 2022: (1) contributions, (2) rollovers, and (3) Roth conversions.
Roth IRA contributions
As mentioned, one can directly contribute either $6,000 or $7,000 on an annual basis. That number can change based on cost-of-living adjustments throughout the years.
However, there are income restrictions as to who can directly contribute to a Roth. Essentially, if you make too much money during the year, you cannot receive the full benefit of the Roth.
Only individuals with income below $144,000, if single, or $214,000 if married filed jointly in 2022 can make Roth IRA contributions. However, there is a legal work-around. Since 2010, there is no longer any income limitations on Roth IRA conversions, known as the Backdoor Roth IRA solution. Thus, one who earns more than the Roth IRA income limitations discussed above, can make an after-tax IRA contribution and then immediately convert to Roth.
There would be no tax on the conversion from after-tax to Roth, although, if the individual had other pretax IRAs at the time of the conversion, the amount converted to Roth could be limited based on the pro rata conversion requirement.
One is permitted to have more than one Roth IRA. You can even make annual contributions to more than one Roth account during a taxable year. However, one is not permitted to make an annual Roth IRA contribution above the annual limits. It doesn’t matter if you have one IRA or five, you cannot exceed the total limit.
For example, if you have one IRA and contribute $2,000 to it, you are allowed to open another account, however, you can only contribute the remainder of the annual limit. For 2022, that would mean you can only contribute $4,000 to the new plan if you are under age 50.
Related: The Self-Directed Roth IRA Secret
If you wish to open a new Roth IRA at another financial institution, you may roll over funds from your current plan. Plus, if you have old Roth 401(k) funds, you can choose to roll those over as well. Please note that you generally cannot move 401(k) funds from a job you are currently employed at.
There are no limits on direct rollovers. Therefore, you can rollover as much or as little as you want, whenever you want. For example, you have $50,000 in an IRA at a local bank and you want to invest in alternative assets with IRA Financial. You can roll over the entire amount, and not be limited to the annual contribution numbers.
Roth IRA Conversion
One can convert pretax IRA assets to a Roth IRA, irrespective of income tax level. Because those funds were never taxed, income tax would be due on the cash or fair market value of the asset converted to Roth. That amount will be treated as taxable income during the year of the conversion. Taxes will be due the next time you file with the IRS.
Depending on the taxpayer’s age, ability to pay the tax, and long-term investment expectations, Roth IRA conversions can become a popular retirement tax planning tool for many savers.
Keep Reading: Traditional IRA vs. Self-Directed Roth IRA
As we talked about, one is permitted to have more than one Roth IRA (or Self-Directed Roth IRA) at various financial institutions. However, the annual contribution limits apply to all of them in the aggregate, and not on an individual basis.
Multiple plans are popular for those that enjoy their current plan/provider but wish to broaden their investment opportunities. Remember, most retirement plans held a “typical” financial institution will limit your options. You generally need a special purpose custodian to invest in nontraditional assets, like real estate and private businesses. In the end, it’s your decision as to how many Roth IRAs you want, and where to hold them.
Did you know that Peter Theil was able to amass $5 billion in a Roth IRA? Learn to how to use a Self-Directed Roth IRA to invest in private businesses today!