Can I Split My Traditional IRA Into Two Accounts?
Sunday, September 24th 2023
Individual Retirement Accounts (IRAs) have long been used as tax-advantaged saving vehicles by Americans looking forward to retirement and looking for tax advantages when saving. Traditional IRAs, among the various kinds of IRAs available, remain one of the most common because it combines tax deductible contributions and deferred growth of investments with tax deductions for contributions made after April 17th 2017. If you wish to split a Traditional IRA into two accounts – is that possible and what are its consequences? In this comprehensive guide we explore this question and examine both its possible outcomes as well as potential advantages/drawbacks/process associated with splitting an IRA into two.
Understanding Traditional IRAs
Before discussing how to split a Traditional IRA, let’s briefly introduce its key features. A Traditional IRA is a retirement savings account that enables individuals to contribute pretax income tax-deductible while taxation for investments that grow is deferred until withdrawal time in retirement – this allows account holders to benefit from compounded growth over the years while potentially paying lower tax rates upon withdrawing funds at this later time.
Why Split a Traditional IRA?
Splitting one Traditional IRA account into two can serve several purposes, such as:
- Diversifying investments: Splitting a Traditional IRA allows account holders to broaden their investment strategy by diversifying among various assets or management styles within each account.
- Distribution planning: Splitting an IRA can aid distribution planning by enabling its owner to withdraw Required Minimum Distributions from one account while leaving another one growing tax-deferred.
- Beneficiary designations: Account holders may wish to divide up their IRA in order to name multiple beneficiaries for each account – this can prove particularly helpful in estate planning.
- Risk management: By splitting their IRA, an account holder can better control risk by employing different investment strategies in each account – one could focus on aggressive growth while the other may favor more conservative options.
Does It Exist Any Options to Split Traditional IRA?
Simply stated, yes – you may split your Traditional IRA into multiple accounts without incurring penalties from the Internal Revenue Service (IRS). There is no maximum limit of IRAs an individual may possess but certain considerations should be kept in mind before proceeding with such action.
As set by the IRS, contributions made across both your Traditional and Roth IRAs must comply with annual contribution limits set by them; currently these amounts stand at $6,000 for those under 50 and $7,000 for those 50+ in 2021 respectively; splitting an IRA does not increase its maximum annual contributions per year.
Second, keep in mind that each IRA account may incur its own set of expenses and fees, so splitting yours could incur extra account management and maintenance charges. Care must be taken when considering splitting an IRA against any possible costs that might accompany its creation – these must outweigh its potential advantages and drawbacks.
How to Split a Traditional IRA
If you have decided to divide up your Traditional IRA, here are the steps that need to be taken:
- Create a new traditional IRA: Assuming you want a traditional IRA, the initial step should be contacting an appropriate financial institution and opening one – either the same one that already holds it or one different than what currently holds yours – in order to open one of your own.
- Decide how you will distribute assets between accounts: Decide how you wish to allocate your assets between accounts – this could involve splitting investments equally or allocating specific ones based on your investment strategy and goals.
- Completion of direct transfer: Request a direct transfer between your existing IRA and new IRA; this event should not trigger tax penalties as funds will simply transfer between financial institutions rather than being distributed directly to you. Take care to provide all details and instructions needed by both financial institutions so as to facilitate an efficient, smooth, and accurate transfer.
- Review the accounts: Once the transfer has taken place, review both accounts to assess how they align with your desired investment strategy and make any necessary rebalance adjustments to achieve desired allocation and diversification in each. This may involve purchasing or selling assets to achieve this result.
- Update beneficiary designations: If you are splitting your IRA for estate planning or to assign different beneficiaries for each account, be sure to update its beneficiary designations immediately after. Otherwise, this could have unfavorable repercussions, with assets distributed according to default rules or state law instead of being controlled by you as intended.
- Monitor and manage accounts: Keep both accounts under regular review to make sure they’re performing as anticipated, making any necessary adjustments or taking RMDs (1) once required, to avoid penalties that can accumulate over time.
Possible Cons of Splitting an Existing Traditional IRA
As with any financial decision, splitting a Traditional IRA into two accounts has the potential for adverse implications. Some potential negatives associated with doing this are as follows.
As previously discussed, opening multiple IRA accounts may incur increased account management and maintenance fees. Be sure to understand each fee structure fully to determine whether splitting up your IRA is more advantageous than any potential costs involved.
Complexity: Administering multiple accounts may prove more laborious and time consuming than managing just one, necessitating additional effort in monitoring performance, rebalancing investments and keeping your retirement savings strategy on course.
Paperwork increase: Opening more IRA accounts can increase paperwork and record keeping requirements, such as the tracking of contribution, RMDs and transactions across accounts.
Dividing a traditional IRA can bring many advantages, including diversification, distribution planning, estate planning and increased fees and complexity. Before opting to split your account in this manner, take time to carefully assess both benefits as well as any associated costs or challenges before making your decision.
If you decide that splitting your Traditional IRA is the appropriate decision for you, be sure to follow these steps to ensure an easy transition and proper account administration. It may be prudent to consult a financial adviser or tax professional regarding any unique considerations related to your situation and ensure your decisions align with long-term retirement and savings goals.
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