Why [do] people have 2 IRAs.

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Basicfin
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Why [do] people have 2 IRAs.

Post by Basicfin » Sun Feb 17, 2013 10:54 am

It's getting hard for me to understand how come people have 2 IRA accounts - Traditional IRA which gives tax deduction instantly and ROTH IRA which does not. I know the difference between them and after careful thoughts, reading this forum and other material, I opted for Roth IRA myself for me and my wife. But when I visit some of the posts here I read people saying they have 2 Roth accounts and a TIRA.
Not sure if I am missing something by not having TIRA.

Thanks as always to bring me up to speed.

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Blues
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Re: Why [do] people have 2 IRAs.

Post by Blues » Sun Feb 17, 2013 11:10 am

Some folks have traditional IRA's which predate the availability of Roth IRA's and for one reason or another these have not been converted.
(They may have then opened a Roth IRA once that option became available.)

Also, it's possible to have IRA's (Roth or Traditional) at more than one institution (depending on the availability of the particular investment).

There are a number of very legitimate reasons why folks can have multiple IRA's of either flavor.
Last edited by Blues on Sun Feb 17, 2013 11:12 am, edited 1 time in total.
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sscritic
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Re: Why [do] people have 2 IRAs.

Post by sscritic » Sun Feb 17, 2013 11:11 am

Someone died.

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momar
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Re: Why [do] people have 2 IRAs.

Post by momar » Sun Feb 17, 2013 11:17 am

They had a Roth, but then left an employer and rolled over their 401k into a TIRA.
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Calm Man
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Re: Why [do] people have 2 IRAs.

Post by Calm Man » Sun Feb 17, 2013 11:23 am

They earn too much for a ROTH. They put nondeductable contributions into a TIRA. Some people eligible for a ROTH might use a TIRA that is deductible anyway because they might think their taxes will be lower in retirement. Some people don 't know the difference. Some peopl may not like the word ROTH. In other words, there are millions of reasons.

FedGuy
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Re: Why [do] people have 2 IRAs.

Post by FedGuy » Sun Feb 17, 2013 11:28 am

They may have had varying incomes or tax situations throughout their career, such that traditional IRAs made sense in some years and Roth IRAs made sense in others.

They may be practicing "tax diversification": the concept of having some traditional retirement accounts and some Roth accounts so that you're not making an all or nothing bet on how your future tax situation compares to your current tax situation. (That is, if a time traveler visited you and told you that you would be in a higher tax bracket throughout your retirement than you are today, you'd probably want to go all-in on a Roth today; but until that time traveler shows up, you might rather hedge your bets by splitting your assets across both types of accounts).

They may be waiting for their tax situation to be right to justify a conversion from a traditional to a Roth. Maybe they expect a year or two of low income in the near future, for example, or they expect their marital status to change.

There may be different investment options at different financial institutions, so they want to maintain an account in one place to get access to the first institution's well-diversified emerging market fund, for example, while holding an account elsewhere to take advantage of the second institution's low-cost international bond fund.

They may have concerns that one financial institution will go bankrupt or have a security breach, and want to diversify their risk.

Or maybe they're just not paying attention.

livesoft
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Re: Why [do] people have 2 IRAs.

Post by livesoft » Sun Feb 17, 2013 11:30 am

I will say more simply than previous posters:

Roth IRAs didn't always exist, so one couldn't have a Roth back in the days, so one had a traditional IRA instead.
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SpringMan
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Re: Why [do] people have 2 IRAs.

Post by SpringMan » Sun Feb 17, 2013 11:35 am

Some look at account diversification as a good thing. Having accounts that are taxable, tax deferred, and tax free provide diversification of accounts.
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Clever_Username
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Re: Why [do] people have 2 IRAs.

Post by Clever_Username » Sun Feb 17, 2013 2:49 pm

I have two IRAs. Here's a brief history of the money in them:

* t-IRA: about $4000 worth of rollover from previous employer retirement plans and about $5000 worth of deductible contributions (when I was in graduate school, I didn't understand why I'd want to pay taxes now and withdraw later... going back, that should have been Roth contributions).

* Roth IRA: in 2012, my earnings were in the high five figures and I was, for the final five months, covered by a 401(k) at work (which I maxed out, but that's not an IRA... yet). Since I made too much for a deductible contribution, I went with a Roth.

I might have a third when I leave my current employer (no concrete plans on leaving, but I don't plan to work there until I die, either) if there's some reason to have a t-IRA consisting solely of 401(k) rollovers. I don't know if this is or is not the right thing to do, but I have plenty of time (plus a great resource) to figure it out.

I hope this helps in some fashion.
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Boglenaut
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Re: Why [do] people have 2 IRAs.

Post by Boglenaut » Sun Feb 17, 2013 3:07 pm

Many people could benefit for a combination of Roth IRA (or 401k) and traditional IRA (or 401k).

When you go to withdraw the money, take from the traditional first. When you start getting into higher tax brackets, take from the Roth. Why take the bottom portion taxed at 0% from a Roth?

Also, if you have boom and bust years while working, put into or convert to Roth during bust years and do traditional during boom.

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BrandonBogle
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Re: Why [do] people have 2 IRAs.

Post by BrandonBogle » Sun Feb 17, 2013 3:19 pm

Boglenaut wrote:Many people could benefit for a combination of Roth IRA (or 401k) and traditional IRA (or 401k).

When you go to withdraw the money, take from the traditional first. When you start getting into higher tax brackets, take from the Roth. Why take the bottom portion taxed at 0% from a Roth?

Also, if you have boom and bust years while working, put into or convert to Roth during bust years and do traditional during boom.
And also, when you finally do get to retirement, if you have taxable can live off those, then start moving what you can from Tradition -> Roth. So if you have for instance, $8k left of income at 0%, take an $8k distribution from your Traditional as a conversion into Roth. This lets you minimize RMDs down the road, and let you take advantage of 0% tax space in case your later traditional withdrawals would be enough to push you to a higher tax bracket.

This is exactly what I plan to do with my mom once later this year when I get a preliminary estimate of her 2013 taxes done.

555
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Re: Why [do] people have 2 IRAs.

Post by 555 » Sun Feb 17, 2013 3:27 pm

I optimize my taxes by putting $X in TradIRA and the rest in RothIRA.

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Toons
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Re: Why [do] people have 2 IRAs.

Post by Toons » Sun Feb 17, 2013 3:55 pm

Blues wrote:Some folks have traditional IRA's which predate the availability of Roth IRA's and for one reason or another these have not been converted.
(They may have then opened a Roth IRA once that option became available.)

Also, it's possible to have IRA's (Roth or Traditional) at more than one institution (depending on the availability of the particular investment).

There are a number of very legitimate reasons why folks can have multiple IRA's of either flavor.
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Alan S.
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Re: Why [do] people have 2 IRAs.

Post by Alan S. » Sun Feb 17, 2013 5:33 pm

Some reasons people may maintain more than one traditional IRA:

1) They want some diversification of IRA custodians, eg use the best offerings of each, or do not want all their eggs in one basket
2) When older, they want each beneficiary to inherit their own IRA account (applies mostly for beneficiaries who don't "cooperate" well with each other or when owner does not want to leave equal amounts
3) Their state does not protect IRAs from creditors, therefore they want to maintain rollover IRAs as separate (no dollar limit for bankruptcy protection).
4) They may want to roll their pre tax IRA balance into an employer plan and some of those plans limit incoming rollovers to rollover IRAs only

For Roth IRAs:
1, 2, and 3 above

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Dale_G
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Re: Why [do] people have 2 IRAs.

Post by Dale_G » Sun Feb 17, 2013 7:19 pm

A tax free Roth sounds great, but some may have figured out that they can take a tax deduction for a traditional IRA - and distributions will also turn out to be tax free in the distribution phase if they are in a low tax bracket.

For many people, the Roth option is vastly oversold.

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JamesSFO
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Re: Why [do] people have 2 IRAs.

Post by JamesSFO » Sun Feb 17, 2013 8:01 pm

I have 2 T-IRAs + 1 Roth all with a single custodian. The T-IRA/Roth is easy to understand. The reason for 2 T-IRAs is to keep rollover funds and nondeductible contributions separately. Hope to roll the T-IRA back into a 401K at some point and the nondeductible contributions to Roth...

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papito23
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Re: Why [do] people have 2 IRAs.

Post by papito23 » Sun Feb 17, 2013 10:12 pm

Basicfin:

See this recent discussionon how Traditional IRAs can provide superiors tax benefits to low/moderate income households. Roths are perhaps oversold, and I will consider T-IRAs much more carefully in the next 10 yrs, perhaps making my contribution during tax time for the previous calendar year.
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fidelio
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Re: Why [do] people have 2 IRAs.

Post by fidelio » Sun Feb 17, 2013 10:18 pm

well, there could be many variations on the stories above. i had a bunch of iras from diff jobs and ended up at a place w/ a good 401k program. i worked w/ a cpa to convert the iras to a roth, as my tax situation etc. allowed. meanwhile i maxed out the 401k but had no funds for ira contributions. i still had a small amount in an old ira. some years later when i retired (last year), i rcvd. a lump sum from the employer as part of the package, and rolled that into the old ira. i did investigate converting, but it appeared to be a wash, so i simply set it up as the 2d draw-down fund, after taxable, in my "distribution phase."

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Rob5TCP
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Re: Why [do] people have 2 IRAs.

Post by Rob5TCP » Sun Feb 17, 2013 10:28 pm

I have 3. I have a Roth because it tax free.
I have a SEP IRA from my business - and I periodically convert that to a Roth (when I have a less than great year
in business).
Plus I have a Rollover IRA from my KEOGH that went back to the mid 80's.
Eventually my RO will be converted to the Roth and I will only have the Roth and SEP.

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Re: Why [do] people have 2 IRAs.

Post by bsteiner » Sun Feb 17, 2013 10:42 pm

The Roth conversion is far from being oversold. To the contrary, most accountants don't understand the benefits of the Roth conversion.

Nevertheless, the Roth conversion (or contribution) generally makes sense to the extent the tax rate on the conversion is less than, equal to, or not "too much" higher than the tax rate that would otherwise apply to the distributions.

Many people can take distributions in the 15% bracket. Since there's a big jump between the 15% bracket and the next bracket (25%), they probably shouldn't convert beyond the 15% bracket to the extent they could otherwise take distributions in the 15% bracket.

However, there are many people who expect to always be in a high tax bracket, whether due to pension income or some other income. For them, unless they intend to leave their IRAs to charity, the conversion generally makes sense.

For many people, it makes sense to spread the conversion out over a number of years, so as to stay within the 15% bracket, or some other bracket. For people who are working and expect to be in a lower bracket upon retirement, it often makes sense to wait until retiring before converting, or beginning to convert.

While this should be looked at on a case by case basis, at a constant tax bracket the Roth conversion is generally beneficial. For example, assuming a constant 30% bracket, suppose you have a $100 traditional IRA and $30 of other money. If you convert and use your $30 of other money to pay the tax, you have a $100 Roth IRA. Over some period of time, it doubles to $200, all of which is yours. If you don't convert, your $100 traditional IRA will grow to $200. You or your beneficiaries will withdraw the $200, pay $60 tax, and have $140 left. You'll still have your taxable account, but it will grow to something less than $60 since you'll have to pay tax on the income and gains each year.

There are other benefits to the Roth conversion. There are no required distributions after age 70 1/2. This benefit is significant. Since IRAs are generally better protected against creditors, the conversion increases your asset protection. A Roth IRA is a more valuable asset to fund a GST exempt disposition. In a decoupled state that still has a state estate tax, the Roth conversion avoids the double tax due to the income tax deduction for the estate tax being available for the Federal, but not the state, estate tax.

The discussion about the interplay between the traditional IRA and the saver's credit and the earned income credit (and, in that regard, also the increased child care credit) is interesting, but most lower income taxpayers don't have the money available to contribute to an IRA of any kind. There are, of course, exceptions, such as young people whose parents have money, or older people in semi-retirement.

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Re: Why [do] people have 2 IRAs.

Post by crowd79 » Sun Feb 17, 2013 10:46 pm

I put enough in a Traditional IRA to lower my AGI enough to get as much of a "saver's credit" as I can. Thus I'll lower my AGI enough to just below $28,750, for example, to get a $200 tax credit. The remainder of IRA space that I have left then goes into a Roth.

I also want tax diversification. I'm currently in the 15% bracket, but I have no idea what tax rates will be in 30-35 years when I retire. Could be 25%, could be 10%, I don't know.

loco00
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Re: Why [do] people have 2 IRAs.

Post by loco00 » Mon Feb 18, 2013 12:09 am

Just a related question, in order to do the backdoor IRA conversion from TIRA to Roth, do you need to create a separate TIRA then convert it? I'm asking this because I already have a Roth IRA and this year I'll make too much money to contribute to Roth. Do I need to create a TIRA with Vanguard and ask Vanguard to convert or roll over my TIRA to Roth? Thanks.

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Re: Why [do] people have 2 IRAs.

Post by Ozonewanderer » Mon Feb 18, 2013 12:21 am

Basicfin wrote:It's getting hard for me to understand how come people have 2 IRA accounts - Traditional IRA which gives tax deduction instantly and ROTH IRA which does not. I know the difference between them and after careful thoughts, reading this forum and other material, I opted for Roth IRA myself for me and my wife. But when I visit some of the posts here I read people saying they have 2 Roth accounts and a TIRA.
Not sure if I am missing something by not having TIRA.

Thanks as always to bring me up to speed.
I have a TIRA for myself and a Roth IRA from conversions. My wife has a Roth IRA. I'm confused by your statement that you have a "Roth IRA myself for me and my wife." Can a married couple have an IRA for both of them jointly? My wife and I have always maintained separate IRA's.

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Re: Why [do] people have 2 IRAs.

Post by sesq » Mon Feb 18, 2013 9:58 am

Ozonewanderer wrote: I have a TIRA for myself and a Roth IRA from conversions. My wife has a Roth IRA. I'm confused by your statement that you have a "Roth IRA myself for me and my wife." Can a married couple have an IRA for both of them jointly? My wife and I have always maintained separate IRA's.
No. They are "Individual" retirement accounts.

To the OP, my wife and I have a total of 4 IRA's, all roth's. Just flotsom and jetsum from the passage of time. We used to have 6 or 7 of them.

scrabbler1
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Re: Why [do] people have 2 IRAs.

Post by scrabbler1 » Mon Feb 18, 2013 10:34 am

When I left my company in 2008, my 401(k) had small amount of after-tax money (back then called 401(a)) in the account. While I did not choose it, I could have rolled that portion into a Roth IRA because that portion most resembled a Roth IRA. (I cashed out the principal instead.) This would have given me two IRAs.

Interesting variety of other reasons posted here......

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Sheepdog
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Re: Why [do] people have 2 IRAs.

Post by Sheepdog » Mon Feb 18, 2013 12:17 pm

I have 2 IRAs, but I had 3 at one time. In 1998, I had a traditional IRA. In 1998, the Roth IRA was initiated, so I had a Roth. In late 1998 when I retired, I rolled over my pension to a Rollover IRA. At that time a regular IRA and a Rollover IRA could not be combined. In 1999 the rules changed so that the 2 could be combined, so I had 1 TIRA and a Roth IRA. I then rolled over part of my TIRA to the Roth so it would be a larger.
So, why do I want these 2 IRAs, a TIRA and a Roth IRA? Similar to Boglenaut's comment, I can take distributions from the TIRA until taxes would be due, then I can take distributions from the Roth IRA. By doing so I have paid little to no income taxes for 10 years..
(My wife also has 2 IRAs which were funded just like mine.)
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MathWizard
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Re: Why [do] people have 2 IRAs.

Post by MathWizard » Mon Feb 18, 2013 2:16 pm

I use a ROTH as part of my emergency fund.

I also have a small TIRA coming from a year when my income spiked due to
consulting work, and I moved up a tax bracket. The TIRA dropped me back
into my normal income tax bracket.

Most of my funds are in a tax deferred account, which I expect to provide
enough income to get me into my current tax bracket, so there is no disadvantage
in using the ROTH.

The pluses for the ROTH are
1) being able to withdraw contributions tax and penalty free before 59-1/2 (which is why it is part of my EF),
2) as a hedge in case tax rates rise,
3) in case my portfolio gains more than I am planning on, and I would end up paying a higher marginal rate
in retirement than I am now.
4) It allows me to effectively save more since $6K pre-tax in a TIRA is less than $6K post-tax in a ROTH.

Carl53
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Re: Why [do] people have 2 IRAs.

Post by Carl53 » Mon Feb 18, 2013 2:33 pm

Besides the reasons cited in this thread for having both TIRAs and Roths, we have multiple Roths. When we do a conversion, we have converted more than we intend to actually do. For instance convert $X for myself and $X for my spouse with the understanding that we will likely recharacterize one of the two conversions in its entirety. We keep the conversion that does better, and recharacterize the other. Keeping the newly converted Roths in their own account, not commingled with other Roths greatly simplifies the recharacterization process should it become necessary. Once recharacterization is no longer possible, we have combined Roth accounts, freeing up the emptied account for the next year transfer. Currently we each have 3 Roths with VG.

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Karl
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Re: Why [do] people have 2 IRAs.

Post by Karl » Mon Feb 18, 2013 5:18 pm

I have six IRAs. Four of them are inherited and being of different type (Roth vs Traditional) and having come from different decedents they can't be combined in any manner that would simplify things.

SGM
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Re: Why [do] people have 2 IRAs.

Post by SGM » Mon Feb 18, 2013 8:37 pm

We each have more than one Roth in different asset classes. If any of the Roths created in 2012 by conversion go down in value we have the option of recharacterization before October 15, 2013. If I do any conversions this year, they will go into at least one different Roth because of possible recharacterization prior to October 15, 2014.
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leonard
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Re: Why [do] people have 2 IRAs.

Post by leonard » Tue Feb 19, 2013 11:47 am

Basicfin wrote:It's getting hard for me to understand how come people have 2 IRA accounts - Traditional IRA which gives tax deduction instantly and ROTH IRA which does not. I know the difference between them and after careful thoughts, reading this forum and other material, I opted for Roth IRA myself for me and my wife. But when I visit some of the posts here I read people saying they have 2 Roth accounts and a TIRA.
Not sure if I am missing something by not having TIRA.

Thanks as always to bring me up to speed.
Some people may have rolled over a traditional 401k (if employer didn't have a Roth 401k) to a Trad IRA. Then, opened a Roth IRA in their own name. Thus, 2 IRA's.
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sdrone
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Re: Why [do] people have 2 IRAs.

Post by sdrone » Tue Feb 19, 2013 11:52 am

heh. This is kind of like someone growing up in the 90s and thinking stocks always go up!

Roth IRAs were introduced by the Tax Payer Relief Act of 1997. I think I had 2 401k rollovers by then.

CrowTRobot
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Re: Why [do] people have 2 IRAs.

Post by CrowTRobot » Tue Feb 19, 2013 12:26 pm

momar wrote:They had a Roth, but then left an employer and rolled over their 401k into a TIRA.
That's my story.

steve r
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Re: Why [do] people have 2 IRAs.

Post by steve r » Tue Feb 19, 2013 5:12 pm

Some may have both for strategic reasons.

On the Wiki, Roths are recommended if you have large tax deferred savings or pension.
Some tax deferred savings is ideal because you can set yourself up with low rates in retirement. The rest in a Roth may be an attempt to find an unknowable sweet spot in terms of lifetime tax minimization.
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