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In general - all things being equal with regards to fund availabilities, fees, etc - is it better to add funds to an existing IRA each year, or open new ones?

Are there different tax benefits to either approach?

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The benefit of multiple accounts -

  • You might wish to have more beneficiary combinations than one account form will permit.
  • You wish to buy a fund that's part of a different broker's free offering.
  • If held in banks where the FDIC insurance limits might be an issue, separate banks might make sense.

I'll edit (and invite others to) if I think of others, but Dilip's answer, 'no' is correct. Taxwise, no benefit.

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  • 1
    +1 for pointing out the possibility of needing more beneficiary designations than might be possible with one account. I wish I could designate different beneficiaries for different mutual funds held with the same IRA custodian but that is not possible. Having multiple beneficiaries of different ages (whether primary or secondary) can create problems if it is not set up right: all the beneficiaries might be forced to take distributions based on the age of the oldest beneficiary, thus negating some of the benefits of stretch IRAs for the younger beneficiaries. Jun 19 '13 at 16:12
  • Exactly. (I never know how much additional detail to include or that's going into a different area.) The IRA bene situation is one that's so complex, I can write a book. Jun 19 '13 at 17:36
  • what about FDIC insurance? Does it make sense to split in different banks if you expect it to grow over the insurance limit?
    – Vitalik
    Jun 19 '13 at 20:11
  • @Vitalik - just added to my answer/list, thank you. Jun 19 '13 at 20:14
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There are no differences tax-wise for the current year as long as we are comparing apples to apples and oranges to oranges, that is, we are not talking Traditional vs Roth IRA contributions. But, investment-wise, it can make a difference. Here are two reasons why contributing to an IRA account that you already have can be better than starting a new account.

  • Some IRA custodians charge an annual fee (typically $10-$25 and possibly per mutual fund) over and above the (hidden) expenses charged by mutual funds that show up as a reduced return on your investment: but waive this fee if the total value of the IRA account is large (or if you sign up for electronic delivery of documents etc). So, adding to an existing account may put you above the threshold where such fees are charged.

  • Some mutual funds offer share classes with lower expense ratios if your investment is large enough. So, in some cases, adding this year's contribution to a mutual fund that you already hold in your IRA can be better in the long term from the investment perspective than opening a new account, possibly with a new custodian, in a similar fund. Of course, if the mutual fund that you currently hold in your IRA is not one that you want to add to, but you don't want to sell that fund and invest in something else either, then by all means invest in a new fund.

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