Keeping Track of Multiple IRAs

| January 7, 2019 | 0 Comments

Besides losing weight and getting in shape, one of the more common New Years’ resolutions is getting organized. It’s also one of the first steps in the financial planning process because it makes keeping on top of your finances a lot easier. Nowhere is that more important than with your retirement savings. This is because the rules around retirement account contributions and distributions are complex and the penalties for not obeying the rules are severe. For example, failure to make a required minimum distribution can result in a penalty equal to half of the amount to be distributed. Ouch!

When you maintain multiple retirement accounts, there are lots of subtle ways that the rules and regulations can combine to make life difficult. Here are some important IRA rules to keep in mind.

Required Minimum Distributions (RMDs). When making required minimum distributions from your IRAs, you are allowed to aggregate your distributions to take the entire amount from a single account. However, this only applies to IRAs (including SEP and SIMPLE IRAs). You can also aggregate your required distributions from 403(b)s to a single account, but each 401k has to have its own distribution.

Contribution Limits. There are annual limits to how much can be contributed to your IRAs. The limits apply to all of your IRAs combined, so that you can only contribute up to the maximum allowed amount to all of your IRAs. If you contribute too much, you must distribute the excess contribution from the IRA (or IRAs) to which it was made.

Distributing IRA Basis. If you make a non-deductible contribution to any IRA in a year, that contribution is called basis. The basis needs to be tracked every year as long as you have IRAs. Once you have basis in one IRA, it is applied across all of your IRAs. When you distribute funds from any IRA, part of that distribution will be a return of your basis (and thus not subject to tax). In short, your basis is added up across all of your IRAs, and any IRA distribution from any IRA for any reason should include a pro-rata share of that non-taxable basis. This one trips up a lot of people who are trying to get creative with Roth IRA conversions.

Inherited IRAs. Most people who inherit IRAs must take a required minimum distribution each year, even if you are not yet 70.5. The exception is spouses who elect to treat the inherited IRA as their own. If you have multiple inherited IRAs from the same person, you can take the RMD from any one of them (e.g.: two accounts from your father can be combined). However, if you have inherited IRAs from different people (e.g.: your mother and father), then each account has its own required minimum distribution.

Rolling Over IRAs. Distributions from IRAs are normally taxable as income. However, if the amount is rolled over to the same type of IRA from which the distribution was made within 60 days of receipt, it won’t be taxed. The catch is that you can only do this once in a 12-month period from ALL of your IRAs.

Roth IRA Distributions. When you contribute (or convert) to a Roth IRA, the funds must remain in the Roth for five years in order to be withdrawn tax-free. The good news is that the five-year clock begins with the first contribution, even if you make additional contributions later on.

Best Practices. The best advice for working with multiple retirement accounts is to consolidate them as much as possible. There are other considerations – like fees, investment options and litigation risk – but consolidating the accounts is the first step to getting ahead of the complex web of regulations surrounding retirement savings. A good fee-only Certified Financial Planner® professional can also help you keep your finances organized and help you avoid some of the pitfalls in our complex financial system.

This column is prepared by Rick Brooks, CFA®, CFP®. Brook is Director/Investment Management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at rbrooks@bfadvisors.com. Brooks and his family live in Mission Hills.

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