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Can I (Should I) Combine My IRAs?

It's a simple question that's not so simple.

Natalie Choate, 01/10/2014

Question: I have several different IRA accounts. I'd like to combine them all into one for ease of management. Can I do that? Is there any reason I should NOT do that?

Answer: That's a simple question that's not so simple. Let's review the rules and the recommendations.

First thing to know is that some IRAs CANNOT be combined with each other; they MUST be kept in separate accounts:

Thou shalt not combine a traditional IRA with a Roth IRA. If Roth money somehow mistakenly gets "rolled" or merged into a traditional IRA, you've made a big mistake and must take immediate steps to try and fix it.

Thou shalt not combine your own IRA with an inherited IRA. If you hold an IRA as beneficiary of another person, that IRA must be kept in a separate account from your own personal IRA. The only quasi-exception to this is for the surviving spouse: She can combine ("roll over") money she receives as a distribution from the deceased spouse's retirement plan or IRA into her own IRA, thereby "converting" an inherited plan into her own IRA. Since 1985, nonspouse beneficiaries are not allowed to do this.  

Thou shalt not combine an IRA inherited from one decedent with an IRA inherited from another decedent. If you inherited IRAs from your father and from your mother, you cannot combine them! If you inherited multiple IRAs from one person (e.g., three IRAs from your mother) you can combine them with each other. Just not with IRAs inherited from a different decedent.

Except for those few rules, you are generally free to combine and/or divide your personal IRAs into as many or as few accounts as you like. Combining accounts is usually done for convenience of management--it's easier to manage one big account than multiple smaller accounts. That being said, however, here are some circumstances that might cause you to use separate IRAs:

Rollover vs. contributory. Once upon a time, there was a significant "legal" difference between an IRA that contained some of the owner's annual contribution money versus an IRA that had been funded exclusively by means of rollovers from qualified retirement plans. In the old days, only "pure" rollover accounts were eligible to be "rolled" back into a qualified plan. Due to a change in the law, however, pretax money can be "rolled over" from an IRA to a qualified retirement plan regardless of whether the IRA contains rollovers, annual-type contributions, or both. Therefore that reason to keep your contributory and rollover IRAs separate no longer exists. Any reason to still do it? Rollover IRAs have slightly better creditor protection than "contributory" IRAs: An IRA funded with rollovers from qualified plans has an unlimited exemption in bankruptcy, whereas a contributory IRA's exemption is limited to $1 million (adjusted for inflation). If you are concerned about potential creditors' claims or bankruptcy, that would be a good reason to keep your rollover IRA separate.

Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is a leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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