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How Many IRAs Should You Have?

There are some legal mandates for keeping IRAs separate, as well as possible beneficiary- and investment-related reasons.

In a recent column I mentioned that I have nine IRAs, causing some to ask why on earth anyone would have that many IRAs. Which leads to this column: How many IRAs should someone have?

Generally, the fewer the better: Fewer accounts to track, fewer required minimum distributions to compute, fewer beneficiary designation forms to fill out. But despite the dream of simplicity, most people end up with multiple accounts.

Start with the IRAs you cannot combine: If you have a Roth IRA and a traditional IRA, they obviously must be in separate accounts. If you own an IRA you established for yourself and an inherited IRA, those cannot be combined. In fact, you cannot combine an IRA you inherited from one decedent with an IRA you inherited from another decedent.

If you have a business that contributes to a SEP-IRA, the SEP-IRA must be separate from your other traditional IRAs.

That's it (I think) for the legally mandated separate IRAs.

Keep Rollover and Contributory IRAs Separate?
An IRA that has received no contributions other than rollovers from qualified retirement plans is called a "rollover" IRA. An IRA to which you have ever made any "regular" (i.e., annual-type nonrollover) contributions is called a "contributory" IRA--even if it also contains one or more rollovers from qualified plans.

There are three reasons offered for keeping your rollover IRAs "pure" and uncontaminated by "regular" contributions--but only one of those reasons is valid!

Not a valid reason: Once upon a time, a rollover IRA was the only type of IRA that could be "rolled over" into a qualified plan--but that rule was repealed in 1992.

Also not a valid reason: Some people mistakenly think that if they make aftertax (nondeductible) contributions to a separate IRA, they can later withdraw those contributions from that particular separate IRA tax-free. Sorry, it doesn't work that way. For purposes of determining what portion of any IRA distribution is considered a tax-free return of the individual's nondeducted contributions, all of that individual's IRAs (whether rollover or contributory) are considered to be one giant single IRA. And the proportion of the distribution that is tax-free is based on the portion of the combined balance of all of the person's IRAs that is represented by aftertax contributions.

So, nowadays there is absolutely no tax difference between these two types of IRAs--but federal bankruptcy law does distinguish, which leads to the valid reason: There is an unlimited bankruptcy exemption for (noninherited) rollover IRAs. The exemption for "contributory" IRAs is very generous but not unlimited. It's possible some states' creditor exemption laws make similar distinctions. So someone who has an eye on potential creditors might therefore want to keep his or her rollover IRA(s) "pure" (not "contaminate" them with any regular contributions).

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