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Reasons not to combine IRAs

Link to 1-minute video about: How to Avoid an IRA Rollover Mistake? 


Reasons not to combine IRAs


You can not directly combine unlike kinds of IRAs. That is a big no-no.

Yes, there are means to convert a Traditional IRAs to ROTH IRAs, but that is not the same as lumping them together in one step. To ultimately get the Traditional IRA assets into a ROTH IRA requires using a process called ROTH IRA Conversion. Before trying this, though, recognize there may be tax consequences that out way the benefits of the ROTH IRA.


Except in a limited circumstance, you can not combine the IRAs of the same type with that of another individual. To legally combine IRAs from another person, unfortunately, a spouse must die and the surviving spouse must make arrangements by a deadline to move the proceeds into the surviving spouses IRA. There are some complicated issues on whether to combine the IRAs or not and most involve taxes.


Another reason not to combine retirement assets from work, 401(k) or 403(b), is the special protection afforded these accounts from creditors. Once the money is moved from the work plan to an IRA, the protection may disappear or be lessened.

For estate planning reasons you may wish to keep the accounts separate. If you have both the Traditional and ROTH IRAs, you have flexibility that is lost if not retained separately. You may want one type to go to certain beneficiaries and another type to other beneficiaries, but this flexibility is lost when an owner combines their IRAs or a Traditional IRA is converted to a ROTH IRA.


For cash flow reasons, you may wish to not to covert Traditional IRAs into ROTH IRAs. You see, withdrawals from Traditional IRA’s may create, and usually do, create a tax liability. In contrast, the ROTH IRA will not have a tax liability no matter how much you take out. So, in some tax years you may need the money, but not the tax liability, so drawing from the ROTH is the answer. Each person’s case is unique and strict calculations must be done before drawing money to decide which account source is best. Only someone competent in these issues can give you a good answer.


Another reason not to take possession of your work retirement money to later place the assets into an IRA is finding money to match the withholding. The workplace administrator will withhold 20% before you get your check, but to avoid taxes you will need to reinvest in the new IRA the original amount before withholding which means you need to add your own assets so the amount deposited in the IRA matches the amount your received plus the amount withheld.


This video and text is for information use only and is based on information believed to be true. Much of the information is readily available, but some is drawn from Advisor Products articles. The reader acts on these ideas at their discretion and should consider consulting an accountant, financial advisor, or attorney. No promise is made that an idea or concept is appropriate or would work well for the reader. This is not an offer to provide legal advice or act as an attorney. Contact Steven Erickson JD, MBA, CFP(R), Accredited Wealth Management Advisor, Chartered Retirement Planning Consultant at 573-874-3888 This email address is being protected from spambots. You need JavaScript enabled to view it. , if you have questions or to set an appointment. Serving Clients in Columbia, Jefferson City, and the surrounding counties.



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Tuesday, December 11 2018