Consolidating multiple IRAs
I have a SEP-IRA, two conduit/rollover IRAs from prior employer plans, one traditional non-deductible contribution IRA, an old Roth IRA, and a current-employer 401K.
I would like to consolidate these accounts as much as possible, to simplify the execution and tracking of my investment strategies (all in stocks, bonds and ETFs). I really would prefer to have a couple of large investment accounts rather then the assortment of smaller ones.
The SEP was originally a Profit Sharing / Money Purchase pair, which were then terminated and converted to a SEP-IRA for administrative simplification – I did not want to keep filing those pesky Form 5500s every year. After conversion, there have not been any contributions to the SEP, as my business has hit some hard times and I got a job.
Would it be wise to dump the three other non-Roth IRAs into the SEP? And also the 401k, when I eventually leave my current employer.
I’m located in Chicago and I’m willing to pay a reasonable fee for this advice.
Thanks
Permalink Submitted by Alan Spross on Sun, 2007-09-16 02:25
One factor to consider here is how the various accounts are protected under the bankruptcy provisions. IL fully protects IRA assets without limit, however some states do not (eg CA). Should you re locate to such a state in the future, that issue could become important, but it is not where you are now or in most of the other states that fully protect IRA accounts.
What this means is that if you thought you would move to one of these states, you should keep the employer rollovers separate from your other traditional IRA accounts, because they will maintain unlimited protection. IRAs accounts funded with contributions are limited to 1mm, and it is best not to commingle the two. You need to decide if all this is a factor or not.
That said, you could maintain as few as two IRA accounts (traditional and Roth), and combine the others. Whenever you leave an employer you could directly transfer your former plan into the same IRA. There is no reason to keep IRA accounts separate that received non deductible contributions since all IRAs are combined as one large account for tax purposes. For the SEP, you can roll most of the funds out of the account into another IRA, and just keep a basic amount in there until you are sure you have no further need for a SEP IRA.
Consolidation can save you small account fees as well, but once you acquire major dollars, you may want to have two custodians just so all your eggs are not in one basket.
Permalink Submitted by [email protected] on Sun, 2007-09-16 03:42
Thank you for your clear and detailed answer! There is only one point I’d like some clarification, if you don’t mind:
[quote=”[email protected]“] For the SEP, you can roll most of the funds out of the account into another IRA, and just keep a basic amount in there until you are sure you have no further need for a SEP IRA.
[/quote]
Is it true also that I could move all of the other funds INTO the SEP, rather than out of it? My initial thought process was to use the SEP as the “final destination” for all funds – since it’s the only one that can receive additional future funds from all sources: contributions, business (should it ever turn a profit again!), and employer rollovers.
Thanks
Permalink Submitted by Alan Spross on Sun, 2007-09-16 05:02
Well, this is very rarely done, although it can be done. Most all transfers done are out of the SEP IRA to a regular traditional IRA or Roth IRA.
A SEP IRA is really just a traditional IRA adapted to accept employer type contributions with the limits based on profit, with a much higher dollar timit than a regular TIRA. It can be established by the employer and controlled by the employer, so you would not want to consider this unless YOU were the employer, as you would be in this case. The SEP IRA custodian may not accept incoming transfers if you were not the employer and may also balk if you were because a SEP almost never receives incoming rollovers.
Another reason this is rare is that the accounting and reporting of contributions must break out the SEP contribution from a regular IRA contribution or rollover contributions, raising the chance of reporting errors that would bring the IRS into the equation.
So, yes, I guess you could do it under the IRS code, but it is reversal of the normal flow of dollars, so it is hard to anticipate what types of issues you might run into. If anyone has actually done this without any problems, perhaps they will post the results.
One other marginally related issue is that once you commingle all these sources under one IRA, it will be very difficult to ever transfer it to an employer plan such as a 401k if you ever wanted to. There are a few specialized reasons why someone might want to do this with pure rollover IRA accounts if they could.
Permalink Submitted by [email protected] on Sun, 2007-09-16 14:25
[quote=”[email protected]“]One other marginally related issue is that once you commingle all these sources under one IRA, it will be very difficult to ever transfer it to an employer plan such as a 401k if you ever wanted to. There are a few specialized reasons why someone might want to do this with pure rollover IRA accounts if they could.[/quote]
The customer service rep at my financial institution had warned me of this very issue. In all practicality I don’t think I would ever want to move funds into an employer plan, but help me understand please…
I found this chart at the IRS website, which seems to indicate that almost anything can be rolled into a 401k: http://www.irs.gov/pub/irs-tege/rollover_chart.pdf
Is the issue then, that although the SEP and the other IRAs could be transfered to a 401k on their own, the act of commingling is what makes it more difficult?
Anyway, how would future employers and custodians know that I have commingled IRAs? Will the initial custodian tag it as a “Commingled IRA”, in the same way that they tag a “Rollover IRA” in the title of the account?
Thanks
Permalink Submitted by Alan Spross on Mon, 2007-09-17 18:02
No, about the only registration format they would look for is “Rollover IRA” and then limit any incoming transfers to those accounts.
The real issue is that any non deductible IRA contributions cannot be rolled into an employer plan. If the plan were to accept such contributions, in a worse case scenario the plan could be disqualified. But the plan administrators have no credible way to know for sure that any IRA does not contain such contributions because starting in 2002, IRAs could even accept after tax amounts in an employer plan rollover. In addition, many IRA custodians retain the “Rollover” label on an IRA even after a regular contribution is made to it. The IRA custodian has no way of knowing whether a contributon is pre tax or post tax. Because of all this, plans all have their various guidelines for which (if any) IRA accounts they will accept and which they will not. All the IRS cares about is that they do NOT accept any non deductible contributions.
There is usually no need to roll IRAs into an employer plan, but some people like their plan so much they want to keep everything simple and maintain just one retirement plan. Other possible reasons:
1) Taxpayer is a professional or otherwise litigation prone and lives in a state that does not protect IRAs. Employer plans have the broader ERISA protection without limits, so there is some asset protection by rolling into the ERISA protected employer plan.
2) Taxpayer plans to separate from service before age 59.5, and employer plans use age 55 for the penalty waiver. Moving funds into the employer plan makes distributions all penalty free if employee separates in the year he turns 55 or later.
3) Employee plans to work into his 70s, when IRA RMDs must begin. But RMDs from the employer plan can be deferred until the year following retirement unless employee owns more than 5% of the company.
4) Employer plans can provide loans and IRAs cannot.
5) Many employer plans allow participants to switch investments frequently without any commissions payable.