From a purely tax standpoint there is no reason to separate the accounts for the reasons you stated, ie pro rating of all owned IRA accounts per Form 8606.

You also mentioned a potential rollover into an employer plan. If a taxpayer has a rollover IRA from a prior employer there are two potential benefits of keeping that rollover separate:
1) Many employer plans will only accept conduit (aka rollover) IRA accounts as incoming rollovers. They will not accept contributary accounts regardless of whether the contributions were deductible or not deductible.
2) In states that do not fully protect IRAs from creditors, creditor protection is limited to the federal bankruptcy act of 2005. Protection of IRA accounts in bankruptcy are limited to 1,000,000 for accounts that received regular contributions, but there is NO LIMIT for rollover IRA accounts. In this situation, a rollover IRA account might contain after tax contributions rolled over as well as the pre tax balance.

Neither of the above are directly related to current taxation of IRA distributions, so the possible benefits of keeping rollover IRAs separate are better portability and better creditor protection in certain states.

• Flag as spam
• Log in to Reply

Yes, they can be converted, but are pro rated with the pre tax balance. They cannot be converted alone unless there is no pre tax balance. The calculations are generated by Form 8606.

One way to accomplish a tax free conversion is to roll the pre tax balance into your employer plan, leaving only the after tax amount in the traditional IRA. The remaining after tax amount can then be converted to a Roth IRA tax free.

• Flag as spam
• Log in to Reply