Combining a Roth IRA & a Roth CONVERSION IRA
Hello –
If someone has a Roth IRA funded exclusively w/ after-tax contributions, AS WELL AS a Roth CONVERSION IRA funded via a conversion from a Traditional IRA to a Roth IRA (done over a few years ago), is there any reason the Roth IRA and Roth CONVERSION IRA cannot, and should not, be combined? Back when recharacterization was permitted through Oct. 15th of the following year, it made sense to keep segregated. However, is there any reason to still keep such Accounts segregated?
Assume the above is for Clients in both NJ & NY in case relevant.
Thank you!
Jason
Permalink Submitted by Alan - IRA critic on Thu, 2022-07-28 16:11
Both states offer complete creditor protection for Roth IRAs, therefore there is no reason that the accounts should not be combined. They are treated as a single combined Roth IRA for purposes of taxation of any distributions, but if these states did not protect IRA against creditors, there may have been a remote reason for keeping them separate IF the Roth conversion had been funded from a rollover IRA (A TIRA that never received regular TIRA contributions). Therefore, they can be combined unless the owner maintains a different beneficiary on each one.
Permalink Submitted by Jason Hochstadt on Thu, 2022-07-28 16:18
Hi Alan,Thanks! In this case, the Roth conversion IRA was funded from a Traditional IRA (not a Rollover). And, the beneficiaries are the same on the Accts. Any concerns if these States were to change their creditor protection laws going forward? Or, if they did, it would be likely having the segregated Roth IRA & Roth Conversion IRA wouldn’t make a difference?
Permalink Submitted by Alan - IRA critic on Thu, 2022-07-28 17:15
I can’t recall any states reducing their IRA creditor protection, but the most likely consequence of one of these states doing that is that the IRA would fall back to creditor protection provided under the 2005 Federal Bankruptcy Act (BAPCPA). Protection under this act requires filing BK in a proper court, and the IRA is then protected without dollar limit if a “rollover IRA” from an employer plan. A contributary IRA (which is the case here) is protected up to 1,512,000 with future inflation adjustments. Therefore, even if the state allowed IRA creditor protection to backslide to the bankruptcy Act rules, if the accounts are valued below this limit it will not matter if the converted account was not a rollover IRA. In this case, better of simplify and combine these accounts.