Merging Traditional and Rollover IRA's - Ed Slott and Company, LLC

Submitted by Saleah Harpole on Tue, 2009-10-13 16:35

Is there any disadvantage to merging Traditional and Rollover IRA’s? I have a client with several of each and he is retiring in the next few weeks. He will not be looking to roll funds back into a company sponsored plan so I’m hoping to help him consolidate into one IRA. Would there be any problem with doing this and which type of account should we consolidate to- a Rollover IRA or a Traditional IRA?

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Permalink Submitted by mk foss on Tue, 2009-10-13 17:13

Rollover IRAs have unlimited creditor protection in bankruptcy, traditional IRAs are limited to $1,000,000 in total. If there’s no concern about bankruptcy protection, they can all be merged together. Otherwise, all of the rollovers could be merged into one and the traditionals into another.

If they’re consolidated into one, the title rollover or traditional isn’t important.

Permalink Submitted by Anonymous (not verified) on Tue, 2009-10-13 18:40

Correct me if I’m wrong, but the protection is not determined by the label, but by the source. So even if combined into one Trad, the unllimited protection for the rollover money (qualified plan source) is perserved. I guess it would be more difficult to keep track of?

pmk

Permalink Submitted by Alan Spross on Tue, 2009-10-13 20:54

As far as I know, the protection for a commingled RO and contributary IRA has not been firmly established, and there was no provision in the BK Act to clarify the issue. Accordingly, the conservative recommendation not to commingle these IRAs emerged in order to play it safe. Eventually there will be a court test about exempting rollover assets in a commingled account from the 1mm limit, as well as some allocation formula for subsequent gains. We just don’t know how the courts will look at this issue, but the name “rollover” on the account would not be conclusive because IRA custodians do not have any uniform procedure for continued use of this term after the original QRP rollover is done.

I have an IRA account with Schwab that combined a RO IRA with a contributary IRA, and it still carries the “Rollover” name. This was done well before the BK Act was passed in 2005. In most states where IRAs are fully protected, the above should be a moot point. However, state laws could change and a taxpayer could relocate to a state that limits IRA creditor protection.

Permalink Submitted by Saleah Harpole on Wed, 2009-10-14 15:09

Thank you for all of your comments and information on this topic, I found it very helpful.

Best regards,

Saleah