Contributory vs Rollover IRA
I have a client that wants to contributed to an IRA for 2010. He already has a rollover IRA set up. Should I open a new account or put it into the existing account? I thought if you put new monies into a rollover account it may lose some benefits or will be reclassified. What would be the potential issue?
Permalink Submitted by Alan Spross on Fri, 2011-04-15 18:52
The contribution can be made to either a new or current account.
If the contribution is made to a current account and the client wants his contribution returned or has an excess contribution for some reason, the earnings calculation is based on the investment results of the entire account, not just on the contributed money. But when made to a new account the earnings is limited to the actual investment purchased with the contribution. This factor can work either in favor or against the client depending on the calculated earnings.
There are a couple other minor advantages of keeping rollover IRAs separate:
1) The federal banktuptcy creditor protection is unlimited on a rollover IRA, but if that IRA accepts a regular contribution, the limit may be reduced to around 1,000,000 plus inflation adjustments. If client is in a state the fully protects IRAs from creditors or will never reach 1,000,000 in total, then this does not matter.
2) If client ever wants to roll IRA funds back to an employer account, many employer accounts only accept incoming rollovers from rollover IRAs that did not receive regular contributions.
Again, these are minor issues and may well be of no concern to the client. The paper trail is smaller with only one account, and there may be a savings in small account fees by combining.