Keeping Track of Multiple IRAs

One of the most common New Years’ resolutions is to get organized. It’s also one of the most important steps in the financial planning process, because it makes keeping on top of your finances a lot easier. Nowhere is that more important than with your retirement savings. The rules are complex and the penalties for not obeying them are severe.  When you have multiple retirement accounts, the rules and regulations can make life difficult. Here are some important IRA rules to keep in mind.

Required Minimum Distributions (RMDs). When making required minimum distributions from your IRAs, you are allowed to aggregate your distributions to take the entire amount from a single account. However, this only applies to IRAs (including SEP and SIMPLE IRAs). You can also aggregate your required distributions from 403(b)s to a single account, but each 401k has to have its own distribution.

Contribution Limits. There are annual limits to how much can be contributed to your IRAs. The limits apply to all of your IRAs combined, so that you can only contribute the maximum allowed amount to all of your IRAs. If you contribute too much, you must distribute the excess contribution from the IRA (or IRAs) to which it was made.  

Distributing IRA Basis. This one trips up a LOT of people. If you make a non-deductible contribution to any IRA in a year, that contribution is called basis. The basis needs to be tracked every year for the life of the IRA. Once you have basis in one IRA, it is applied across all of your IRAs. When you distribute funds from any IRA, part of that distribution will be a return of your basis (and thus not subject to tax). In short, your basis is added up across all of your IRAs, and any IRA distribution should include a pro-rata share of that non-taxable basis.

Inherited IRAs. Most people who inherit IRAs must take a required minimum distribution each year, even if you are not yet 70.5. The exception is spouses who elect to treat the inherited IRA as their own. If you have multiple inherited IRAs from the same person, you can take the RMD from any one of them (e.g.: two accounts from your father can be combined). However, If you have inherited IRAs from different people (e.g.: your mother and father), then each account has its own required minimum distribution.

Rolling Over IRAs. Distributions from IRAs are normally taxable as income. However, if the amount is rolled over to the same type of IRA from which the distribution was made within 60 days of receipt, it won’t be taxed. The catch is that you can only do this once in a 12 month period from ALL of your IRAs.

Roth IRA Distributions. When you contribute (or convert) to a Roth IRA, the funds must remain in the Roth for five years in order to be withdrawn tax-free. The good news is that the five-year clock begins with the first contribution, even if you make additional contributions later on.

Best Practices

The best advice for working with IRAs is to consolidate them as much as possible. There are other considerations – like fees, investment options and litigation risk – but consolidating the accounts is the first step to getting ahead of the complex web of regulations surrounding retirement savings.

At Blankinship & Foster, we specialize in helping retirees and near-retirees simplify and organize their finances. We have a proven process we call the B&F Way which integrates planning and investment planning, so you can live your retirement with Clarity, Confidence and Direction. Please contact us to learn more.

About Rick Brooks

Rick Brooks, CFA®, CFP® is a partner of Blankinship & Foster LLC and is the firm’s Chief Investment Officer. He is a lead advisor, counseling clients on all aspects of personal financial management. Rick serves on several boards. He is the Chairman of the Board of Girl Scouts San Diego, and also chairs the San Diego Foundation’s Professional Advisor Council. Rick and his family live in Mission Hills. Rick enjoys spending time with his family, theater, cooking, skiing, gaming and reading.

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