Should Your Clients Hold Multiple IRAs?

Ellie Lowder

A recent call from an NTSA member reminds all of us that holding multiple IRAs strictly for the purpose of controlling the taxation of withdrawals doesn’t work. The member’s client holds two traditional IRAs — account number 1 contains only deductible IRA contributions and the earnings on those contributions,
while the second account consists of non-deductible contributions and those earnings. The client plans to control the income tax-consequences of withdrawals by using the non-deductible IRA in which he believes income taxes are due only on the earnings in the non-deductible account.

Unfortunately, his two IRAs will be aggregated — that is, the values added together with any withdrawals considered to come from the total value. Thus, income taxes will be calculated on a pro-rata basis as though he had withdrawn from each of the IRAs. The aggregation rule applies to all traditional IRAs (including SEPs and SIMPLE-IRAs) held by the individual tax-payer. See Part I of Form 8606.

Is there any action that the individual could take to change that scenario? Yes, he could convert the non-deductible IRA to a Roth IRA, which after a 5-year holding period has been satisfied can be withdrawn tax free (provided he is at least age 59½ at that time)! Why? Because the aggregation rule does not apply to traditional and Roth IRAs. Those IRAs are held separately for purposes of withdrawals. In the year of the conversion to the Roth IRA, the individual will pay income taxes only on the earnings in the non-deductible IRA!

Additionally, inherited IRAs are not aggregated with any other IRA (except another inherited IRA from the same decedent) for purposes of withdrawals.

Conduit IRA

In years before 2002 (when EGTRRA gave us pension portability), it made sense to establish a rollover IRA to receive money from an employer sponsored plan, and to keep that IRA totally isolated, so that, at some point the conduit IRA could be rolled back into the employer sponsored plan. However, effective on Jan. 1, 2002, it became permissible to roll traditional IRAs into employer sponsored plans. Is there any purpose now in maintaining an IRA which consists ONLY of money rolled from an employer sponsored plan?

We found one instance just within the past few weeks where the individual did hold a conduit IRA which consisted only of amounts rolled from her 403(b) plan following severance of employment. The individual now wishes to roll that IRA back into the 403(b) plan in which she does not currently have an account. If the plan document accepts rollovers into the plan for former employees, the conduit IRA can, in fact, be rolled into the 403(b) plan as long as the rollover is directed to an approved provider in that plan. In the absence of the conduit IRA, she could NOT have created an account in the plan into which to direct an IRA rollover.

Ellie Lowder, TGPC, Consultant

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.