Too Many Roth IRAs? It's Time to Consolidate
By Beverly DeVeny, Chief IRA Analyst
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A common strategy is to go through with smaller Roth IRA conversions or to convert different assets to different Roth IRAs. If you have done this over a number of years, you probably have more Roth IRAs than you know what to do with. Maybe it is time to consolidate.
Generally the reason for doing Roth conversions to separate Roth IRAs is to simplify the net income calculation that must be done if you want to later recharacterize that Roth conversion. The deadline for doing a Roth recharacterization is October 15 of the year after you do a Roth conversion. Once that date has passed, there is no longer a need to keep a separate Roth IRA.
There are several good reasons for consolidating your Roth IRA accounts. The biggest one is simplicity. You have fewer account statements to review and potentially fewer financial institutions with which to deal. You may also be able to reduce certain fees after a consolidation. Also, a larger account with one financial institution usually gets you a better level of service than several smaller accounts with different institutions. And, it makes things easier for your beneficiaries after your death.
Consolidating generally does not mean that you have to cash in your investments in order to move cash to the receiving custodian. You can usually transfer your existing assets from one Roth IRA to another Roth IRA, depending on what your Roth IRA is invested in.
A direct transfer should almost always be used. You can do only one 60-day rollover of Roth IRA assets to another Roth IRA in a 12-month period. The one-rollover-per-year limit applies to both your Roth and traditional IRAs – combined. You cannot do a Roth IRA rollover and a traditional IRA rollover within the same 12-month period. When you do more than one rollover in a year, any rollovers after the first rollover become excess contributions in the receiving IRA or Roth IRA. They are subject to a penalty of 6% for each year that they remain in the account.
Since I mentioned beneficiaries a moment ago, let me just remind you that this is a good time to check those beneficiary forms on the Roth IRAs that remain after your consolidation. Be sure that those beneficiaries are still the individuals that you want to inherit your hard-earned Roth account. And, be sure you have both primary and contingent beneficiaries named for the account.
I have used a lot of Roth terms in this post that some of you may not be familiar with such as recharacterization and net income calculation. You can find more information on the IRS website, www.irs.gov for those unfamiliar terms, or you can use the search bar at the top right of www.irahelp.com to learn more about any unfamiliar terms. Or, better yet, consult with an advisor who has experience in this area. You can find a list of advisors here.
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