The Traditional IRA and its offshoots (SEP, SIMPLE, rollover and Roth IRAs) play a leading role in helping millions of U.S. taxpayers invest for retirement. However, many IRA owners are unaware of the opportunity they have to consolidate their multiple IRAs by using a “Super IRA” strategy (most common is a rollover 401k). An IRA consolidation strategy can lead to reduced fees and increased buying power. I’ve had several instances where an individual has had several old retirement plans from previous employers. That has included defined benefit plans, 401k’s, TSP’s, 403b’s and Keough plans. The paperwork alone was cumbersome and consolidating has made tremendous sense.
If you like this article, please be sure to also check out 401k Tips: What Not To Do, Rollover IRAs Offer a Wide Range of Benefits, 7 Things To Know About The 2010 Roth IRA Conversion
IRA Consolidation Case Study
The following is a common scenario involving a worker (Patrick) who has changed jobs several times throughout his career. He has been diligent about saving for retirement, but his assets are scattered. An IRA consolidation strategy is suggested, and the section concludes with a three-step action plan for investors like Patrick.
- Frequent job changer, age 62, is approaching retirement.
- He has lost track of his numerous retirement savings arrangements.
- He turns to his advisor for help with simplifying his financial affairs.
During his career, Patrick has accumulated various retirement accounts but has lost track of the status of each. He is 62 years old and is thinking of retiring from his current job. He has three retirement plans with former employers [a profit sharing plan, a target benefit plan and a 403(b) plan], four Traditional IRAs, a SIMPLE IRA, two Roth IRAs, an Individual(k) plan he established when he owned his own business and a Thrift Savings Plan he now has as an employee of the federal government. He is also the beneficiary of his deceased wife’s nonqualified deferred compensation plan and her Traditional IRA. In an effort to simplify his life, he turns to his financial planner for help. This is a strong case for implementing the “Super IRA” consolidation strategy.
Step 1: Understand the Rules
- A person who owns multiple SEP IRAs and Traditional IRAs can combine them into one “Super IRA” at any time.
- If the person also owns a SIMPLE IRA, he or she can transfer or roll it to a “Super IRA” after participating in the SIMPLE IRA plan for at least two years. The two-year period begins when the first SIMPLE IRA plan contribution is made to the individual’s SIMPLE IRA.
- A “Super IRA” can receive ongoing SEP plan contributions and annual Traditional IRA contributions.
- Ongoing SIMPLE IRA plan contributions must first be contributed to the participant’s SIMPLE IRA. If the individual has participated in the SIMPLE IRA plan for at least two years, he or she can transfer or roll over the SIMPLE IRA into one “Super IRA.” (Note: special rollover rules may apply.)
- A “Super IRA” can receive rollovers of eligible assets from all types of qualified retirement plans [e.g., 401(k) plans, profit sharing plans, defined benefit plans, etc.], 403(b) plans, 403(a) plans and governmental 457(b) plans.
- A Roth IRA cannot be transferred or rolled over into a “Super IRA.” Multiple Roth IRAs can be combined to create a “Super Roth IRA.” Under the Pension Protection Act of 2006, effective in 2008, participants in qualified plans, 403(b) plans and governmental 457(b) plans can directly roll over eligible plan assets to Roth IRAs if conversion rules are satisfied.
- Spouse beneficiaries of qualified plans and SEP, Traditional and SIMPLE IRAs generally can consolidate their inherited accounts into their own “Super IRA.”
Step 2: Consider the Potential Benefits of a “Super IRA” Strategy
- Increased buying power, which allows for more sophisticated investment strategies
- One fee vs. multiple fees
- Simplified investment tracking
- Beneficiary organization and consolidation
- Consistent service
- Streamlined paperwork
- Simplified retirement income planning
Step 3: Work With Your Advisor
Investors should work with their advisors to determine whether a “Super IRA” asset consolidation strategy makes sense for them.
In our scenario, Patrick’s planner asks him the following key questions:
- Do you have the most recent statements from each of your retirement accounts?
- What type of investments do the plans hold?
- Are any of your retirement plans invested in employer securities?
- Is your goal to consolidate your accounts as much as possible?
- How long has it been since you first participated in the SIMPLE IRA plan?
Patrick’s goal is to consolidate as many of his retirement accounts as he can into one “Super IRA.” He obtains copies of his most recent retirement account statements to review with his advisor. He first participated in the SIMPLE IRA plan a year and a half ago. He does not hold employer securities as a plan investment.
After reviewing the statements, Patrick and his planner determine he could combine the following retirement accounts into a “Super IRA”:
- Profit sharing plan
- Target benefit plan
- 403(b) plan
- Five Traditional IRAs (the four he owns outright and his inherited IRA)
- Individual(k) plan
In another six months (two years after first participating in the SIMPLE IRA plan), he could transfer or roll over that balance to his “Super IRA” as well. Patrick cannot combine his two Roth IRAs into his “Super IRA,” although he could consolidate them into one “Super Roth IRA.” And he cannot roll over the nonqualified deferred compensation plan. Although he could combine the plans as outlined above into one “Super IRA,” it would be best for Patrick and his planner to carefully examine the types of investments currently held by the various plans to see if a rollover is the wisest course of action from a taxation standpoint. For example, special tax rules apply to distributions of employer securities from qualified retirement plans. This would be case of NUA or Net Unrealized Appreciation. Keep in mind, a consolidation strategy may not always be suitable. An advisor, or a tax or legal professional, can help identify the best course of action to incorporate the best investment services.
Are you candidate for a “Super IRA” strategy? If so, feel free to contact me and I would be glad to review your situation.