Most people like to keep their retirement savings as simple as possible, and having fewer accounts can make things a lot easier to handle. Yet for a long time, there were restrictions on your ability to commingle new IRA contributions with money in a rollover IRA that you had moved from an employer 401(k) or other retirement plan. That led many retirement savers to have multiple IRAs in order to avoid any concerns about ineligibility of their rollover IRA money. Now, many of the guidelines that kept people from combining rollover IRAs with regular IRA contributions have disappeared, but there are still some reasons to consider keeping them separate rather than contributing directly to your rollover IRA.
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Why there used to be a big problem with contributing to a rollover IRA
In the past, financial advisors routinely told people never to combine a rollover IRA with IRA money from regular contributions. The primary reason was that if you did so, you would lose some of the flexibility that rollover IRA money offered. In particular, if you later wanted to take the rollover IRA money and put it back into a 401(k) or other employer plan, then you could do so as long as you hadn't commingled non-rollover assets in the rollover IRA. If you made regular contributions, however, then you would no longer be able to move the rollover IRA back into a 401(k) or similar plan.
However, the IRS now allows you to roll over an IRA into a qualified retirement plan like a 401(k) at work, regardless of the original source of the money. Therefore, you could take a rollover IRA into which you had made additional contributions and roll it back to a employer plan. Theoretically, you could even take a regular contributory IRA and roll that money over to your 401(k).
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Why you still should consider keeping your IRAs separate
Even though IRS restrictions have become less strict, there are still some reasons to keep your rollover IRA free of additional contributions. First, some employers haven't yet adopted the language that allows their employer plans to accept money that wasn't rolled over from a previous employer plan. If that's the case, then if you have commingled funds in an IRA, the employer won't let you roll it over into a 401(k) account -- even if the IRS wouldn't have any legal issues with it at all.
In addition, there can be some legal advantages in some jurisdictions to rollover IRAs over regular contributory IRAs. For instance, in the area of creditor protection, many of the same favorable protections in bankruptcy filings for qualified plan money also apply to rollover IRAs, offering potentially unlimited amounts of retirement money to get sheltered from debts. However, regular IRA money that you contributed directly to the retirement account doesn't get the same level of protection, with federal bankruptcy law limiting the amount protected to just over $1.28 million. If you combine them, then you could lose the unlimited protection that rollover IRAs get. Admittedly, it's rare to have seven-figure rollover IRAs, but it's still something that retirement savers should keep in mind.
Finally, there are some legal reasons beyond the retirement account context that could justify a decision to keep money separate. For instance, if your rollover IRA came from a job you had before you got married, then it might be helpful to keep your pre-marriage assets separate from what you earned during your marriage. Making contributions to a pre-marriage rollover IRA would mix the two, making it impossible to go back and later claim with certainty how much of the account should be attributable to pre-marriage assets.
Weigh the pros and cons
On the other hand, there are some practical reasons why combining IRAs can be smart. By having a larger account balance, you can sometimes get access to cost-saving investments in which smaller accounts don't qualify to invest. That in turn can sometimes justify any downside from combining rollover and contributory IRAs.
With few outright prohibitions left in the IRA area, what you do with your retirement savings is largely up to you. By understanding the potential downsides to combining IRAs and weighing them against the benefits, you can make a smarter decision about what to do in your particular situation.
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