Can You Combine Multiple IRA Accounts?

IRA consolidation is the process of merging multiple Individual Retirement Arrangements into a single account. This simplifies financial management and can lead to lower administrative fees, as a larger balance may qualify for waivers. Consolidation also helps streamline your investment strategy by making it easier to maintain a balanced portfolio.

Permissible IRA Combinations

The ability to combine IRA accounts depends on their type. The primary rule is that accounts with the same tax treatment can be merged. This means you can combine multiple Traditional IRAs into one, or merge several Roth IRAs into a single Roth IRA. This concept extends to employer-sponsored accounts as well. You can roll over funds from a Simplified Employee Pension (SEP) IRA or a SIMPLE IRA into a Traditional IRA, as they all hold pre-tax contributions, making their consolidation permissible.

SIMPLE IRA Rule

A timing restriction applies when moving funds out of a SIMPLE IRA. You must wait two years from the date of the first contribution before you can roll it over into a non-SIMPLE IRA, like a Traditional IRA. Moving the funds before this two-year period concludes results in a taxable distribution, not a tax-free rollover. You are, however, permitted to move funds from one SIMPLE IRA to another at any time.

Prohibited Combinations

Traditional and Roth IRAs cannot be combined into a single account due to their opposite tax structures. Traditional IRAs use pre-tax dollars and are taxed upon withdrawal, while Roth IRAs use after-tax dollars for tax-free withdrawals. Moving funds from a Traditional IRA to a Roth IRA is not a consolidation but a “Roth conversion,” a separate transaction with significant tax implications.

Understanding Tax Consequences

The tax outcomes of combining IRAs are tied to the account types. When you combine accounts of the same type, such as a direct transfer from one Traditional IRA to another, the process is a non-taxable event. Because the funds do not leave their tax-deferred environment, no income tax is due.

Roth Conversions

Moving funds from a pre-tax account like a Traditional, SEP, or SIMPLE IRA into a post-tax Roth IRA is a Roth conversion. This is a taxable event where the converted amount is added to your ordinary income for that year and taxed accordingly. For instance, converting $50,000 from a Traditional IRA to a Roth means you must report an additional $50,000 of income. This can potentially push you into a higher tax bracket.

The Pro-Rata Rule

The tax calculation for a Roth conversion becomes more complex if you have made both deductible (pre-tax) and nondeductible (after-tax) contributions to any of your Traditional, SEP, or SIMPLE IRAs. The “pro-rata rule” applies, requiring the IRS to treat all your non-Roth IRAs as a single, aggregated account to determine the taxability of a conversion. For example, if your total Traditional IRA balance is $100,000, with $80,000 from pre-tax contributions and $20,000 from after-tax contributions, your balance is 80% pre-tax. If you convert $30,000, the rule dictates that 80% of that conversion ($24,000) is taxable. This calculation is performed using IRS Form 8606.

Information and Documents for Consolidation

Before merging your IRAs, you need to gather specific information and documents. Having these items prepared will ensure a smoother process. You will need:

• A list of all existing IRA accounts you intend to consolidate, including the full account number and current estimated value for each.
• The legal name and contact information for each financial institution that holds your funds, which is found on your most recent account statement.
• A copy of a recent statement for each account, as the new institution may require it.
• The “Trustee-to-Trustee Transfer Form” from the new financial institution. This form authorizes your new custodian to initiate the transfer of funds directly from your old custodians.

The Consolidation Process

After gathering your account details and paperwork, you can begin consolidation. The most common method is the direct, or trustee-to-trustee, transfer. You submit the completed transfer authorization form to your new IRA custodian, who then contacts your old custodians to manage the direct movement of assets. This process can take several business days to a few weeks.

Indirect Rollover

An alternative method is the indirect, or 60-day, rollover. In this process, you request a distribution from your old IRA custodian and receive a check. You then have a 60-day window from the date you receive the funds to deposit the full amount into your new IRA. Tax withholding is optional, but if you don’t waive it, you must use your own money to make up the difference. This method carries risks: missing the 60-day deadline will cause the distribution to be treated as taxable income and may be subject to a 10% early withdrawal penalty if you are under age 59 ½. The IRS also limits you to one such indirect rollover between any of your IRAs within a 12-month period.

Post-Consolidation Steps

After the funds arrive in your new consolidated IRA, complete these final steps:

• Verify the correct amount was transferred and that the old accounts are closed.
• Ensure the funds in the new account are invested according to your financial plan.
• Review and update the beneficiary information on your new IRA to reflect your current wishes.