Q. Dan, I came across one of your articles in which one of the questioners stated, “I have three IRAs.” Is that normal? Why would anyone need more than one? — Ben in Cocoa Beach
A: Ben, most people find having one IRA account makes tracking contributions, managing the assets in the account and directing distributions simpler than having multiple accounts. For most distributions, for purposes of determining the taxable amount of a distribution the balances of all IRA accounts are aggregated anyway under the “pro-rata” rule.
Nonetheless, tax law allows you to have as many IRAs as you want. Some people are well served by having more than one. Three situations come to mind.
First, some people designate some of their IRA funds for a specific purpose. For instance, they may want a specific amount to be available throughout retirement for their health care, travel, or to leave a specified amount to charity. By setting the desired amount aside in a separate IRA, they find it easier to track how much is available for these purposes.
Second, and more commonly, is people designate some of their funds for specific people. It is perfectly permissible to name multiple beneficiaries for a single IRA account but multiple accounts sometimes make things simpler for beneficiaries once you pass due to rules governing Required Minimum Distributions (RMD) on Inherited IRAs and practical matters.
This allows each beneficiary to make their own claim to their portion of your IRA money when they see fit. There is no coordination among beneficiaries needed. It also allows each beneficiary to make their own decisions about how much and when they take funds from their inherited account over and above any RMD that may apply based on their ages.
How do premature distributions penalties work?
Having multiple IRAs usually does not affect your RMD while you are alive. Technically, the RMD is calculated separately for each account even though for most the total of these RMD will be the same amount as though it came from a single IRA. Oddly, though calculated separately, you can satisfy the RMD by making distributions from just one of your IRAs.
The third situation I will mention that often results in more than one IRA is the case in which one wishes to avoid the 10% premature distribution penalty normally applicable to distributions made prior to age 59 ½. Normal taxes still apply to distributions but one exception to that penalty is to use Substantially Equal Periodic Payments, aka “SEPP” or “72t” distributions.
There are a couple of formulas for determining how much can come out of an IRA penalty free prior to 59½ under a SEPP arrangement that are beyond the scope of this article. Once started, a SEPP must continue for a minimum of five years or until age 59½, whichever comes later. Alterations during this time are limited, which means that the account supporting the payments is generally not available for distributions outside of the SEPP arrangement.
Sometimes, people have IRAs large enough that they do not need to encumber all their IRA money with SEPP restrictions to get the amount of distributions they want. It is permissible to carve off the amount needed to generate the penalty free distribution amount in a separate IRA and leave the rest of the IRA balances alone.
Bottom line: Most people do not need more than one IRA but there are goals that make having multiple IRAs attractive enough to some to warrant the inconveniences.
Dan Moisand is a fee-only financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne and Tampa, Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Originally published on FloridaToday. Read the original article here.