Should I have multiple IRAs?
Q: I have several IRAs with various brokers and a couple of 401(k) accounts at previous employers. I have been thinking I should consolidate them into a single IRA. Is there any benefit to keeping them separate?
A: Personally, I like to consolidate my accounts. It makes my investments easier to follow and I am able to keep a better eye on my asset allocation. In my financial planning practice, I also generally recommend that my clients consolidate their accounts. However, there are circumstances when it makes sense to have multiple IRAs. This is especially the case when an individual invests in several different types of assets or when they have more complicated estate planning goals.
A client invested in many different types of assets might benefit from holding each type of asset in a different IRA. For example, an individual might find it advantageous to hold traditional assets, such as publicly-traded stocks and bonds, in one IRA and alternative assets, such as private equity, in a separate IRA. Because the dynamics of these investments are significantly different from each other, keeping them in separate IRAs might allow you to better monitor their performance. Private equity often requires responding in a timely manner to capital calls. Having an IRA dedicated to private equity will allow you to make sure your cash is available when needed.
If you are investing in real estate using IRA money, you should seriously consider holding each individual property in a separate IRA. As we have discussed in previous columns, the rules governing real estate investing in IRAs are very complex and the penalties for violating those rules are onerous. Unless great care is taken, you could inadvertently find yourself engaging in a prohibited transaction that could disqualify your entire IRA. By keeping each property in a separate IRA, you insulate your other investments from the consequences of a misstep in one of your properties.
Separate IRAs can also be used to segregate your investments by time horizon. For example, with retirement planning it is common to think in terms of asset buckets. A short-term asset bucket is used to fund expected withdrawals inside of 3 years, a medium-term bucket is for withdrawals between 3 and 10 years and a long-term bucket is for anything beyond 10 years. People who are still working can easily have investment horizons that stretch 30 years or more into the future. By maintaining separate IRAs for these different time horizons, you will be able to track the sustainability of your withdrawals and know when and if you need to make course corrections over time.
Multiple IRAs are also helpful if you intend to leave your IRA wealth to a combination of individual beneficiaries and charities. You may recall that individual beneficiaries can stretch the required minimum distributions from inherited IRAs over their expected lifetimes. The actual time period depends on several factors including the age of the designated beneficiary and whether or not the IRA creator died before or after reaching his required beginning date.
However, if one of the beneficiaries is a charity, or a trust that has a charity as one of its beneficiaries, your individual beneficiaries could get stuck with the five-year rule. The five-year rule says that the IRA must be depleted by December 31 that is five years after the IRA creator’s death. One way to prevent this problem is to set up a separate IRA just for the charity.
The flexibility of IRAs makes them extremely valuable as a financial planning tool. Depending on your circumstances, multiple IRAs may help you protect and manage your assets. They can also help protect your beneficiaries. A knowledgeable financial planner can help design the combination of IRAs that will work best for you.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to email@example.com.