Multiple IRA strategies

[proud_texan]

My wife and I are working on our ER stratagy and today we spoke with a fellow from EDWARD JONES investments. He suggested that we might split our two 401Ks into multiple IRAs so that we can control the amount we have withdrawn before age 59 1/2 by only withdrawing from one of them. Sounds reasonable.

Has anyone else here done that? If so, how does it work for you.

 

[sgeeeee]

I haven't started SEPPing from any of them, but between us my wife and I have 4 different 401K accounts and 2 IRAs. We have intentionally kept them separate so that we would have more versatile options in case we need to tap into some or all of them before age 59 1/2.

 

[unclemick]

No we ended up not touching our IRA's. Circa 1993, in ER at age 49, we got alot of free meals from groups wanting our rollover IRA money. Reached age 60 this year without any withdrawals at all- 4 buckets trad.(2) and (2) rollover.

Now - this is memory only - splitting IRA's for early withdrawal was to put that money into a low volatility fund so you were not taking it out at low market points. But I don't remember any difference between Trad. and rollover IRA's. Keeping rollover separate was in case you went back to work and wanted the option of rolling back into a 401k.

Like I said, going by memory.

 

[Mr._johngalt]

I expected I would have to start drawing down my IRA
when I semiretired in 1993. Have not touched it yet.
Currently I plan to start drawing at 59 and a half
(March, 2004). But................lately I've been thinking I might be able to hold off a while longer. My comfort level increases with every day that I draw closer to 62 and SS.

 

[Mr._johngalt]

Just a comment about Edward Jones. I have never used
brokers much, and of course they will never get rich on
working with me. However, I have been with Edward Jones for about 7 or 8 years now and am quite
satisfied. Could be just the broker I suppose.

 

[proud_texan]

I don't have anything against Edward Jones, I was just wondering what advantage there might be spreading my portfolio over multiple IRAs. From an investment standpoint, I think very little.

I'm just not knowledgable enough about taxes to know how it might benefit me to do so. I already know that I will have to pay taxes if and when I take it out and that taking any monies out early will hurt me growthwise by reducing my compounding power.

However, I don't need or want my money to compound into a million dollars by the time I'm 80. I really can use the money now while my wife and I are young so that we can enjoy our retirement the way we've planned. I just want to find a way to take my 4.28% SWR and not let Uncle Sam have half in the process. :

 

[sgeeeee]

I don't think there's a tax advantage to having your IRAs and 401Ks subdivided into separate accounts. The potential advantage I saw was in the versatility of SEPP withdrawal. If all goes right, I won't need to take SEPP, but if the economy were to turn stale for several years before I reach age 59 1/2, then I might want to take some SEPP income. The rules of SEPP determine the smallest amount you can take from a 401K account based on the amount in the account. If all your money is in one account, then you have to take out that minimum for 5 years even if you only need half that much. But if you have your 401K money in two accounts, you can withdraw SEPP payments from only 1 of them. By having several accounts of differing values, you can tailor your SEPP withdrawals to almost any amount you might want to withdraw.

 

[Ted]

As far as I know, it's legal to set up any number of IRA's by transferring money out of existing 401(k) or IRA accounts.  The downside of having too many is that the accounting of the payments for tax purposes would become burdensome.

Uncklemick pointed out the potential problem of stocks in a "distribution phase" IRA being automatically liquidated when they are too cheap.  However, the "solution" of putting all of the assets in the "distribution phase" IRA in a low volatility (meaning, short term bond) fund has a couple of disadvantages too.  You wouldn't get much long term return, and you wouldn't be selling stocks when they were expensive, when you should be selling them to maintain a reasonably constant asset allocation.

It seems to me that the best strategy for maintaining a fairly constant asset allocation in one's total portfolio would be to have approximately that allocation in their "distribution" IRA(s).  

Edward Jones has its main offices about two miles from my house, so those of you who trade with that company are contributing to the local economy here and helping to sustain the resale value of my house.  Their "market niche" is to provide highly personalized, close-to-home service for "small" investors.  To do this, they recruit brokers from all backgrounds on the basis of their potential sales ability -- whether or not they have more than the superficial knowledge of markets that is required to pass the necessary examination.  So, as with other "full service" brokerages, you can expect to get mediocre, somewhat biased advice while paying relatively high commissions.  That's OK as long as you understand the value of investments such as index funds and TIPs (which brokers generally don't recommend) and don't trade very much.

 

[sgeeeee]

As far as I know, it's legal to set up any number of IRA's by transferring money out of existing 401(k) or IRA accounts.

 
If you mean that you could roll the money in one existing account into multiple IRAs, I don't think this is true. When I checked on this a few years ago, I was told that a rollover could only be made from one account into one account.

The downside of having too many is that the accounting of the payments for tax purposes would become burdensome.

This could be a problem if you are not comfortable with accounting and tax filing. Some people might find it unpleasant to keep track of another account.

Uncklemick pointed out the potential problem of stocks in a "distribution phase" IRA being automatically liquidated when they are too cheap.  However, the "solution" of putting all of the assets in the "distribution phase" IRA in a low volatility (meaning, short term bond) fund has a couple of disadvantages too.  You wouldn't get much long term return, and you wouldn't be selling stocks when they were expensive, when you should be selling them to maintain a reasonably constant asset allocation

It seems to me that the best strategy for maintaining a fairly constant asset allocation in one's total portfolio would be to have approximately that allocation in their "distribution" IRA(s).

If your IRA and 401K accounts are with companies that offer appropriate investment choices, it is not too difficult to keep all of your accounts balanced in approximately the same way.

 

[unclemick]

Back in 1993 our 'specific company' wouldn't let you stay in your 401k or even get 'heaven forbid' a loan.

Yes rollover was only to one account -BUT you could go to a self directed IRA and split from there. And in our case (Vanguard) I went initially to multiple funds in one rollover account.

I still have a very small 401k with a temp. company which has no requirement to rollover.

My memory says Vanguard would let me ccombine my trad, and rollover accounts - but warned me that would erase the rollback to 401k option.

Just trying to remember this under 591/2 stuff hurts my limited brain cells - glad I made ten years in ER without having to use the under 591/2 option.

Wish everybody luck if they need the early withdrawal option. Read the latest rules and when at all possible - keep it simple.

 

[Mr._johngalt]

Re. "glad I made it 10 years w/o using the under 59-1/2 option". Mega dittos!!

Re. KISS system (keep it simple), agree 100%. Avoiding
hassles in your investments or other aspects of your ER
life are very important. I've been in ER over 10 years
and am still working on it. Of course, my life is very
much simplified from my working days. I am starting to suspect this process (cutting back, simplifying) is
perpetual. Once again Terhorst had it right. When he quit, he quit. No backsliding or constantly working
on "deals" that look lucrative. Got to put a high value
on your time, even if that time is not "productive" in
any traditional sense.

 

[jojodontno]

hi fellow travellers,has any one metion (god forbid) bankrutcy.your 401k is protected ,not your I.R.A.!We have 7different mutual fund(famlies) accts.We hoped to cover the different styles ;growth,value,large cap, mid-cap, small cap,micro-cap;anddomestic versus international,etc-did I forget anything(ha-ha)?this includes self-directed brokerage accts,too.Beleive it or not we sleep very well at night!hvae you considered Royh-IRA,s?do you really want to risk depleting your funds or continue to work part-time for awhile?Iam confused about your stratigy.

 

[Ed the Gypsy]

Two points that favor of leaving $ in the 401K as opposed to rolling over into an IRA:

1) As just mentioned, a 401K is a "Qualified Plan" and therefore protected from certain civil attachments (just ask OJ Simpson). IRAs are not.

2) If you are at least 55 in the year that you leave a job, you can get at ALL of the money in that 401K at once without the 10% penalty being imposed, without the need to piddle it out through an SEPP procedure. Of course, you must pay income taxes on it. I have two such 401Ks that I am retaining for just this reason. It is my private unemployment insurance--and I am unemployed at the moment.

Although this is all in the IRS literature, I bought a very nice little book from NOLO Press, "IRAs, 401(k)s & Other Retirement Plans--Taking Your Money Out", by Slesnick and Suttle. I found it very useful.

Ed

 

[Bob_Smith]

...a 401K is a "Qualified Plan" and therefore protected from certain civil attachments (just ask OJ Simpson).  IRAs are not.

Ed, it is my understanding that some states have extended this protection to IRAs, and others appear to offer some protection. Still others offer very weak or ambiguous protection. So it is definitely something to consider before dumping a 401(k) into an IRA account, but it depends on what state you live in.

 

[unclemick]

Then throw in the push for umbrella insurance - and things can get very complex.