Any reason to segregate lump sum pension?

[Philliefan33]

I am going to be taking a lump sum pension payout by 12/31/2022 and doing a direct roll over to a tIRA. I have an existing tIRA with a small amount of money (contributions made in recent years to manage income for IRMAA reasons).

Is there any reason to open a new tIRA account for the rollover? Any reason not to open a new tIRA? DH thinks I should keep my lump sum money segregated, but I can't think of any reason why. If it matters, I have ~$8K in the existing tIRA and the lump sum will be a little over ~$400K.

(Before anyone asks, the lump sum is my choice because: 1) the alternative annuity is only partially COLA'd, and 2) we expect to be able to live on other income streams and leave most if not all of the lump sum to heirs once DH and I have both kicked the bucket)

 

[Car-Guy]

I did initially but only because I didn't have a tIRA before I took my lump sum... Then I split it up to stay under the FDIC 250k limit at each bank. Then that was more trouble than "I felt" it was worth so a few years ago I merged them all back together.

I think there are benefits to keeping your 401k money separate but not sure about tIRA(s).

 

[Rianne]

We'll receive our pension lump sum early next year and roll it into an existing tIRA. Our pension did not have COLA so we thought this was the best way to go.

More than likely, we'll put it in a 2-year treasury while hopefully, things recover.

 

[Philliefan33]

Thanks all, you’ve confirmed my thinking.

 

[Midpack]

I did initially but only because I didn't have a tIRA before I took my lump sum... Then I split it up to stay under the FDIC 250k limit at each bank. Then that was more trouble than "I felt" it was worth so a few years ago I merged them all back together.

I think there are benefits to keeping your 401k money separate but not sure about tIRA(s).

Same here. We had 4 TIRAs, consolidated down to 2 after a few years. The only downside is you can't separate them again. We now have 2 TIRAs and 1 Roth. Simple is best.

 

[youbet]

If the TIRA contains any non-deductible contributions, keep them separate.

 

[Sunset]

I'm thinking there is a benefit, should you be successfully sued, depending upon your State, there could be a benefit to being able to demonstrate the entire amount originated from a 401K, and should be protected.

Since it was easy to do, we kept them separate.

In OP's case, especially since the original IRA is so tiny, if they don't want to have two IRA's, just do a Roth Conversion on the tiny one.

 

[Midpack]

If the TIRA contains any non-deductible contributions, keep them separate.

Why? I combined DW and my 4 TIRAs** down to 1 TIRA each many years ago, and I’ve had no issues after taking Roth conversion distributions for several years. On distribution you have to aggregate all your TIRAs for tax purposes anyway, you can’t cherry pick non-deductible.

TurboTax even provides an updated “basis” every year and uses it the next year - easy peasy. What am I missing?

** 2 rollover IRAs and 2 TIRAs with non-deductible contributions

Let’s say you have $1 million divvied up over five IRAs, with one of them holding $50,000 in nondeductible contributions. If you take $20,000 from any of those IRAs, part of that distribution is deemed to come from the nondeductible contributions. Divide the nondeductible contributions by the total balance held in the five IRAs to figure the tax-free ratio, and apply that to the distribution. In this example, 5% of the distribution would be tax free, or $1,000 of the $20,000. The ratio must be recalculated for every distribution until the nondeductible contributions have all been accounted for in withdrawals.

 

[Gotadimple]

For the purposes of tax reporting it doesn't matter how many T-IRAs you have, if any have non-deductible contributions it's all the same money to the IRS. That is, you have to combine all the T-IRAs for reporting purposes and the non-deductible amount(s) are reported as a fraction of the total value of the accounts.

 

[OldShooter]

I did a Roth conversion early one year and segregated the proceeds into a new Roth account. The reason was that I wanted to make it easy to un-do the conversion near year-end if the market went down. It didn't and I just put the new Roth money into my regular Roth and closed the new account. That is a pretty arcane reason to segregate money based on its source, but it is the only one I can think of.

That said, where someone is stock-picking or investing in stock-picker funds I think it is highly desirable to do that in a separate account from the fixed income investments. Then it is easy to benchmark the equities' total return. Having equities and FI mixed in a single account makes benchmarking extremely difficult. Mix the red and the green Kool-Aid and it's impossible to know which is responsible for the color and the flavor of the result.

So you may want to look at segregation of funds for that reason.

 

[Dash man]

You need to check your state laws on protection of tIRAs from judicial judgments. Some states protect them. If your state does not, your want to keep it separate so the IRA will be protected under ERISA like a pension or 401k.

 

[RE2Boys]

If the TIRA contains any non-deductible contributions, keep them separate.

I think the issue is not whether to keep them separate or not, the issue is that if you have non-deductible contributions in an IRA, that one should NOT role a 401K to an IRA at all. Increasing the total amount in one's IRAs when a basis exists will result in a higher percentage of any IRA distribution to be taxed.

 

[Midpack]

I think the issue is not whether to keep them separate or not, the issue is that if you have non-deductible contributions in an IRA, that one should NOT role a 401K to an IRA at all. Increasing the total amount in one's IRAs when a basis exists will result in a higher percentage of any IRA distribution to be taxed.

The IRS requires you aggregate all your TIRAs when you take distributions anyway, so there’s no advantage to having non-deductible money in one TIRA and not others. I combined a 401k rollover IRA with a separate IRA that I made deductible and non-deductible contributions to - makes no difference WRT taxes on distribution. I quoted an example above from https://www.kiplinger.com/article/r...gregation-rule-when-many-iras-become-one.html While you can withdraw selectively from one TIRA over another, for tax purposes all your TIRAs are one and you have to prorate your non-deductible credit with each distribution - you can’t pick and choose.

 

[Philliefan33]

You need to check your state laws on protection of tIRAs from judicial judgments. Some states protect them. If your state does not, your want to keep it separate so the IRA will be protected under ERISA like a pension or 401k.

From what I can find online, PA protects IRA funds as long as they were deposited a year before any judgment. I could find no mention that ERISA funds had to be in a separate account.

If we get sued it will be easier bookkeeping if the lump sum is separate. I guess I could open a new tIRA for the pension money, then work on doing Roth conversions from the smaller account when we have room under the relevant IRMAA tier.

My goal is to minimize redundant accounts as we get older. In my position as a tax preparer for AARP TaxAide, I’ve seen many seniors with too many accounts. They come in with a stack of 1099Rs, each for a few hundred dollars representing the RMD from that account. At some point there’s going to be a caretaker or heir trying to figure out the finances and it would be much easier with just one IRA.

 

[Dash man]

From what I can find online, PA protects IRA funds as long as they were deposited a year before any judgment. I could find no mention that ERISA funds had to be in a separate account.

If we get sued it will be easier bookkeeping if the lump sum is separate. I guess I could open a new tIRA for the pension money, then work on doing Roth conversions from the smaller account when we have room under the relevant IRMAA tier.

My goal is to minimize redundant accounts as we get older. In my position as a tax preparer for AARP TaxAide, I’ve seen many seniors with too many accounts. They come in with a stack of 1099Rs, each for a few hundred dollars representing the RMD from that account. At some point there’s going to be a caretaker or heir trying to figure out the finances and it would be much easier with just one IRA.

Yes, Pennsylvania does protect all retirement accounts as if they were ERISA.