Commingling rollover IRA and traditional IRA contributions

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Topic Author
n00b
Posts: 198
Joined: Sun Feb 03, 2013 7:36 pm

Commingling rollover IRA and traditional IRA contributions

Post by n00b »

Hi,

I have a rollover IRA with only funds from a cashed-out 401a retirement plan. Is there any reason not to commingle these funds with traditional IRA contributions from a Roth recharacterization from the current tax year?

For simplicity, it would be nice to limit the number of accounts but I am afraid that there may now be, or later be, different rules for the rollover/contributed funds though I know of no differences.

Thanks!
exodusNH
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Joined: Wed Jan 06, 2021 7:21 pm

Re: Commingling rollover IRA and traditional IRA contributions

Post by exodusNH »

n00b wrote: Tue Mar 21, 2023 2:32 pm Hi,

I have a rollover IRA with only funds from a cashed-out 401a retirement plan. Is there any reason not to commingle these funds with traditional IRA contributions from a Roth recharacterization from the current tax year?

For simplicity, it would be nice to limit the number of accounts but I am afraid that there may now be, or later be, different rules for the rollover/contributed funds though I know of no differences.

Thanks!
Some states may protect rollover funds as strong as ERISA funds where regular IRAs have weaker protection.

If you're still working, you may have more difficulty rolling a commingled account into a new employer's plan.

You will also lose access to CITs or stable value funds, if you happen to be using either of those.
Topic Author
n00b
Posts: 198
Joined: Sun Feb 03, 2013 7:36 pm

Re: Commingling rollover IRA and traditional IRA contributions

Post by n00b »

exodusNH wrote: Tue Mar 21, 2023 2:35 pm
n00b wrote: Tue Mar 21, 2023 2:32 pm Hi,

I have a rollover IRA with only funds from a cashed-out 401a retirement plan. Is there any reason not to commingle these funds with traditional IRA contributions from a Roth recharacterization from the current tax year?

For simplicity, it would be nice to limit the number of accounts but I am afraid that there may now be, or later be, different rules for the rollover/contributed funds though I know of no differences.

Thanks!
Some states may protect rollover funds as strong as ERISA funds where regular IRAs have weaker protection.

If you're still working, you may have more difficulty rolling a commingled account into a new employer's plan.

You will also lose access to CITs or stable value funds, if you happen to be using either of those.
That looks like reason enough to open a new account for the recharacterized funds. Thank you!
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David Jay
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Re: Commingling rollover IRA and traditional IRA contributions

Post by David Jay »

exodusNH wrote: Tue Mar 21, 2023 2:35 pm.You will also lose access to CITs or stable value funds, if you happen to be using either of those.
You may have lost your train of thought, the rollover funds are in an IRA (segregated from other IRA assets).
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retiredjg
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Re: Commingling rollover IRA and traditional IRA contributions

Post by retiredjg »

n00b wrote: Tue Mar 21, 2023 2:32 pm Hi,

I have a rollover IRA with only funds from a cashed-out 401a retirement plan. Is there any reason not to commingle these funds with traditional IRA contributions from a Roth recharacterization from the current tax year?
If you cannot contribute to Roth IRA directly, then the contribution to tIRA (via the re-characterization) would be non-deductible. That means that you will have "basis" (already taxed money) in your tIRA even if the two IRAs are separate. That means that whatever you do with your IRA from now until the IRA is empty will have to be pro-rated between the pre-tax money and the after-tax money.

Is that something you want to deal with? If not, you may want to have your custodian completely remove the contribution (along with its associated earnings or losses).

Or you might want to roll the rollover IRA into a current retirement plan and convert the basis to Roth IRA. Do you have a 401k or similar plan that would accept the rollover IRA?

So yes, there may be a reason to keep the separate. Or you may want to get out of this entirely. Not enough information.
Topic Author
n00b
Posts: 198
Joined: Sun Feb 03, 2013 7:36 pm

Re: Commingling rollover IRA and traditional IRA contributions

Post by n00b »

retiredjg wrote: Tue Mar 21, 2023 6:03 pm
n00b wrote: Tue Mar 21, 2023 2:32 pm Hi,

I have a rollover IRA with only funds from a cashed-out 401a retirement plan. Is there any reason not to commingle these funds with traditional IRA contributions from a Roth recharacterization from the current tax year?
If you cannot contribute to Roth IRA directly, then the contribution to tIRA (via the re-characterization) would be non-deductible. That means that you will have "basis" (already taxed money) in your tIRA even if the two IRAs are separate. That means that whatever you do with your IRA from now until the IRA is empty will have to be pro-rated between the pre-tax money and the after-tax money.

Is that something you want to deal with? If not, you may want to have your custodian completely remove the contribution (along with its associated earnings or losses).

Or you might want to roll the rollover IRA into a current retirement plan and convert the basis to Roth IRA. Do you have a 401k or similar plan that would accept the rollover IRA?

So yes, there may be a reason to keep the separate. Or you may want to get out of this entirely. Not enough information.
Thank you for pointing that out since I failed to give a reason for recharacterization (sorry). We are recharacterizing to stay in the 12% marginal bracket.
Navillus1968
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Re: Commingling rollover IRA and traditional IRA contributions

Post by Navillus1968 »

I would keep the two accounts separate. This marginally increases paperwork, but may greatly increase your options going forward.

If you ever get to the point where a Backdoor Roth process is the only way to contribute to a Roth IRA, you will need to rollover your IRA to your 401k (or similar) to minimize the pro rata issue that retiredjg mentioned.
Many employers plans won't take a incoming rollover from an IRA with commingled contributary & rollover money. They are allowed to under federal law, but many just don't want the hassle.
Here's an Ed Slott article that is right up your alley- https://www.irahelp.com/forum-post/1395 ... llover-ira
exodusNH
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Re: Commingling rollover IRA and traditional IRA contributions

Post by exodusNH »

David Jay wrote: Tue Mar 21, 2023 3:21 pm
exodusNH wrote: Tue Mar 21, 2023 2:35 pm.You will also lose access to CITs or stable value funds, if you happen to be using either of those.
You may have lost your train of thought, the rollover funds are in an IRA (segregated from other IRA assets).
Thanks. I was dozing off on a conference call...
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retiredjg
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Re: Commingling rollover IRA and traditional IRA contributions

Post by retiredjg »

n00b wrote: Tue Mar 21, 2023 6:19 pm
retiredjg wrote: Tue Mar 21, 2023 6:03 pm
n00b wrote: Tue Mar 21, 2023 2:32 pm Hi,

I have a rollover IRA with only funds from a cashed-out 401a retirement plan. Is there any reason not to commingle these funds with traditional IRA contributions from a Roth recharacterization from the current tax year?
If you cannot contribute to Roth IRA directly, then the contribution to tIRA (via the re-characterization) would be non-deductible. That means that you will have "basis" (already taxed money) in your tIRA even if the two IRAs are separate. That means that whatever you do with your IRA from now until the IRA is empty will have to be pro-rated between the pre-tax money and the after-tax money.

Is that something you want to deal with? If not, you may want to have your custodian completely remove the contribution (along with its associated earnings or losses).

Or you might want to roll the rollover IRA into a current retirement plan and convert the basis to Roth IRA. Do you have a 401k or similar plan that would accept the rollover IRA?

So yes, there may be a reason to keep the separate. Or you may want to get out of this entirely. Not enough information.
Thank you for pointing that out since I failed to give a reason for recharacterization (sorry). We are recharacterizing to stay in the 12% marginal bracket.
Yes, that is a different story altogether. At that level of income, chances are you can deduct the contribution (although it appears there is a small band of income where the contribution could not be deducted if covered by a plan at work). Therefore, no basis and no pro-rating.
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