Co-mingling Funds in IRA Accounts

Co-mingling Funds in IRA Accounts is when money from one IRA account such as a 457b package for example, is deposited, or mingled, with another IRA account. This is generally not a problem. You can have as many IRAs as you wish as long as you don't exceed the deposit limits as defined by the IRS. You may want to combine them for simplicity's sake and to cut down on the number of statements you get. Only if you have a 401k does this become an issue.

The 401k problem

401k plans are great for saving for retirement with tax deferred funds. The money you or your employer contributes is tax-deferred as is the interest or returns earned on the account. While there are strict limits on how much you can put into a 401k plan, it changes every year. If you are over fifty you are also allowed to deposit more so you can catch up. The money is only taxed when you withdraw it and it is presumed that will happen when you are retired and earning less money and will then be in a lower tax bracket. There are penalties in the form of additional taxes if you withdraw funds earlier than allowed. You can tax funds from your 401(k) plan without paying additional tax penalties, at age fifty-nine and a half.

If you change employers or retire before age fifty-nine and a half, you must do a direct rollover into an IRA. If you don't do a direct rollover the IRS will tax you at a rate of 20% of your plan's value. When you do the direct rollover, this now becomes called a conduit IRA and this is when co-mingling of funds is a bad idea. If you co-mingle conduit IRA funds with another IRA, you can never pull that money out again to be 401k money. And 401k money has tax advantages IRA money does not.

If you quit or lose your job that has a 401(k) plan you can often just transfer the funds to your new employer's 401k plan. But if you are unemployed for a long period, you will need to do a direct rollover into a conduit 401k. Then when you get a job, you can switch that conduit IRA into your new employer's 401k plan. But if you co-mingled the funds in the meantime with a normal IRA, you cannot do that. That is why it is vitally important to not co-mingle your IRA funds if you have a conduit IRA. You may even retire and think there's no problem with co-mingling funds. But it is possible in the future you may need or want to work again and again be eligible for a 401k plan. Just to be safe you should not co-mingle conduit IRA and normal IRA funds.

Other Considerations

There are manifold variations on the above example. A good financial adviser can help you with your particular situation and should advise you to not co mingle your IRA accounts. The rules are complex and too complicated to cover here for any situation. A good financial adviser can help you negotiate the maze of or IRS regulations pertaining to IRAs and 401k plans. Don't try to handle this on your own. You are busy enough with your job and your financial adviser's job is to keep your money safe and give you the most tax advantages. In order to have a prosperous and enjoyable retirement, you need good advice and good council. A 401k plan where you work is a great vehicle for saving for retirement but you want to do it right.

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