IRA consolidation may bring more benefits

Following are some of the most common reasons investors maintain multiple IRAs and why they may be unnecessary:

• Deductible vs. nondeductible IRAs. Many investors contribute to a traditional IRA to supplement their employer-sponsored retirement plans. For some, the traditional IRA contribution may not be tax- deductible, although the tax-deferred growth of earnings offers a significant advantage to a comparable savings account. Because nondeductible contributions may be distributed tax-free in retirement, some investors mistakenly feel that stashing their nondeductible IRA contributions in a separate account will allow full tax-free distributions from that account at a later date.

In reality, the calculation used to determine the tax-free portion of any distribution in retirement is based on all the investor’s IRAs, not solely the account from which the distribution is taken. There is little benefit, therefore, in maintaining a separate account for nondeductible IRA contributions.

• Contributory and rollover IRAs. Until a few years ago, investors were encouraged to maintain their rollover IRAs separately from their contributory IRAs. By maintaining separate accounts, the owner had the option of transferring the rollover back to an employer-sponsored plan. Combining the IRAs would have forfeited this opportunity. Under new legislation, however, both rollovers and contributory IRAs (except after-tax contributions) are eligible to be rolled into an employer-sponsored plan, eliminating the need for separate accounts.

• SEP and traditional IRAs. Many self-employed business owners have established SEP IRAs that allow annual contributions up to 25 percent of compensation, not to exceed $42,000 for 2005, whichever is less. Except for the larger contribution limits, these accounts operate similarly to traditional IRAs. In fact, a business owner can contribute the maximum SEP and traditional IRA amounts into the same account.

• Roth contribution and Roth conversion IRAs. Roth IRA distributions are tax-free provided the owner is age 59 1/2 or older and five years have elapsed since the first Roth con-tribution or conversion was transacted. Under the original rules, a separate five-year holding period was required for both contributions and conversions. Recently, the five-year period was combined and begins upon the first contribution or conversion. Roth IRAs, therefore, should be consolidated.

• Multiple IRA beneficiaries. For IRA owners with multiple beneficiary designations, the old distribution regulations mandated that distributions would be based upon the life expectancy of the oldest beneficiary. To afford younger beneficiaries the opportunity to use their own single-life expectancies, a common practice was for an IRA owner to establish multiple IRAs with a different beneficiary for each. The final regulations changed this rule, eliminating the need for an IRA owner to establish multiple accounts to accommodate various beneficiaries.

If your situation is similar to any of those discussed here, you may want to consider consolidating your IRAs because most firms charge an annual IRA fee. By consolidating your IRAs, you may reduce the total annual IRA fees you pay on multiple accounts.

Also, you can more easily track required minimum distribution amounts if you are older than 70 1/2.

If more than one IRA exists, you may overlook holdings when performing an asset allocation analysis or calculating total retirement asset performance.

Consolidating your IRAs may save you time and money, and allow you to manage your retirement funds more efficiently. Consult tax and legal advisers for guidance.

Joe E. Froehle is a financial consultant and financial planning specialist with Smith Barney. Smith Barney is a division, Citigroup Global Markets Inc. Member SIPC.