Know when Less Is More and More Is Less

Physician's Money DigestJuly15 2004
Volume 11
Issue 13

It's common for workers to accumulatea gaggle of tax-qualified retirementaccounts over the years. Survey resultsreleased in early February by AmericanExpress revealed that nearly half of allworkers have multiple accounts of thesame type. But multiple accounts can betrouble. Consider the following multiple-accountcons:

  • Multiple accounts are more difficultfor investors to manage.
  • They can obscure the picture ofyour overall investment portfolio.
  • They often mean more in custodialor other administrative fees.
  • These accounts can swamp ownerswith time-consuming paperwork.


The standard advice for people whohave multiple retirement accounts is tominimize the number and consolidatethem. By consolidating, you can move assetsout of old employer-sponsored retirementaccounts with limited investmentoptions into a self-directed IRA where youhave a much broader universe of investmentchoices. IRAs are not always asprotected from creditors as 401(k)s orother employer-sponsored plans.

With an IRA, you can also stretch outthe life of the account through yourheirs, which you might not be able to dowith an employer-sponsored retirementaccount. Furthermore, a 2001 tax lawmakes it much easier than before to rollover employer-sponsored accounts into asingle IRA, or vice versa. But don't rushto consolidate. There can be good reasonsfor owning multiple retirementaccounts, particularly multiple IRAs.

Acceptable Exceptions

You may want to leave IRA assets totwo or more beneficiaries. If the beneficiariesare similar in age, a single IRA mightbe fine. But if they happen to be significantly different in age, it's often better toset up separate accounts for each heir.

The life expectancy of the beneficiariesdetermines the amount that must beannually withdrawn—the longer the lifeexpectancy, the smaller the distributions.The withdrawal rate for multiple heirs of asingle account is normally determined bythe life expectancy of the oldest beneficiary.Thus, the younger beneficiaries don'treceive the tax and deferral advantages ofindividual accounts.

You may also want to own more thanone IRA if you plan on donating IRA assetsto a charity. Including a charity along withbeneficiaries in an IRA will usually forcethe beneficiaries to take all of their distributionsat once. This results in a bigger taxbill and the end of tax deferral. New taxrules generally allow the beneficiaries tosplit up the IRA after the owner dies, aslong as they do so by Sept. 30 of the yearfollowing the owner's death. But lifemight be easier if the owner split up theIRA before their death.

Honorable Mention

Another time to consider multipleaccounts is when you anticipate drawingon some but not all of your IRA moneybefore you turn age 59 1/2. You can makeearly withdrawals from an IRA withouttriggering the 10% early withdrawalpenalty as long as the withdrawals aresubstantially equal periodic paymentsand you make them for at least 5 years.The withdrawals must be based on all ofthe assets you own in that particular IRA.

Transfer heads-up:

In this case, if those assets producemore income than you need, split the IRAinto two or more smaller IRAs and makeyour periodic withdrawals from just oneof the accounts. Before consolidating ormultiplying your retirement accounts,consult with a knowledgeable financialadvisor. They can help you decide what isthe best strategy for your particular circumstances. Make surethe transfer of assets is made directlybetween financial institutions to avoidunnecessary tax consequences.

This article has been produced by the FinancialPlanning Association (, which isthe membership organization for the financialplanning community.

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