We learn how to apply the RMD rules when an individual has multiple accounts….(read more)

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What Are the Aggregation Rules That Apply When an Individual Has More Than One IRA?

Individual Retirement Accounts (IRAs) are popular investment vehicles that offer tax advantages for saving for retirement. Many individuals choose to have more than one IRA to diversify their investments or take advantage of different tax benefits. However, when it comes to reporting and aggregating these accounts, certain rules apply to ensure compliance with the Internal Revenue Service (IRS) regulations.

The aggregation rules come into play when an individual owns multiple IRAs. These rules are essential to accurately calculate tax liabilities and determine the required minimum distributions (RMDs) from the accounts. Here are the key aggregation rules to keep in mind:

1. Like IRAs Must Be Aggregated: The first rule is that all traditional IRAs must be aggregated together, excluding Roth IRAs. Traditional IRAs share an aggregation limit, meaning the contributions and RMD calculations are considered as a whole. However, Roth IRAs are not subject to these aggregation rules and can be managed separately.

2. RMD Calculations: Aggregation rules are crucial when calculating RMDs. For traditional IRAs, RMD calculations are determined by the total combined value of all the aggregated accounts. This means that even if an individual has multiple traditional IRAs, they only need to withdraw the total RMD amount from one or more of these accounts collectively.

3. Rollover Considerations: Rollovers from a traditional IRA to another traditional IRA account do not create additional aggregation issues. Any rollovers made are not considered as new contributions and, therefore, don’t affect the aggregation limit. However, if a rollover is made from a traditional IRA to a Roth IRA, it converts into a new Roth IRA and is excluded from the aggregation rule.

4. Annual Contribution Limits: The IRS limits the total amount an individual can contribute to their aggregated traditional IRAs. For 2021 and 2022, the contribution limit is $6,000, or $7,000 for individuals aged 50 or older. It’s important to keep track of contributions to avoid going over the limit, as excess contributions may result in penalties.

5. Spousal IRAs: When spouses own multiple IRAs, each spouse’s accounts are treated independently. The aggregation rules apply separately to each individual, allowing them to manage their accounts individually. This means that a spouse’s IRA balances will not be combined or aggregated with the other spouse’s IRAs.

Understanding and following the aggregation rules is essential for individuals with multiple IRAs. Compliance with these rules ensures accurate reporting and tax calculations, helps avoid penalties, and allows for effective retirement planning. Consulting with a tax professional or financial advisor can provide further guidance and clarify any doubts or questions related to IRA aggregation rules.