When you own multiple IRAs and take an IRA distribution, the IRS treats all your non-Roth IRAs as one. This helps you when you reach age 70 ½ and must begin taking annual required minimum distributions (RMDs). Instead of taking a separate RMD from each IRA, you can take the total RMD for all of them from any one of the IRAs, or from across them in any way you wish.
How: The IRS requires you to compute your RMD from each traditional IRA, SEP IRA and SIMPLE IRA, and total them. You can then take the total RMD from any or all of those IRAs in any proportion you wish.

The resulting flexibility in taking RMDs may prove a big benefit.
• If one IRA holds illiquid investments, such as real estate or large certificates of deposit, the RMD on its balance can be taken from another IRA.

• If IRAs hold different kinds of investments, you can take RMDs from one over the other to rebalance investment holdings annually, or gradually liquidate one investment while keeping the other intact.

• If multiple IRAs have different beneficiaries, you can allocate RMDs among them to adjust the amounts that will be left to different beneficiaries as their circumstances and your intentions change.

Knowing this, if you are younger than age 70 1/2, you can plan your IRA investment holdings now to take advantage of this flexibility in the future when RMDs begin.

More Aggregating

* Roth IRAs are aggregated as well, but since they are not subject to RMDs generally this doesn’t matter.

* 403(b) plan accounts are aggregated.

* Inherited IRAs may be aggregated, but only when they were received from the same owner and are being distributed using the same life expectancy. Moreover, Roth and non-Roth IRAs cannot be aggregated.

Aggregation does not apply to employer-sponsored plans such as 401(k) and Keogh plans. Each such plan must have its RMDs calculated separately. And the IRAs of spouses are not aggregated.


The downside of the aggregation rule is seen when your IRAs hold both deductible and nondeductible contributions. Because total IRA balances are aggregated, it is not possible to withdraw just nondeductible contributions, which will be tax-free when distributed, no matter which IRA you withdraw funds from. The “pro rata rule” applies so that any distribution will be taxable in proportion to the ratio of pre-tax to post-tax funds in your aggregated IRAs.

Say that you own multiple IRAs holding a total of $100,000 of which $5,000 consists of nondeductible contributions and $95,000 of deductible contributions and earnings. Any withdrawal from any of the IRAs will be 95% taxable and 5% tax free, regardless of whether it comes from an IRA to which you made nondeductible, post-tax contributions or not.

This becomes problematic especially with Roth IRA conversions. The aggregation rule applies to all IRA distributions, and a Roth IRA conversion starts with a distribution from a traditional IRA. So, if your IRAs hold both pre-tax and post-tax funds it is not possible to convert just post-tax funds to avoid income tax on the conversion. This is seen most starkly, and is most likely to come as a costly surprise, in the case of a “backdoor” Roth IRA contribution.

Example: Warren’s income is too high to be eligible to make a regular Roth IRA contribution, so he decides to use the “backdoor” strategy. He makes a $5,000 nondeductible contribution to a newly created traditional IRA which holds no other funds, then converts it to a Roth IRA. He expects that no income tax bill will result because the converted IRA holds no pre-tax funds. But If Warren also owns another IRA holding $95,000 of pre-tax funds, the conversion will generate $4,750 of taxable income as 95% of the converted amount will be taxable.

However, there is a potential tax saver in this situation. An important exception to the aggregation rule is that it does not apply to transfers from an IRA to a 401(k). So, it is possible to move only pre-tax funds from an IRA to a 401(k), leaving all post-tax funds in the IRA, thus reducing or eliminating the tax on a Roth IRA conversion. Such a transfer is only possible if the terms of the 401(k) plan allow, so check with the plan’s administrator before acting.