Is It Necessary to Keep a Rollover IRA Separate From a Traditional IRA?

When you roll over a 401(k) or similar retirement account, you can put the money into any IRA you want. Except for IRA beneficiaries, there's no law that requires you keep rollover money out of an individual retirement account filled with regular contributions. However, opening a separate account for rollovers can be a smart financial move.

Waiting Period

You can't shift assets between IRAs nonstop. If you move money from an under-performing IRA to a second one, for example, a waiting period kicks in. It'll be another year before you can roll money out of either account. You get more flexibility if you open a third IRA and roll the money into that. The first IRA and the new IRA are both stuck with a waiting period, but you're still free to move money out of the second IRA.

Bankruptcy

IRAs get different treatment in Chapter 7 bankruptcy if they came from a rollover instead of your contributions. Assets in Chapter 7 normally go to your creditors. As of 2013, federal law protects up to $1.17 million in a regular IRA and everything in most workplace plans. If you roll over a workplace plan to a new IRA, you keep the unlimited protection. If you mix rollover assets in with your IRA contributions, the rollover loses that protection.

Beneficiary IRA

If you inherit an IRA from anyone but your spouse, you can't put the money in an established IRA. You have to roll it into a new account that identifies you as the beneficiary and names the original owner in the account title. If you put your inheritance in a regular account, the IRS treats the money as if you'd withdrawn the entire amount and counts it as part of the year's taxable income. This could bump you up to a higher tax bracket.

Divorce

If you and your spouse divorce, your IRA may get divided up in court. If any of your IRA goes to your spouse, you can roll it over into her existing IRA or a new one set up for that purpose. Alternatively, she can keep your existing account and change the name. If you keep any of the assets, she can roll them over into whatever part of the assets into a new or existing IRA of yours.

About the Author

Author of two film reference books, "Cyborgs, Santa Claus and Satan" and "The Wizard of Oz Catalog." Published in Air & Space, Backpacker, Newsweek, The Writer, and multiple trade journals (can fax samples if requested, don't have them available digitally)