While it is a good rule of thumb to keep the investing process relatively simple, tax laws, estate planning and investment choices can limit the amount of simplicity an investor can get away with. In some cases, adding some complexity can actually work to an investor’s advantage. Individual retirement accounts are one such example.

Each type of IRA has its own rules. Some can be converted from one type of IRA to another, such as converting a traditional IRA into a Roth IRA. A person desiring to use both a traditional and a Roth IRA must set up separate accounts with a broker or mutual fund company. A 401(k) can be rolled over to a traditional IRA tax-free. It can also be rolled into a Roth IRA, though taxes will be charged on the conversion. An inherited IRA must be kept in a separate account.

The federal bankruptcy code gives an incentive for owning more than one IRA. Rollover IRAs [comprising money rolled over from a 401(k) or similar type of employer-sponsored retirement plan] have an unlimited exemption in the event of a bankruptcy. The exemption for “contributory” IRAs, though generous, is not unlimited. Thus, having more than one IRA can offer advantages in terms of protection against creditors.

Estate planning also favors holding more than one IRA. Separating intended amounts to be bequeathed into different accounts allows each beneficiary to make their own decisions without impacting the other heirs. If the intended beneficiaries include humans and organizations (e.g., a charity), having separate accounts can simplify matters. Doing so will allow your heirs to use a different payout method than the charity.

Any investments at risk of violating the prohibited transaction rules should be placed into their own IRA. Investments found to violate the prohibited transaction rules disqualify the entire account. By putting such investments into their own silo, other IRA investments will not be affected.

The Securities Investor Protection Corporation (SIPC) insures accounts up to $500,000 ($250,000 for cash). A traditional and Roth IRA account would each be protected up to $500,000.

Source: “How Many IRAs Should You Have?,” Natalie Choate, Morningstar.com, May 14, 2016; “Investors With Multiple Accounts,” SIPC.org; “Rollover Chart,” IRS.gov.

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