Manage withdrawals from multiple retirement accounts carefully to avoid surprises (and penalties). Getty Images By Rachel L. Sheedy, Editor September 30, 2019From Kiplinger's Retirement Report After working for multiple decades, it's not uncommon for a taxpayer to have multiple traditional IRAs. Perhaps you have rollover IRAs from previous jobs or several IRAs at different financial institutions. But “in the eyes of the IRS you have one IRA, no matter how many IRAs you have,” says David Cherill, a certified public accountant and member of the American Institute of CPAs’ Personal Financial Planning Executive Committee. SEE ALSO: 11 Strategies for IRA Withdrawals in Retirement That wrinkle, known as the aggregation rule, can create surprises if you don’t understand when it comes into play. Here’s how the rule can affect your tax planning. The IRA Aggregation Rule and RMDs The aggregation rule makes a big difference when it comes to required minimum distributions. Traditional IRA owners are required to take annual minimum distributions starting April 1 of the year following the year they turn 70½. For every traditional IRA the taxpayer owns, she needs to determine the required withdrawal. (To calculate an RMD, the original account owner divides the account balance from December 31 of the previous year by a life expectancy factor found in IRS tables in Publication 590-B.) But after calculating those RMDs, an IRA owner with multiple accounts has the flexibility to decide from which account, or accounts, she’ll draw the money. Let’s say you need to take out $20,000 in the first year from three traditional IRAs. You could take $5,000 from one IRA, $15,000 from a second and nothing from the third. Because all the IRAs are considered to be one, the total $20,000 withdrawal satisfies your IRA RMD for the year. Advertisement Keep in mind that Roth IRAs don’t have RMDs and generally aren’t aggregated with traditional IRAs. And remember that there are no joint IRAs, as IRA expert Ed Slott and his team noted at Slott’s recent IRA workshop in National Harbor, Md. Even if you are married and file jointly, withdrawals from a spouse’s IRA can’t satisfy your RMD and vice versa. IRAs are individually owned accounts. Nonspouse heirs need to be particularly careful navigating RMDs. If you inherit two traditional IRAs from your mother and one from a sibling, you can take an RMD from a combination of the inherited IRAs from your mother, but you must take a separate RMD from the inherited IRA from the sibling. And the RMDs from the inherited IRAs must be completely separate from the RMDs for your own traditional IRAs. One silver lining: Such a scenario “gives you the opportunity to manage the assets differently,” says David Levi, senior managing director at CBIZ MHM. The IRA Aggregation Rule and Nondeductible contributions If you stash nondeductible contributions in one of multiple IRAs you own, you can’t cherry pick and tap only the nondeductible contributions from that one IRA in order to pay zero tax on the withdrawal. In this scenario, the rules get more complicated. Let’s say you have $1 million divvied up over five IRAs, with one of them holding $50,000 in nondeductible contributions. If you take $20,000 from any of those IRAs, part of that distribution is deemed to come from the nondeductible contributions. Divide the nondeductible contributions by the total balance held in the five IRAs to figure the tax-free ratio, and apply that to the distribution. In this example, 5% of the distribution would be tax free, or $1,000 of the $20,000. The ratio must be recalculated for every distribution until the nondeductible contributions have all been accounted for in withdrawals. Advertisement To make sure you don’t pay tax twice on nondeductible contributions, keep up with the paperwork. “You need to use Form 8606 as you continue along the contribution trail,” says Levi. That form, which you file with your tax return, tracks nondeductible contributions—and thus your basis. Keep those records handy when you’re ready to withdraw money so you don’t pay Uncle Sam unnecessarily. The IRA Aggregation Rule and Roth Conversions Similarly, if you do a Roth conversion but own traditional IRAs that hold nondeductible contributions, you need to figure out the tax-free ratio that will apply to the conversion. Using the same example from above, if that $20,000 from the traditional IRA was converted to a Roth instead of withdrawn, 5% of the conversion would be tax-free. Again, the IRS views all of your traditional IRAs as one, even if the conversion comes from just one traditional IRA. The IRA Aggregation Rule and 60-Day Rollovers About five years ago, the rules for 60-day rollovers for IRAs became more restrictive. A taxpayer is now allowed only one 60-day rollover every 12 months, no matter how many IRAs she owns. And in this case, that includes not only all traditional IRAs but all the Roth IRAs she owns, too. Advertisement Let’s say you want to move IRA money to a custodian with cheaper account fees, so you take a distribution from your old traditional IRA and put it in a new traditional IRA within 60 days. No problem. But if you take a distribution from a Roth IRA a few months later to set up a new lower-fee Roth IRA, that rollover is disallowed and the money is forced out of the tax shelter. (If the second attempted rollover is traditional IRA money, that amount would become taxable income.) The rule applies only to rollovers of traditional IRAs and Roth IRAs; it does not apply to conversions of money from traditional IRAs to Roth IRAs. There’s an easy way to avoid tripping over this rule: Request a direct transfer from trustee to trustee when moving traditional and Roth money to new accounts. The rule doesn’t apply to direct transfers, so you ensure the money stays in the tax shelter and avoid Uncle Sam’s wrath. Advertisement Rules Differ for Multiple 401(k)s Besides multiple IRAs, some taxpayers may own multiple 401(k)s or other employer retirement accounts at the time they become subject to required minimum distributions. But the aggregation rule does not apply to RMDs from employer retirement accounts. If you mistakenly assume it does, you’re at risk of withdrawing too little to satisfy each account’s RMD, leaving you subject to a 50% penalty on the shortfall. SEE ALSO: 12 States That Won't Tax Your Retirement Income Let’s say you have three 401(k) accounts from which you must take RMDs. You’ll need to figure out the RMD for each one. But instead of mixing and matching the withdrawals, you must separately withdraw an RMD from each account. The RMDs from employer retirement accounts are also completely separate from the RMDs for IRAs and vice versa.