Well, today's question is a comment from you, the viewer of our YouTube channel.
We appreciate it. We had one about multiple IRAs. It makes sense to try to consolidate them.
What are some strategies? What if RMDs are involved? A lot of different scenarios. We'll work through them all today with John Stillman. We went into the comments. A lot of times people say, stay out of the comments when you're on the internet, but there's a little bit of value down in our comments. Especially YouTube. YouTube is well known for having probably some of the most brutal commenters on the internet.
Not us, though. We have a great question that came up that I won't actually run by you today, and it's got a good scenario on IRAs and consolidating and what if our RMD is involved. So we'll ask you that in just one second for you. Leave a comment down below if you have anything on your mind you want to run a question by. John, this is a great way to do it.
Drop it down. We obviously do read the comments. John sorts through them.
We obviously filter out the ones that aren't valuable, but we do try to answer the questions that come in and provide you a little bit of guidance and insight. As always, if you want to get in a little bit deeper, dig a little deeper into your situation. Meetwithjohn.com is the website to find John's calendar.
Pick out a time that works for you, and you're on your way. All right, so let's pull out the comment, John. Here it is, the question we got on a previous video. So we have multiple IRA set up over the years as different approaches appealed each year. Would you recommend consolidating all those IRAs to one account, and would it matter at all if we were taking RMDs or not in your answer? So let's suppose then you roll a different 401k over to a different IRA, maybe eight or 10 years later, and you get to retirement, and you have four or five different IRAs in different places. Maybe you have one at Vanguard, one in Fidelity, one with some kind of insurance or something like that.
You have another one on E-Trade that you set up on your own years ago. You have all these different IRAs. And the question here is, should we combine all of these IRAs into one?
Well, I guess, first of all, can you do that? Yes, you can. You can combine IRAs, just like you can roll a 401k into an existing IRA. Or if you have a SEP IRA, if you're self-employed, or a simple IRA, or you're a government employee, and you have a 403b, all of those retirement accounts can be rolled into an IRA.
Because for tax purposes, they're all the same thing. They're money that has not yet been taxed, and you're going to have to pay taxes on it when you take it out as income in retirement. So, for simplicity purposes, it can be a really good idea to go ahead and take that money and combine it into one IRA, because now you only have one account to keep up with.
You only have one login to worry about. But most importantly, probably, is this thing that he just referenced, which is, well, what if you're already taking RMDs? RMDs, if you're not familiar, are required minimum distributions, which is, once you hit a certain age, and depending on your birth year, it's going to be either 73 or 75. For people that are aging into that now, it's age 73. So, if you're turning 73 this year, you have to take a certain amount of money, it's a little under 4%, that you would have to withdraw from your IRA this year.
Whether you need that money as income or not, you have to take it out, because the IRS has said, look, we've let you defer those taxes all these years. Now it's time for us to get our tax revenue. So, Ben, let's make the math easy. Let's just say we have five different IRAs, and all of them have a balance of $200,000. Okay, so we have a million total IRA dollars, but it's split up between five different accounts, each at $200,000.
Well, the math is pretty simple if we're figuring out the RMDs, right? We got to take, again, it's not exactly 4%, but let's just call it 4% to make the math easy. So, we're going to take 4% of $200,000, that's going to be what? $8,000 we would have to take from each account. But the reality is, you don't have to take $8,000 from each account, you just have to satisfy the total amount of withdrawals you need to take. So, you could take $40,000, that's the amount that the IRS is requiring you to withdraw.
You must realize $40,000 in income. You could take all of that from one of those IRAs if you wanted to, as long as the aggregate dollar amount has been satisfied. Obviously, in real life, all these different accounts aren't going to have the same balance. So, your RMD for each account is not actually going to be the same. So, if you have it in too many different accounts, then it gets a little challenging to figure out, okay, what's my RMD for each of these accounts? You got all these to keep up with, figure out, do I want to take the RMD from each one?
Would I be better off? Maybe you have one account that's way up one year. Maybe it made, for whatever reason, a lot more money than the other accounts. Well, that would actually be a good one to take your RMD out of that year. You could take the entire RMD out of that one account because you've had big gains.
So, it's a good time to sell, turn it into cash, and take it out as you're required to do. So, those are the kinds of strategies that might come into play when you're talking about RMD. So, you can see how maybe having a couple of different accounts with wildly different strategies might make some sense because then you've got different places to pull from. If it's a down year in the market, you want to pull from the account that's down the least, the one that lost the least because you don't want to sell low.
If the market had a good year, you're going to pull out of the most aggressive bucket. So, you could make a case for having a couple of different IRAs. But if we're getting to three, four, five different IRAs, that's a lot of hassle on your part when it comes to calculating your RMDs each year.
And quite frankly, like I said before, just keeping up with all those logins, all those statements, you could really benefit by consolidating those into one account. Now, a lot of people, Ben, might say, well, hold on, I've heard you talk about diversification. So, wouldn't it make sense for me to have my money in different places, some at Fidelity, some at Vanguard, some at Charles Schwab or wherever? Well, here's the thing about diversification. Basically, if you're saying, well, I have some money at Vanguard and some money at Fidelity, therefore, I'm diversified.
Here's what you're really saying. That's like saying, I went grocery shopping last week and I bought a loaf of white bread at Food Lion. But I didn't want to be, I wanted to have a more diversified diet. I didn't want to just eat one thing. So, I also drove down the road to Harris Teeter and I bought a loaf of white bread from Harris Teeter. And now I have a diversified palate because I got white bread from two different places, right?
Like that would be absurd. So, just because you have money with two different custodians, Schwab, Fidelity, Vanguard, your 401k platform, whatever it is, just because the money is in different platforms doesn't automatically mean that it's diversified. Diversification is built by the actual investment that you're in. And you could be invested in 50 different things that do give you great diversification. And you could do all of that in one IRA. So, being in one IRA or multiple IRAs has nothing to do with your diversification. So, don't get hung up on this idea of, well, if I combine it, all my eggs are one basket. No, it doesn't really work that way. Yeah, a very good question. And one to really think through, it does seem like a lot more sense to try to narrow that all down, just trying to track it up. Because I could imagine even there can be situations where people even forget about an IRA that it's been so long since they've opened it up, looked at it that they overlook it when RMD time comes around, it could end up costing a penalty, right?
It happens a lot. I've seen people have accounts that they, you know, maybe they open an account one year because they wanted to save some money on their taxes. So, they said, all right, well, I'm going to open an IRA and stick some money in there this year, get that deduction. But then they never contributed to it again.
They just kind of lost touch with it. Well, I only put like 5,000 in that. Okay, well, that was 1994 that you did that. That 5,000 might have grown into a pretty nice sum here for you now. So, something to be aware of. We also see that with 401ks. You forget about an old 401k because you never rolled it to an IRA. And then, you know, the company changes platforms and they're no longer in the same, using the same 401k custodian that they were before.
And you've moved and the new custodian can't figure out how to mail statements to you. You can see how those get lost pretty easily. So, yeah, the more you can simplify, the more you can consolidate, the more it's probably going to help you out in the long term. All right. Well, I appreciate your question. If you have one for John, whether it be about this video specifically or any of the videos we have, drop it below.
We'll do our best to answer it even in a future video. John might actually reach out directly. But the best way to get in touch with John is always go to meetwithjohn.com. You can schedule a meeting right there through the website, find John's calendar, and you're off and running from there. But if you want to call, that's also an option as well.
You can call or text 800-545-2991. John, we hope to keep the comments coming. First time I've ever said that about anything on the Internet. Keep the comments coming. Bring them on. Happy to answer whatever is on your mind. Carolina Wealth Stores doing business as Rosewood Wealth Management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.
