Inherited IRA: Five Year vs Life Expectancy.
Hi all, I just had a Beneficiary IRA set-up in my name at my dad’s investment company and I was planning on doing the five year distribution but now I am not so sure. So I am trying to understand what the difference is between these options. I know the five year option requires you to take the whole amount within five years but under the life expectancy option can I still take out more than the RMD?
Also, when do I formally select my choice and does the fact I already took a distribution to take care of some of my dad’s funeral expenses lock me into the five year option?
Finally, how easy is it to access these funds once I pick an option? I ask just because the whole process of setting up a Beneficiary IRA and getting that initial distribution was quite a production. Does this vary by investment company?
Thanks!!
Permalink Submitted by Alan Spross on Thu, 2007-08-16 02:22
Under either option, you can also take out as much as you want as often as you want. What differs is the minimum that you are required to take out.
The distribution that you already took does not lock you into either choice. If the IRA agreement allows you to make an election, you must make it no later than 12/31/08 in your case. What you do prior to that does not affect your election. If you are allowed to elect life expectancy, it is best to do that by taking the life expectancy distribution required in 2008. The amount you took this year cannot be credited to 2008. But if you fail to take out the required amount in 2008, you have elected the 5 year rule and are stuck with that. Remember, if you elect life expectancy you can always distribute the money faster, even a lump sum if you wish.
What you have gone through so far probably constitutes one time documentation that you will not have to repeat. But if the IRA agreement does NOT allow you to elect life expectancy, I suggest you transfer the account.
Permalink Submitted by [email protected] on Thu, 2007-08-16 03:39
In my mind, no one should ever elect a five-year deferral, if a life expectancy stretch-out is available. Then one has 5 years to decide what to do, since the balance could all be taken out in year 5 anyway. Many people on this forum and elswhere elected the 5-year deferral (many times because of bad or no advice), and have been sorry ever since!
Permalink Submitted by Stan McConnell on Thu, 2007-08-16 04:32
Thanks for both the great replies, I am really glad I asked this question. So if I am understanding this correctly I can just choose the life expectancy option as long as I take the minimum distribution every year but I can elect to take more. This really seems like kind of a no brainer. I guess need to check with what the current investment company allows and then I have until the end of next year to make my final election.
Also, I know I could take my time and mull over transferring this account but now that I am doing research and looking at how my money is allocated I am wondering if moving to a new investment company sooner might be a better idea. For instance aren’t some invest companies just cheaper when it come to expenses for moving and allocating to different mutual funds? And don’t some companies just have a better choice in funds? For example in doing research it seems like Vanguard has a lot of great fund options.
Permalink Submitted by Alan Spross on Thu, 2007-08-16 18:02
Yes, I think you’ve got it now, but talk to the current custodian to make sure their agreement allows life expectancy when owner dies prior to age 70.
With respect to investments, you should try to match your investment needs with the strengths of various providers. Major firms like Schwab, Fidelity, Vanguard and T Rowe Price offer an extremely wide range of products (including CDs) and low costs. I used to recommend deep discounters for sophisticated traders, but since the major firms have cut commissions, there is little difference left. Moreover, small firms may get into financial difficulties, like we are seeing now with E Trade having massive exposure to the mortgage mess. The larger firms also offer free help with asset allocation, and to assist them the SEC requires that they gather some basic information about you, so they can make more appropriate recommendations. Finally, you should look at this account as part of your overall retirement assets, and make decisions considering your overall investment profile. As a result, the other firms will ask about your other retirement and even taxable accounts if you want their help in making recommendations.
Permalink Submitted by Stan McConnell on Thu, 2007-08-16 19:06
So let me ask you one more thing. Does it matter if I move the money now, given the volatility of the market? I probably do need to distribute some of the money but I want to wait out this down turn in the market. Couldn’t I just make this transfer and continue to wait for things to turn around or am I better off keeping it where it is until the market moves back a little?
Permalink Submitted by Alan Spross on Thu, 2007-08-16 19:52
Yes, there is no rush to do the transfer if you find out that you need to in order to use life expectancy.
If there are any proprietary investments in the account now, that is certain holdings that a new custodian will not accept or service, you would need to convert them to cash before the transfer. And this is probably not the time to sell unless you think this is going to get much worse. That’s another reason to hold off on the transfer.
If the investments are plain vanilla stocks etc it does not matter when you do the transfer as they will be transferred in kind. However, you may not have transaction access for a couple days while the transfer is being completed, another reason to wait for the volatility to calm down. Generally, you should provide a copy of a statement showing the account holding to the new custodian to see if they can accept them.
Permalink Submitted by Stan McConnell on Fri, 2007-08-17 18:36
Hey Alan, first, thanks for the excellent advice. I did some research and it looks like all of the funds I am currently invested in our with Fidelity, a company at which I already have an account set up through my corporate stock purchase plan.
I guess what I am torn about now and what’s driving me crazy is that one of the funds that half the money is currently in seems to keep dropping and it seems to have a high risk low return compared to other funds in it’s category. To be honest I am not sure why my dad or his advisor had his money in this fund. The other issue is that it seems this investment company doesn’t allow the same ease of access in reallocating investments as other companies do. On line I can see my balances but I can’t seem to do anything else unless I call the my investment guy and it seems that every single fund at this company has a front load fee of 5.5% which is pretty significant.
Here is a little more on my situation if this helps you in your advice. I am expecting a new child in about six months and I do have a few pieces of high interest debt out there that I probably should take some of this money to pay that off. Once I pay off this debt I want to have the money in a place that I can access it for “baby expenses” as needed but I don’t want to take one large withdrawal if I don’ t have to. My best friend seems to think that I should be talking to a tax guy and a financial planner at the same time and he thinks I should pay off any debt that has an interest of 10% or higher. Any advice on the above issues and what kind of advisor I should be talking to on this stuff? Thanks!!
Permalink Submitted by Alan Spross on Fri, 2007-08-17 20:02
Since credit is going to be getting much tighter as a result of the current credit crunch, the rush to pay down debt should be tempered by any chances you would need to incur new debt, because the provisions for any new debt will probably be worse. That said, it is otherwise good advice to pay down debt which carries a higher rate than what you would receive from the after tax investment income. In that sense paying off debt that carries a double digit interest rate is good advice.
With respect to load funds, that is a very expensive way to pay for advice. However, if you inherit load funds, the cost has already been paid and many of them have on going expenses that are reasonable. You may also be able to exchange out of a current front end load fund into another without incurring an additional cost, and you may want to check that out.
These forums are useful in providing technical clarification on various issues, but are not really geared to generate the detail needed for a comprehensive financial plan. They are helpful in providing education so someone can recognize whether the planner they select is up to speed on various issues. Locally, if you get a recommendation from an acquintance who has worked with a particular planner, and their circumstances are generally the same as yours, that’s a good start.