STRETCH OPTION – INHERITED IRA

STRETCH OPTION – INHERITED IRA
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I own an inherited IRA fixed annuity with annual lifetime RMDs through the stretch option. The annuity is a fixed annuity with a lifetime of 7 years. The interest rate over the first three (3) years is a guaranteed rate of 3.1%. The interest rate for the 4th year (2019) is 1.25% (with a minimum of 1% between years 4 through 7.) Does it make sense for me to break the contract today, pay surrender charges of $10,000.00, and do a direct transfer into a bank IRA (where I know I can get a higher rate)? Would the stretch option (for an inherited IRA) still apply if I broke the contract and did a direct transfer today? I am age 57 and newly retired. Would I be exempt from the 10% penalty for federal tax reporting purposes, assuming I am able to do this type of transfer/rollover of IRA money? Please advise. Regards, Ken Zaepfel



There is never a 10% penalty on an inherited IRA and your 1099R should be coded 4 in Box 7. The stretch is not lost if you surrender the contract and transfer it to another custodian. Not sure how your beneficiary RMDs are being handled now, but each year’s RMD is calculated from the prior year end balance. You should be able to increase the future yield by around 1.5% to 2.75, but you did not indicate the current value of the contract, so could not tell if surrender is beneficial. There is also no good way to determine what interest rates would be in years 6 and 7 unless you go for a 4 year CD or bond. Rates could rise by then or fall.



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