Looking for advice for Inherited IRA

[Sue J]

Dad died last month and left his Traditional IRA for my sister and I to split 50/50. He had his investments with Wells Fargo and had worked with the same advisor for over 30 years. He was living in assisted living for 3 years and then a hospice facility, paying for it out if his investments so this is what was left.

The account has been divided and I now have $54,000 in my account. Dad was invested in 6 high yield bond funds (AGDCX, FCISX, MYHCX, PGYCX, PGDCX, CCHIX) with the dividends going to a cash sweep account. My account is now in those same funds. He was getting monthly dividends that added up to about 5% annually.

His investment advisor called me today to let me know that my half is set up and he wanted to talk to me about how I wanted to invest. I've talked with him before as I was Dad's POA for a few years so I was comfortable with talking to him and I expected the call.

I asked about fees, there is a 1% advisory fee in addition to the expense ratios in each fund. We also talked about how these 6 bond funds are higher risk bonds. I told him that I am considering moving it all to Vanguard and he understood, although I'm sure he'd like to stay my advisor.

So I'm looking for a little guidance here, because you folks have a lot of experience and don't cost me anywhere close to 1%!

My gut says to move it to Vanguard and put $50,000 in Wellesley Admiral Shares with the balance in another fund, possibly one of the Life Strategy funds. My experience with Vanguard is that I have my small Roth IRA in Wellington, S&P 500 and Life Strategy Growth Fund. Outside of my Roth we have cash and 5% and 3% PenFed CDs.

I know the mechanics of an inherited IRA - must take RMDs based on my age/life expectancy. RMD for 2016 is already satisfied. Withdrawls are taxable and we are in the 15% bracket. While on Obamacare (we are both 61) I will only withdraw the minimum.

We don't need monthly income as DH's COLAed pension (Ohio Public Employees) more than covers our expenses in a low COL area. I just want to keep this safe and have some growth. While this amount is not a life changing sum, it's a once in a lifetime occurrence for me.

Thought or ideas are welcome!

 

[REWahoo]

My gut says to move it to Vanguard and put $50,000 in Wellesley Admiral Shares with the balance in another fund, possibly one of the Life Strategy funds.

This is one of those circumstances when listening to your gut is probably a good idea.

 

[powerplay]

Your inherited IRA is a nice inheritance.

Several years ago I inherited part of an IRA which was more modest (abt $40K). It was with EJ so I moved it to Vanguard as soon as possible. It is now all in Wellesley. I took the RMD the first year and then looked at my future RMD from the TSP and decided to work on draining the inherited IRA before my TSP RMD kicks in. I will be in a higher tax bracket at 70 so for me it makes sense to take the inherited IRA at a lower tax rate. I know, nice problem to have.

Best wishes with your decision on where to keep you inherited IRA.

 

[Sue J]

Your inherited IRA is a nice inheritance.

There was also money in his checking account that was POD to my sister and I. I had withdrawn enough from his IRA to cover the next few months in his hospice facility. I was matching the withdrawls to be offset by his deductible medical expenses and personal exemption so that his 2016 tax liability would be close to zero.

We also did a prepaid funeral in January so that was covered. By the end there was still $16,000 left in the checking account. When Dad was managing his own financial life he really liked to see large numbers in his checking account so I kept doing it the same way. He'd be very proud to know that he paid no tax and his daughters got a nice hunk to pocket with no tax to us.

Last week I took a death certificate into his bank and came home with two certified checks, one for each of us.

The last piece to wrap up is his only life insurance policy which was from the Navy. In 1948 (age 22) he bought a $2000 life insurance policy, probably with his mother as beneficiary. This was a significant amount in 1948! Later, the beneficiary was my Mom and after she died he changed it to my sister and I. It was all paid up years ago and he was still getting dividends on it, about $52 a year. I sent in the form last week and they only do direct deposit now so that should show up soon.

 

[panacea]

Your plan certainly seems reasonable to me. Wellesley is a good low cost, long-term holding... set it and forget it.

 

[harley]

Your plan certainly seems reasonable to me. Wellesley is a good low cost, long-term holding... set it and forget it.

I agree, but why do you want to put $4k into a target fund? It's not much of a percentage of the total, and wouldn't (IMO) be worth the effort. I'd just put it all in VWINX and not worry about it. Unless you're just trying to tweak the AA a tad.

 

[pb4uski]

Your instincts are right... move it to Vanguard... but put it in one fund... not worth having another fund for $4k. Wellesley is fine but since it is long term money I would probably be more aggressive and put it in Wellington or Total World Stock Index fund if it were me. What is your target AA generally?

 

[CaliKid]

Maybe move to Vanguard and dollar cost average it, over the next year or two, into a more aggressive fund. Also, stretch that baby out and take out the minimal required amounts each year.

 

[Done]

Sorry for your loss. I inherited an IRA and moved it to Fidelity where I aligned the investments with my own AA. Since it's a tax-deferred account, it's a good place for fixed income if you need more in your allocation. I turn the income/dividend reinvestment on or off as needed to have enough to distribute once a year for the RMD, but you can also just sell the exact amount needed. It appears you are using the life expectancy (slowest) method of distribution, but you can always choose to withdraw more if it would be beneficial.

 

[Sue J]

What is your target AA generally?

Yes, that's the question. I can analyze what we have been doing so far but I'm not sure where I'm headed. I'm learning as I go.

Right now, before the inherited IRA, we have 14/53/33 but the majority of that "bonds" percentage is the PenFed CDs, very little is bonds in mutual funds. Or should the PenFed CDs be considered to be cash? If they are cash then the allocation is 14/4/82.

Another component is DHs COLAed pension. It's steady income that we live off of, so is that considered a bond in our asset allocation? I didn't include the value of the pension in the asset allocation.

We don't have a withdrawl rate, we are able to save every month off the pension and my small earnings.

Like I said, learning as I go.

 

[Done]

You're in a great situation at 0% WR. If you don't expect to need the invested assets, some would say that you can invest aggressively, while others say why bother since you have won the game. You have to feel comfortable with your AA based on how you may feel or respond to swings in the market. For planning purposes, you might also consider whether the pension would change if one spouse passes before the other, and whether you plan to leave assets to heirs.

As for location of investments, it's normally better to have fixed income assets in tax deferred accounts. Your CDs produce interest taxed as ordinary income. You could consider putting your fixed income investments in the IRA and holding your equities in a taxable account, where dividends and long-term cap gains are taxed at 0% in your bracket.

 

[Sue J]

You're in a great situation at 0% WR. If you don't expect to need the invested assets, some would say that you can invest aggressively, while others say why bother since you have won the game. You have to feel comfortable with your AA based on how you may feel or respond to swings in the market. For planning purposes, you might also consider whether the pension would change if one spouse passes before the other, and whether you plan to leave assets to heirs.

As for location of investments, it's normally better to have fixed income assets in tax deferred accounts. Your CDs produce interest taxed as ordinary income. You could consider putting your fixed income investments in the IRA and holding your equities in a taxable account, where dividends and long-term cap gains are taxed at 0% in your bracket

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The trick to the 0% WR (or maybe it's a negative withdrawl rate?) was to be debt free when DH retired and to keep our monthly expenses reasonable. Some years the COLA feels like a nice bonus and other years it gets consumed by medical insurance increases. We do feel like we have won the game even if we don't have large wealth like a lot of retirees.

The pension is 100% to the survivor. If I die first DH gets an increase to a single life payment. Also, I will get around $750 in SS at FRA in 2021. DH is WEPed and GPOed and will not be getting SS.

Almost half of the CDs are in a Roth IRA, so no tax on those. Up until the inherited IRA nothing was in tax deferred. The pension (except for a small percentage) is taxable income, of course.

Typical AA ideas make it appear that we need to invest in a lot more stocks, but I'm a fairly conservative (cowardly) investor. Yes, the ups are fun, but the downs make me nauseous.

 

[38Chevy454]

I would move it to Vanguard or whatever brokerage house you have the restof your funds. oncur with the just put it all in one fund advice, and Wellington is better choice for the longer term with 60 equities/40 income mix.

Just ensure that it comes over as inherited IRA, but use your age for the RMD calculation.

 

[powerplay]

There was also money in his checking account that was POD to my sister and I. I had withdrawn enough from his IRA to cover the next few months in his hospice facility. I was matching the withdrawls to be offset by his deductible medical expenses and personal exemption so that his 2016 tax liability would be close to zero.

We also did a prepaid funeral in January so that was covered. By the end there was still $16,000 left in the checking account. When Dad was managing his own financial life he really liked to see large numbers in his checking account so I kept doing it the same way. He'd be very proud to know that he paid no tax and his daughters got a nice hunk to pocket with no tax to us.

Last week I took a death certificate into his bank and came home with two certified checks, one for each of us.

The last piece to wrap up is his only life insurance policy which was from the Navy. In 1948 (age 22) he bought a $2000 life insurance policy, probably with his mother as beneficiary. This was a significant amount in 1948! Later, the beneficiary was my Mom and after she died he changed it to my sister and I. It was all paid up years ago and he was still getting dividends on it, about $52 a year. I sent in the form last week and they only do direct deposit now so that should show up soon.

I'm sure your Dad is so proud of you!

Your experience has a number of parallels with mine. My aunt had a $3K life insurance policy purchased in 1951. She changed the beneficiary to me after her husband died. My aunt and uncle added me to their checking account and safe deposit box some years ago so access to the box and writing checks when necessary was easy. When I went to the bank to close the checking account they asked if I wanted cash or a check. I said check and they charged a fee to issue the check!

My uncle left a trust for which I was the successor trustee. My aunt was disabled and had to move to an adult foster care home to receive the care she needed a couple years before my uncle passed away. The trust remained in place after my uncle passed and the assets could be used to care for my aunt if needed. When my aunt passed several years later I was able to start making distributions of the trust. I made the final distribution late in 2015. It felt good to wrap it up. I needed to be actively involved in helping and caring for my aunt and uncle for about 7-8 years.

One of the best planning things my uncle did was to prepay and make final arrangements. It was really nice when the time came to know what they wanted and only a phone call needed to be made. After they both had passed I got together some family and friends and we placed their ashes on the beach as they both requested. They requested no funerals so we didn't do that, but had a couple small memorial gatherings.

 

[MrLoco]

First....condolences on your loss.

Second....yes....ASAP get the money to Vanguard. I didn't check the expense fees on the current holdings you inherited, but I am sure they are higher than any index fund you can get at VAnguard. Plus.....you wil eliminate the advisor's 1% fee. A balanced Vanguard fund is fine if that suits you.

One thing to keep in mind is that you will "burn" through money distributed from an inherited Traditional IRA at a faster rate than you will when you reach 70 1/2 and start taking RMD's from your own IRA. This is because in addition to the requirement of taking distributions beginning DEc 31 following the year of your Dad's death.... inherited IRA's use the "single life expectancy table" to calculate withdrawals while your own Trad IRA will use the "uniform lifetime table" beginning at 70 1/2.

The difference between the two tables is that the single life table uses a "lower divisor" resulting in a larger distribution. For example suppose at age 70 you have $50,000 in a inherited IRA. The divisor is 17 resulting in a required payout of $2,941. For your own Trad IRA, at 70 1/2 the divisor from the uniform lifetime table is 27.4. Hence, on $50,000 this equates to a withdrawal of only $1,825.

So you can see the IRS wants you to clean out money from an inherited IRA at a faster rate than future withdrawals from your own IRA account.
One other thing to keep in mind is that you are not allowed to ever convert an inherited Trad IRA to an inherited ROTH IRA. The account must always remain "traditional."

Best of luck.

 

[ExFlyBoy5]

Typical AA ideas make it appear that we need to invest in a lot more stocks, but I'm a fairly conservative (cowardly) investor. Yes, the ups are fun, but the downs make me nauseous.

This is the key. You and your DW are in a fabulous position, so I would put the money where you think you will have the least worry. If I was in your position, then I would probably put it in Wellesley...I think I would rest easier with that.

 

[scrabbler1]

First, my condolences on your loss. And you are wise to reject the advisor and his 1% fees to manage the account.


My best friend's remaining parent (mom) died suddenly back in 2012. He, along with his sister, received half of the large estate. Most of it was in a brokerage account but they each received about $90k in an inherited IRA. Morgan Stanley Smith Barney (MSSB) held the account but I advised my friend to move it to Fidelity because they have more options and that is where I have my own investments including an IRA so I would be best able to help him out. The MSSB guy was a little disappointed but too bad on him.


The Inherited IRA had some bonds, CDs, stocks, cash, and mutual funds. We took the cash and put it into a bond fund. I also figured out his overall AA including his other holdings, separately between his taxable and retirement holdings, so he could determine what was best for him in each one. Because the inherited IRA has RMDs he has to take each year (using his own life expectancy, as pointed out by others here), I wanted to set up some cash generators within the IRA so taking the RMD would be easy. The individual bonds and stocks spun off enough for a while until the big bond got called early. So now we have all the mutual funds throwing their cash into the cash account every month which will be enough for at least 10 years of RMDs until the RMD overtakes the annual cash.


He doesn't need the RMD for his daily expenses because he is still working full-time (he is 52). But when I do his RMD we have most of it withheld for income tax purposes to pay down his higher tax bill from the investment income his inherited brokerage account generates. This reduces or even eliminates any estimated tax bills later.


As for funds to invest in, I'd say one maybe two funds are plenty. Make sure it fits in well with your overall AA and your overall AA within any other retirement accounts you have.

 

[Sue J]

First....condolences on your loss.

Second....yes....ASAP get the money to Vanguard. I didn't check the expense fees on the current holdings you inherited, but I am sure they are higher than any index fund you can get at VAnguard. Plus.....you wil eliminate the advisor's 1% fee. A balanced Vanguard fund is fine if that suits you.

One thing to keep in mind is that you will "burn" through money distributed from an inherited Traditional IRA at a faster rate than you will when you reach 70 1/2 and start taking RMD's from your own IRA. This is because in addition to the requirement of taking distributions beginning DEc 31 following the year of your Dad's death.... inherited IRA's use the "single life expectancy table" to calculate withdrawals while your own Trad IRA will use the "uniform lifetime table" beginning at 70 1/2.

The difference between the two tables is that the single life table uses a "lower divisor" resulting in a larger distribution. For example suppose at age 70 you have $50,000 in a inherited IRA. The divisor is 17 resulting in a required payout of $2,941. For your own Trad IRA, at 70 1/2 the divisor from the uniform lifetime table is 27.4. Hence, on $50,000 this equates to a withdrawal of only $1,825.

So you can see the IRS wants you to clean out money from an inherited IRA at a faster rate than future withdrawals from your own IRA account.
One other thing to keep in mind is that you are not allowed to ever convert an inherited Trad IRA to an inherited ROTH IRA. The account must always remain "traditional."

Best of luck.

Yes, I looked into this and it's Table 1 in Appendix B here - https://www.irs.gov/publications/p590b/index.html for a non-spouse single life expectancy. I will be 62 in 2017 so the divisor is 23.5.

Thank you everyone who read and commented. And thanks for the condolences. Dad would be happy to know that I'm wrapping up the loose ends.

I will definitely move it all to Vanguard. Even though I ask for advice here, I don't feel the need to pay 1% for an advisor. I enjoy learning by doing so I will probably start in Wellesley or Wellington. I've had my Roth IRA in Vanguard since 2010 and it's so easy to research and compare funds and do exchanges between funds, I think there are no wrong choices and plenty of good choices. We tend to think that we make decisions forever but really, I could easily make changes.

Going to go with the gut on this and look at the short term (RMDs while getting an Obamcare subsidy, Medicare starts in 2020) while keeping the long term (safety and growth) in mind.