Author Topic: Help me make the most of a lousy inherited IRA (stretch)  (Read 1416 times)

kidslice

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Help me make the most of a lousy inherited IRA (stretch)
« on: February 03, 2017, 07:49:14 AM »
When my last parent died I inherited an IRA and went with the stretch option meaning I take annual RMD (Required minimum dispersal) every year for life. I've come to realize that I didnt get the best advice and the money has been performing very poorly the entire time so far (6+ years.)  There is a pretty stiff penalty for taking it out in a lump sum at this point but I can take up to 10% without penalty only paying income tax on it.
My idea:  To take the maximum penalty free withdrawl (every year) which is about $35,000 (~350,000 balance). and offsetting the tax hit by maxing my and my wifes' 401k/403b to reduce our taxable income. My thought is that over time this would transition the money from lousy IRA funds to good index funds in my 401k. 

Is this a good idea? or is there a better way to get the money working?

also, first time posting, hi

neo von retorch

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Re: Help me make the most of a lousy inherited IRA (stretch)
« Reply #1 on: February 03, 2017, 07:59:39 AM »
So the issue you have is with the funds it's invested in at whatever brokerage it is?

Does it have to stay with the same brokerage?
Does it have to stay invested in the same funds?

I'd first look into doing a transfer from the existing brokerage to the one of your choice (i.e. Vanguard, Fidelity, etc.)
Then, whether or not that's possible, I'd look into migrating from the existing funds into the funds you want aka your desired asset allocation. (You should have an investor policy statement; you don't want to "change strategies" just because of short-term performance. But you do want the funds invested the way you prefer, with minimal fees.)

I'd only migrate to your 401k as a last resort, or if the funds/fees in there are definitely better than another option like directly working with Vanguard.

kidslice

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Re: Help me make the most of a lousy inherited IRA (stretch)
« Reply #2 on: February 03, 2017, 08:06:03 AM »
I will ask the agent about that, but I don't think I can move it. I moved it once after a couple years at his (possibly selfish) advice because I (and he) got a commission for transferring that was larger than the penalty but that locked me in for 10 years here. It's at the northamericancompanyforlife, and all their funds are pretty terrible. It is invested in the S&P500, via the Monthly Average Index, which I don't fully understand. It is set up to never lose money, but that comes at the cost of bad returns.

(also, my 401k is in a good low fee fidelity index fund, and my personal IRA is at vanguard.  Waking up and smelling the coffee the last few years is what made me realise I did a bad job with the inherited IRA)
« Last Edit: February 03, 2017, 08:07:47 AM by kidslice »

neo von retorch

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Re: Help me make the most of a lousy inherited IRA (stretch)
« Reply #3 on: February 03, 2017, 08:10:33 AM »
I'd actually call up Vanguard and ask them. Why? Because unlike "your agent", they'll give you the best advice (i.e. in your interests) that they can. They may or may not know what kind of options you have for moving it, and if/what penalties there would be, but they might be able to help you figure that out, and if it can be moved, they'll know how to do it.

kidslice

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Re: Help me make the most of a lousy inherited IRA (stretch)
« Reply #4 on: February 03, 2017, 08:17:05 AM »
That's good advice, thanks.  I'll call and tell them Neo sent me ;)

Catbert

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Re: Help me make the most of a lousy inherited IRA (stretch)
« Reply #5 on: February 03, 2017, 10:52:57 AM »
I'm guessing that the money inside the inherited IRA is in an annuity product of some sort.  :(  If that's the case I would certainly take out of the annuity the amount each year that you can do without a penalty.  Once it is outside the annuity, but still within the IRA, I would transfer to Vanguard inherited IRA. 

While you can transfer a tIRA into your 401k, you can't do it with a inherited IRA.

Frankies Girl

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Re: Help me make the most of a lousy inherited IRA (stretch)
« Reply #6 on: February 03, 2017, 11:19:08 AM »
A stretch inherited IRA is actually a super awesome thing to have, so you definitely want to speak to a rep at Vanguard before blowing it up and trying to take it all out to invest in other formats. I would cease any and all communications with the current agent and definitely stop considering any of their advice. They've treated your account as a money pit for their company, so get the facts on exactly what you're holding with them and then speak to Vanguard to get all the options. (I have a substantial iIRA and use it as my main source of living expenses now since I'm completely FIRE, so I do understand how this all works, so it yours is lousy, it is ONLY because of who you have it invested with, not the account itself)

The advantage to an iIRA is that it is a tax deferred account, BUT you can take distributions on it at any time with no penalty. This is a Very Big Deal.

And you're being told some things that are flat out wrong, or else are related to the particular company you're invested with, not things that are typically associated with an inherited IRA. You are able to take out any amount from a regular inherited IRA account with zero penalty, you just will need to pay whatever taxes are owed, based off the amounts you withdraw and your taxable income bracket for whatever calendar year you do the withdrawals. If your agent/company has imposed limits to your account for withdrawal, that's strictly on them. (agree with mary w - it may be they put you in an annuity which could impose limits according to their own rules)

Yes, you have to take a required minimum distribution every year, and yes, you may have to pay taxes on it (in most cases unless you are very low income/taxable bracket). But the ability to grow your investments tax deferred in an iIRA without taxable events UNLESS you withdraw, and even then can draw down at any age penalty free... that's a great combo.