How should I invest Inherited IRA?

[NinetyFour]

Hi--

I currently have about $20,000 in my TIAA Brokerage account.  It is in the form of an inherited IRA.  Since my mother was old enough to be taking distribution when she died, I must continue to take yearly distributions (fairly small ones, <$500).  Those distributions are taxed, but I pay no penalties.

Right now, about $12,000 is in a Franklin Templeton Mutual Fund (FFALX), and the rest is in Liquid Insured Deposits.  I would like to keep about $2000-3000 liquid, for the next few distributions.  So that leaves about $6000 that I would like to move from cash into some kind of mutual fund.  There are a zillion choices.  For some funds, there are no transaction fees, but for others (like Vanguard), there are.

More info:  I am 52 years old, and am still working full time.  I am hoping to reach my financial goals within the next 8 years.  I could envision this Inherited IRA continuing to sit there indefinitely (except for the required distributions--which will decrease as I age).  Also, I am currently using TIAA because that is where my retirement funds are.  Right now, I have about $225K in the retirement account.

Thanks for any suggestions you have!

[cynthia1848]

Look for a no-load mutual fund or broad-based ETF.  Depending on how the balance of your retirement assets are held, you may want to target small cap or emerging market funds rather than the S+P (for example).  If you are going to buy and hold, it doesn't matter what the trade/transaction fees are since you won't be trading.  If the fund has built-in fees, then some of your $$ will be lost to those fees.

[NinetyFour]

Thanks for your reply, cynthia1848.

The other part of my retirement funds (the $225k) is in TIAA's Social Choice Account.  Here is their description:  "This variable annuity account seeks a favorable long-term rate of return that reflects the investment performance of the financial markets while giving special consideration to certain social criteria. The account is balanced, with assets divided between domestic and foreign stocks (about 60%) and bonds and other fixed- income securities, including money market instruments (about 40%). The domestic equity portion of the account attempts to track the return of the U.S. stock market, as measured by the Russell 3000 Index, while the foreign equity portion attempts to match the return of developed international markets, as measured by the MSCI EAFE + Canada Index. The fixed-income portion seeks a favorable long-term total return from investment-grade, fixed-rate securities. The account invests only in companies that are suitable from a financial perspective and whose activities are consistent with the account's social criteria.

Regarding the transaction fees, yes, good point, if I just buy once and hold, I won't be doing any transactions.  I guess I wanted to avoid any initial transaction fees, if possible, when I change from cash to funds.

Here is one that might fit your suggestions:  TRBIX.  This is the TIAA-CREF Small-Cap Blend Index Fund.  Here is the description:  "The fund seeks a favorable long-term total return, mainly through capital appreciation, by investing primarily in a portfolio of equity securities in smaller domestic companies based on a market index. It normally invests at least 80% of its assets in equity securities within its benchmark index. The fund buys most, but not necessarily all, of the stocks in its benchmark, and will attempt to closely match the overall investment characteristics of this index."

What do you think?  Thanks for your help.  I am a total newby at this.

[Another Reader]

Unless the balance decreases quickly, your RMD's will actually increase as you get older.  In the year of your mother's death, her RMD must be taken.  Every year after that, the RMD is based on the age at which you inherited the account.  The RMD's are NOT the same as they would be if this were your IRA.  Check the IRS website for more information on calculating RMD's for an inherited IRA.

I would not have any money in the investments you list.  I would move all of my money to Fidelity or Vanguard, unless the variable annuity is in a company sponsored plan and cannot be moved.  These investments are expensive and you can do much better on your own.  I don't know if TIAA waives the load, but FFALX has a 5.75 percent sales charge up front and an expense ratio well above index funds.  This is an "aggressive allocation" fund, with only a three star Morningstar rating.  If you look at the cumulative expense on Yahoo finance, almost 18 percent goes to expenses over 10 years.  Here's the link.

http://finance.yahoo.com/q/pr?s=FFALX+Profile

In your shoes, I would read JL Collins's series of articles on investing, which is discussed in other threads here, and some of the books mentioned in the investing threads.  It's in your best interest to learn as much as you can, so you keep more of your money and it grows faster.

[NinetyFour]

Thanks, Another Reader, for your input.

My largest stash of retirement funds (the $225K) is through my work, so I don't think I can move it out of TIAA.  I do have some choice within TIAA, but I decided on Social Choice 15 years ago and haven't waivered--until recently, after reading some MMM readers' poo-pooing the idea of "social choice" kinds of investment schemes.  So, maybe I will look into my other options within TIAA for my main retirement funds.

OK, maybe I will move the inherited IRA out of TIAA and into Vanguard.  I already have an account there with a $6500 Roth IRA.  I will still want to keep about $2500 of it in a liquid state, but do you have any suggestions for what Vanguard funds I should put the other $17,500 in?

Thanks for the suggestion to read some of JLCollins.  I will do that.

Thanks again for your time.

[Frankies Girl]

I just inherited several accounts when my father passed, so I understand what you're dealing with. My sympathies on the loss of your mother.

I am also having to take the required minimum distributions, and will have to file those as income on my taxes (which you probably already knew). As far as what to invest in, I agree moving the account(s) to someplace like Vanguard or Fidelity would be a better bet as they have very low cost index funds. My father had one with Fidelity and one with UBS, and I had my 401K with Fidelity and after much research, I decided to stay with Fidelity. I will be rolling the UBS over once they are clear. Fidelity's Spartan funds are in general comparable with Vanguard's index funds that both MMM and jlcollins use as their top picks, Vanguard's are slightly cheaper, but I like Fidelity and have been very happy with them.

Two posts that are what I'm using as a guide for my portfolio (I checked out the Bogleheads' wiki to find the Fidelity equivalent of the Vanguard picks):

http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/
http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/

[NinetyFour]

Thanks, Frankies Girl, for the condolences.  It has been 6.5 years, but it still hurts.  And, every piece of correspondence I receive about the IRA has "DEATH" and my mother's name at the top!  Ugh.

Anyway, thanks for the suggestions as well.  I will definitely read those blog posts.

[NinetyFour]

Thanks to all of you for your comments.  Because of your suggestions, I called TIAA and Vanguard this morning, and will be moving the inherited IRA over to Vanguard.  I have completed the paperwork and will drop it in the mail this afternoon or tomorrow.  15% of it will be in the Prime Money Market (it is a $3000 minimum, but once it's there, I can move some of it elsewhere until I need to take distributions), and 85% will be in VTSAX.  Should be fun to watch it grow!

Also, I moved half of my retirement funds from TIAA Social Choice to CREF Equity Index.  The expenses are about the same, but the returns have been much stronger.  I can compare the two halves of my retirement funds, and then re-evaluate in 1 year.

Thanks again!

[NinetyFour]

Oh, and Frankies Girl, yes, I have been (and will continue to) pay taxes on my distributions.  Thanks for mentioning that.

[NinetyFour]

Another update:  I didn't like so much of my retirement stash to be in equities, so now it is spread out like this:  25% Social Choice, 25% CREF Equity Index, 25% CREF Growth, and 25% CREF Stock.  All of those have low expenses (for TIAA-CREF funds, that is).  I may decide to get rid of the Social Choice part altogether--I will speak to the TIAA folks on Monday.

Also, the $6500 I have in a Vanguard Roth IRA is in a Social Choice fund, but I will be changing that over to something with lower expenses on Monday.

And I mailed the paperwork to Vanguard today in order to transfer the inherited IRA from TIAA to Vanguard.  Progress!