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Author: TheXRayStyle One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75340  
Subject: Inherited IRA Allocation Date: 2/19/2008 9:07 AM
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Greetings,

I'm 23 years old and have an inherited IRA held at TIAA-CREF. From this account I receive a relatively small required minimum distribution annually. I'm looking for an allocation that will provide moderate growth, but because some money is coming out annually, I don't want to be fully invested in a market index fund.

I am considering the following allocation, rebalanced annually:

40% - Equity Index (US)
15% - Global Equity
15% - Real Estate
20% - Bond Market
10% - Inflation-Linked Bond

My investment choices can be found at: http://www.tiaa-cref.org/performance/retirement/index.html#crefvariableannuities under the annuity headings.

Basically, my question is if this seems to be a reasonable allocation or if I'm doing something foolish here. Any advice or opinions would be most appreciated.

Also, I'd consider moving the account (if that's even possible) to another broker if there are significantly better investment choices available elsewhere.

Thanks,
~X
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61502 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 10:14 AM
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I'd consider moving the account (if that's even possible)

It is. You just need to make sure that it retains the "inherited" label.

Phil

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Author: jweinstein1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61504 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 10:37 AM
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You can transfer the account to most full or discount brokerages, just transfer it into a "beneficiary IRA" account so that it maintains the inherited status.

As for the allocation, it appears ok for your age and risk level but you didn't build in any cash position (maybe 10-20%). I would suggest transferring the account and then using ETFs or mutual funds at a discount brokerage to create your allocation.

Josh

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Author: TheXRayStyle One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61506 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 11:12 AM
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As for the allocation, it appears ok for your age and risk level but you didn't build in any cash position (maybe 10-20%).

Thank you for the advice on transferring the account and my proposed allocation. However, I don't understand the reasoning behind having that large of a cash position in this account (I'm not saying that I think you're wrong, I just like to understand the reasoning before I make any decisions). What purpose would a cash position of that size accomplish that an inflation-linked bond fund wouldn't?

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Author: jweinstein1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61507 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 11:34 AM
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Couple of reasons I would recommend a cash position:
1) cash is 100% liquid and depending on the custodian should pay 2-4% interest
2) With a cash position you can immediately modify your allocation and make purchases if the market were to drop substantially in a given day (i.e. - 9/11, black monday, etc) whereas to sell and re-allocate will take a few days to a week, possibly missing out on these opportunities
3) Interest rates are falling and will continue falling as the fed continues to cut rates
4) Unlike cash, you will be paying an expense fee on a bond fund which will negatively impact fund performance, plus you aren't in 100% control of the assets being invested in within a fund unlike your cash
5) with the current credit crisis and with bond insurers in loads of trouble at the moment, the ratings agencies may (and I believe have already started) downgrade a large amount of bonds which these funds may or may not hold - the uncertainty in the credit and bond markets is enough for me to stay clear of these funds currently

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61508 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 12:20 PM
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...moving the account .......It is. You just need to make sure that it retains the "inherited" label...

The link the OP posted was to variable annuity options so it sounds like there is a variable annuity within an IRA that was inherited. Would that make a difference in the ability to transfer the IRA or generate charges for terminating the annuity?

Don't be surprised if the current company charges something like a $50 or $75 transfer fee.

I have not used them, but I have heard some good things about TIAA-CREF so it may not be a bad place to leave the account at.

FYI, By far the best way to transfer any type of IRA is to contact the new company and let them transfer it for you. There may be other transfer options but if you make a minor error it could result in lots of taxes. This would be especially true with an inherited IRA.

... but because some money is coming out annually, I don't want to be fully invested in a market index fund...

Typically the dividends are automatically reinvested in the same mutual fund. If you want you can have the company put the dividends and capital gains distributions into a money market fund instead so that you will have enough cash at the end of the year for the annual distribution without selling mutual fund shares. You may not be able set up your distributions this way on their web site, but if you call their 800 number they should be able to set this up.

Since this is an IRA, you don't need to worry about capital gains taxes or excessive paperwork so it would be easier just let them take it out of the mutual funds then do your annual rebalance right after the distribution is done. The exception to this is that some mutual funds may have short term trading restrictions or fees that you need to be aware of.

... Any advice or opinions would be most appreciated....

It is very important to set up the annual distribution to be done automatically. If you forget one year(like if you are in the hospital) you will be have absurdly high penalties. You might think that there isn't any way that you would ever forget but there really isn't any reason to take a chance.

Pick a date early in the year that you will remember so that there is plenty of time to resolve any mistakes. April 15th is an easy day to remember since you will be thinking about money then anyway.

Assuming that you qualify for an IRA, it is perfectly acceptable to deposit the money from the required distribution into an IRA to get an offsetting tax deduction so the net tax affect will be zero. Likewise, if you are in a 401K, you can increase your annual payroll contributions by the amount of the distribution.

...I am considering the following allocation,...

The inflation-linked bonds don't look to good to me. The problem is that typically these just yield a little bit more than the CPI index which probably understates the real inflation rate so they most likely get about a zero percent real inflation adjusted return. When you retire and this is withdrawn from the IRA it will be taxed, so that after being invested for decades you may really only get 75% (assuming a 25% tax rate) of the current value. For example if you have $1000 in it now, in 50 years it may only net you $750 in buying power when you are retired. The bond funds have a similar problem for very long term investments.

In real (inflation adjusted) dollars a stock fund might be able to double on average every 10 to 12 years so and could have easily doubled 4 or more times on 50 years. That thousand dollars might conservatively then be worth $16K in today's dollars and after 25% taxes net you $12K verses the $750 from the inflation linked bond fund.

The loss of the compounding of the interest gets even worse the longer out you go. It is reasonable to do your financial planning assuming that you will need to support yourself into your 90's so some of you money will be invested to 70+ years. By then that $1000 might have doubled a few more times and then be worth $64K.

This might not be so bad if it is earmarked for withdrawal in a few years for something like a down purchase of a house

There wouldn't be anything wrong with just "parking" the money in the 2040 or 2050 lifestyle fund for five or ten years until your long-term financial picture becomes clearer and you have some more experience with investing. As with any fund with stocks, they can go down in value, but in my opinion these tend to be pretty conservative for the average investor since they are a "one size fits all" asset allocation. If you want to be more or less aggressive you can buy lifecycle funds with longer or shorter dates.

Greg

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Author: jweinstein1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61509 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 12:49 PM
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Good catch, it probably is a variable annuity that the OP was referring to. As for the annual distribution, it could be the dividends or it might also be that the descedant was 70 1/2 and already taking RMD payments, so these payments will proceed to be paid to the beneficiary.

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Author: Hohum77 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61510 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 12:58 PM
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I am considering the following allocation, rebalanced annually:

40% - Equity Index (US)
15% - Global Equity
15% - Real Estate
20% - Bond Market
10% - Inflation-Linked Bond


I realize you are taking RMD from the inherited account. Even in this market, at your age, a 30% Bond position is too high. Just my thought.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61512 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 1:22 PM
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As for the annual distribution, it could be the dividends or it might also be that the descedant was 70 1/2 and already taking RMD payments, so these payments will proceed to be paid to the beneficiary.

Inherited IRAs that were not inherited from a spouse require an annual distribution whether or not the the decedent was receiving RMDs.

AJ

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Author: jweinstein1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61516 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 2:23 PM
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AJ,
I don't fully agree with your comment above. If the IRA owner dies before 70 1/2, the "general rule is that the entire balance of the IRA must be distributed under the five-year rule". Thus you aren't required to take an annual distribution, you could wait until the last year and take a full distribution.

See the "Inherited IRA" article directly from Fool.com:
http://www.fool.com/Taxes/2000/taxes000804.htm

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Author: TheXRayStyle One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61517 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/19/2008 2:32 PM
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Thanks for all of the advice and expertise you're all sharing.

Apparently I was mistaken in calling in an Inherited IRA. Apparently it's a "Self-Remitter Or Survivor Mdo | SRA." The SRA is a "Supplemental Retirement Annuity" and it's in MDO (Minimum Distribution Option). I guess I have some more research to do, as I don't really understand how these kinds of annuities work or if it's even possible to transfer to another broker (I know that I can't roll it over into an IRA of mine, as I was a non-spouse beneficiary).

I inherited this account about 8 years ago, so I'm already set into the required minimum distribution for my expected lifetime guideline. However, I'm somewhat confused by my options now as this is an SRA rather than an IRA.

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Author: TimoDOZ Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61528 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/20/2008 5:52 AM
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I have met very few people who have purchased annuities that end up being happy with what they have gotten themselves into. The long term health care annuity may be an exception. The 2 or three inches of fine print on the back of the second page of the application expains how you are about to get screwed but people buy into "safe" and "guaranteed". Variable annnuties are not safe from market disruptions and fixed annutities are not safe from interest rate risk. You are guaranteed to be forking over 10% or more up front in commissions. You will pay the same 10% or more to get out of the annuity which is why most people never do. The sales men always tell you "you could be doing so much better". Annuities are excellent for the salesmen and insurance companies that sell them. Amerisuprise... great commercials for annuities, annuities and more better annuities! The commercials don't tell you this. That should be your first warning clue. And lots of load mutual funds to recommend as well. Annuities generally are not very good for your estate either. Trusts and good estate planning attorneys are far superior to annuities. They even enable you to reach out from the grave.

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Author: TheXRayStyle One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61556 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/20/2008 7:24 PM
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Alright, so as best as I can tell, this is the situation: This type of vehicle that TIAA-CREF offers is called a Supplemental Retirement Annuity. However, while it's called an annuity, in my case it hasn't been "annuitized", nor will it be, because when I inherited it, we opted to take the required minimum distributions, as determined by my lifetime expectancy. From what I've read, I may yet be able to transfer it into a Beneficiary IRA because it has not been annuitized. If anybody has any more information on this particular vehicle, I'd appreciate it. I'll try calling TIAA-CREF in the near future and hope I get somebody who knows what he/she is talking about.

Thanks again for all of the good advice and questions so far.

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Author: TheXRayStyle One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61558 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/20/2008 9:04 PM
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Sorry to be replying to myself, but here's what I've most recently read that leads me to believe that this is an option.

From IRS Document 590:
Rollover From Employer’s Plan Into an IRA
...
Rollover by nonspouse beneficiary. A direct transfer
from a deceased employee’s qualified pension,
profit-sharing or stock bonus plan, annuity plan,
tax-sheltered annuity (section 403(b)) plan, or governmen-
tal deferred compensation (section 457) plan to an IRA set
up to receive the distribution on your behalf can be treated
as an eligible rollover distribution if you are the designated
beneficiary of the plan and not the employee’s spouse. The
IRA is treated as an inherited IRA. For more information
about inherited IRAs, see What if You Inherit an IRA,
earlier.


Am I totally misreading/misinterpreting this, or does it confirm my hopes that this account can still be moved to a discount broker as a beneficiary IRA?

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61559 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/20/2008 9:12 PM
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Am I totally misreading/misinterpreting this, or does it confirm my hopes that this account can still be moved to a discount broker as a beneficiary IRA?

You're reading the wrong section. According to your first post this account is already in a beneficiary account for you. The section of Pub 590 that you most recently quoted pertains to transfers from employer plans to IRAs. It appears that has already happened.

What you want is a rollover/transfer from one beneficiary IRA to another. Yes, this is possible, even with annutities. There's a separate discussion in Chapter 1 of Publication 590 regarding rollovers from one IRA to another.

Phil

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Author: TheXRayStyle One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61560 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/20/2008 9:37 PM
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Thank you, Phil, for sharing your expertise with me. I sincerely appreciate it. I see now that I was not properly understanding what is considered an IRA because of the "SRA" designation. I will continue to read the relevant IRS Publications and contact TIAA-CREF and my discount brokerage of choice before making any moves.

Thank you again,
~X

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61562 of 75340
Subject: Re: Inherited IRA Allocation Date: 2/21/2008 1:43 AM
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I see now that I was not properly understanding what is considered an IRA because of the "SRA" designation.

My apology. I didn't read the middle of the thread. In that case you are at the mercy of the plan. They are allowed, but not required, to do a direct transfer to an inherited IRA.

Phil

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