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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: of 75335  
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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