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Mawhinney writes:

<<Problem: An inherited IRA CD worth $60,000 paying 5.5% compounded daily that does not mature for another year. IRA rules require I take about 10% a year in distributions. If I sell the CD now, the penalty would be $1,600. Question: Is it better to keep the CD until it matures or would it be better to pay the penalty and move it in to a mutual fund or other investment that would hopefully gain 10% a year?
I feel I am loosing money if I leave it in the CD. What are your thoughts?>>

I've been scratching my head trying to determine what you mean by "IRA rules require (you) take about 10% a year in distributions." All I can figure is that you were the joint beneficiary of someone age 70 1/2 or older taking mandatory distributions. Now you have the option to continue taking those distributions over the remainder of a term certain or over the remainder of your life expectancy assuming a joint life expectancy was used for the mandatory distribution. If that's not the case, then you must either take a complete distribution of the IRA no later than 12/31 of the fifth year following the date of death or a yearly distribution based on your life expectancy. If you wish to use the life expectancy method, then the first distribution must occur no later than 12/31 of the year following the year of death, otherwise you're stuck with the five-year rule.

Regardless, at some point you're gonna have to take a distribution, which means the CD must be cashed. The 2 2/3% penalty for an early sale of the CD is rather steep. Seeing as you have to take a distribution in roughly a year anyway (thus reducing investment capital), IMHO you would be best served by doing so after the CD matures. Otherwise, you will further reduce your investment principal. OTOH, if you have run some numbers of your alternative that suggests you can make up the penalty prior to the CD's maturity and before taking the first distribution, then have at it.


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