Where should I put an inherited IRA?

March 7, 2009 6:58 AM

I inherited an IRA (under 50 K). Because the person who contributed all the money is dead, I am required to take annual distributions. It's currently managed at a big bank, for an annual percentage, plus fees. I'd prefer to have it local, low-cost. Who might offer this, plus managing the distribution, at very low cost?

What IRS reporting is required - can I do that myself? The current manager keeps it more active than I think is necessary, and it seems too small for that level of management. The calculation about how much to take out seems pretty straightforward.

posted by theora55 to work & money (14 comments total)

I'm pretty sure you can rollover an IRA to any financial institution that grants IRAs, look on their website or contact them about how.

If you feel its too active, transfer it over the an index fund, these are funds that essentially follow the S&P 500 or so and have minimal overhead fees. You basically don't want anything over 1%. Alternatively, if you don't want an index fund, you can safely put it in things like bonds or a money market which are much more stable.

I'm pretty sure when I was filling out my 1040 this season that there's just a simple "were you required to take out IRA distributions?" and just fill that part out as you take them. It's not as difficult as you would think.
posted by miasma at 7:16 AM on March 7

Can you roll some or all of it over to a Roth IRA?
posted by gudrun at 7:49 AM on March 7

Just about any bank or credit union will act as custodian of an IRA. If you want investments, then either the investment arm of a bank or the local office of, say, Edward Jones can help.

The new custodian will take care of arranging the custodian-to-custodian transfer to avoid an inadvertent distribution to you, which would be taxable.
posted by megatherium at 8:51 AM on March 7

You don't provide many details (age etc...) but if you want to keep the money working you may want to consider taking the distributions and using the money to ladder CDs.
posted by MikeMc at 10:56 AM on March 7

I'm assuming that you were a designated beneficiary of the IRA. This means that you can take the required minimum distribution (RMD) each year over your expected lifetime. This is to your advantage because you can continue to allow tax deferred compounding of your investment. You can make the calculations for the RMD yourself or some custodians will make the calculations for you.

There is no need to have a local custodian in the internet age. I would recommend transferring your inherited IRA to Vanguard because they have the lowest expenses and fees in the financial industry. You can invest your IRA in CDs, money market funds, bond funds or stock funds. You can change your investments at any time with a few clicks of the mouse. They have a RMD service that will automatically calculate the required distribution and either send you a check or electronically transfer a deposit into your local checking account. You have the choice of splitting your distribution into monthly, quarterly, semi-annual or annual withdrawals.

If you transfer to a new custodian, you must do it via a direct trustee to trustee transfer. You cannot withdraw the money to yourself and then invest it in the new IRA. The new IRA must be designated as inherited and in the original owner's name with you as beneficiary. The new IRA cannot be in your own name.

When you select a custodian, make sure that they understand the rules for inherited IRAs and that they allow your preferred method of RMD withdrawals. Not all custodians will allow lifetime withdrawals. Some will only allow the 5-year withdrawal plan. Vanguard is well equipped to handle inherited IRAs.
posted by JackFlash at 11:31 AM on March 7

Give Vanguard a call, they do the work and they do it well and they do it cheap. This is from personak experience and I do not work for the company, they work for me.
posted by ptm at 12:08 PM on March 7

You also asked about IRS reporting. Assuming that the inherited IRA is traditional, not a Roth, then you will be required to pay income taxes on the distributions. The custodian will send you a Form 1099-R in January that reports the amount that you withdrew during the previous year. This form is much like the W-2 that your employer sends to you and the IRS to report income. You take the number from the 1099-R and put it on line 15a of your Form 1040 and add it to your other income. That's all there is to it for reporting.

You don't need a manager for your inherited IRA. You do need a custodian, just like for any other IRA you may have. The custodian just holds the investments for you and keeps records for the IRS. You yourself can direct the custodian as to how to make investments.
posted by JackFlash at 12:39 PM on March 7

Low cost and local essentially means a credit union. Call around, and they can give you the transfer paperwork, too.
posted by dhartung at 1:22 PM on March 7

"Local" and "low fees" rarely occur together. Typically, a local B&M bank will resell managed offerings by a big brokerage, which involves substantial fees. This is at least the case with all my local banks. I love them for checking/savings accounts, safe deposit boxes, and I'd give them a shot if I was shopping for a mortgage, but investments? I don't see what they'd offer me. A mutual fund is inherently not a "local" investment; it's being put into bonds and stock issued by organizations all over the country (or world), typically via funds managed by huge investment banks. Routing this through the local bank branch doesn't help much.

I use Vanguard and I'd say you wouldn't go wrong to take a very hard look at them. Their fees are very low, especially on their index funds. They also have money market, Treasury, and tax-free muni funds that are very low as well.

If a certain degree of hand-holding or advice is what you want, I would look at that as a separate service from the investments themselves. Don't trust any 'advice' unless you paid for it, and make sure you find out before hiring someone where they are affiliated with or receive commissions from any brokerages. A good advisor ought to have no problem picking funds for you out of Vanguard's catalog, versus (say) Fidelity's or Merrill Lynch's. If they seem unable to talk about any funds except those offered by one company, look for someone else.
posted by Kadin2048 at 1:34 PM on March 7

There are plenty of "big banks" and credit unions that don't charge ANY fees for IRA accounts, assuming you put the money into a CD. Some of them charge annual "trustee" fees - stay away from them, because interest is so low on CDs now that you'll end up eating any earnings. They will also help with the Trustee-to-Trustee transfer paperwork and can set up automatic RMD payments. JackFlash pretty much covered everything very well.
posted by tra at 1:53 PM on March 7

Tell your manager your concerned about churning. He'll get the message and manage less.
posted by Ironmouth at 12:31 AM on March 8

Kadin, what's a B&M bank?

My current plan is to put it in CDs. I specifically want to avoid hand-holding. I'll ask my credit union if they offer custodial IRA accounts.

Thanks, everybody, for the help.
posted by theora55 at 1:18 PM on March 8

B&M is "Brick and Mortar", I think. A bank with a physical building as opposed to just an internet presence.
posted by Daddio at 6:23 PM on March 8

Try Vanguard. They're are about as low cost as it gets and they will serve as an IRA custodian.
posted by bananafish at 11:53 AM on March 10