Q: My wife recently inherited her father's IRA. It's earning a horrible interest rate. She wants to move it to a different investment for a better return, but avoid severe penalties. What options does she have? -- GS via email
A: Your wife should be able to move her inherited IRA without incurring any taxes or tax penalties, provided she does it correctly. The only potential cost might be a fee levied by the current custodian. For example, if the IRA is in a CD that hasn't yet matured, the bank will charge an early withdrawal penalty.
What your wife must not do is take a check for the account balance and deposit it in a new IRA elsewhere. If she does that, the money loses its tax-deferred status. She'll owe income taxes on the entire amount.
Wait a minute, some readers are thinking, can't you take money from an IRA without a tax penalty as long as you redeposit it in an IRA within 60 days?
Yes -- but only if you're the IRA's owner. An IRA beneficiary doesn't have that option. (As the original IRA owner's daughter, your wife can't become the IRA's new owner. Only a surviving spouse has the option of rolling an inherited IRA into a new IRA in his or her own name.)
An inherited IRA must be moved in a trustee-to-trustee transfer. The money should go directly from one inherited IRA into another inherited IRA that is titled exactly the same way, says Natalie B. Choate, a Boston, Mass attorney who specializes in estate planning and retirement benefits.
An inherited IRA must be titled in the original owner's name, and must include the beneficiary's name. For example: "John Doe (deceased 7/15/07) for the benefit of Jane Doe Smith."
Your wife can easily get an application to open a new inherited IRA at any bank, mutual fund, insurance company, or brokerage firm by calling their toll-free numbers or visiting their websites. (My own recommendation would be to open the new account at a large, low-cost mutual fund company like Vanguard Group, T.Rowe Price, or Fidelity Investments. The reason: It will give her inexpensive access to a virtually unlimited choice of investments.)
In the application, she should state that she's opening the new inherited IRA with money to be transferred from the old inherited IRA.
The new custodian -- let's call it XYZ Mutual Fund Company -- will then ask the current custodian to transfer the money into the new inherited IRA.
If the current custodian has any special requirements before releasing the money -- like having your wife's signature on the paperwork notarized or guaranteed, for example -- the XYZ Mutual Fund Company will get back to her and tell her what she needs to do to complete the transfer.
The only thing that could prevent the above scenario is a clause in your late father-in-law's custodial agreement prohibiting transfer of inherited IRAs.
This kind of prohibition is outrageous -- and relatively rare -- but unfortunately it isn't illegal. An IRA owner can always move his or her account at any time -- but an IRA beneficiary is governed by the custodial agreement. If this particular custodian doesn't let beneficiaries transfer inherited IRAs, your wife is stuck.
IRA owners, take note! Make sure your current custodial agreement lets your beneficiaries transfer their money elsewhere if they wish. If not, move your IRA to another custodian. Why do business with an institution that has decided to treat your heirs like prisoners?
A: Your wife should be able to move her inherited IRA without incurring any taxes or tax penalties, provided she does it correctly. The only potential cost might be a fee levied by the current custodian. For example, if the IRA is in a CD that hasn't yet matured, the bank will charge an early withdrawal penalty.
What your wife must not do is take a check for the account balance and deposit it in a new IRA elsewhere. If she does that, the money loses its tax-deferred status. She'll owe income taxes on the entire amount.
Wait a minute, some readers are thinking, can't you take money from an IRA without a tax penalty as long as you redeposit it in an IRA within 60 days?
Yes -- but only if you're the IRA's owner. An IRA beneficiary doesn't have that option. (As the original IRA owner's daughter, your wife can't become the IRA's new owner. Only a surviving spouse has the option of rolling an inherited IRA into a new IRA in his or her own name.)
An inherited IRA must be moved in a trustee-to-trustee transfer. The money should go directly from one inherited IRA into another inherited IRA that is titled exactly the same way, says Natalie B. Choate, a Boston, Mass attorney who specializes in estate planning and retirement benefits.
An inherited IRA must be titled in the original owner's name, and must include the beneficiary's name. For example: "John Doe (deceased 7/15/07) for the benefit of Jane Doe Smith."
Your wife can easily get an application to open a new inherited IRA at any bank, mutual fund, insurance company, or brokerage firm by calling their toll-free numbers or visiting their websites. (My own recommendation would be to open the new account at a large, low-cost mutual fund company like Vanguard Group, T.Rowe Price, or Fidelity Investments. The reason: It will give her inexpensive access to a virtually unlimited choice of investments.)
In the application, she should state that she's opening the new inherited IRA with money to be transferred from the old inherited IRA.
The new custodian -- let's call it XYZ Mutual Fund Company -- will then ask the current custodian to transfer the money into the new inherited IRA.
If the current custodian has any special requirements before releasing the money -- like having your wife's signature on the paperwork notarized or guaranteed, for example -- the XYZ Mutual Fund Company will get back to her and tell her what she needs to do to complete the transfer.
The only thing that could prevent the above scenario is a clause in your late father-in-law's custodial agreement prohibiting transfer of inherited IRAs.
This kind of prohibition is outrageous -- and relatively rare -- but unfortunately it isn't illegal. An IRA owner can always move his or her account at any time -- but an IRA beneficiary is governed by the custodial agreement. If this particular custodian doesn't let beneficiaries transfer inherited IRAs, your wife is stuck.
IRA owners, take note! Make sure your current custodial agreement lets your beneficiaries transfer their money elsewhere if they wish. If not, move your IRA to another custodian. Why do business with an institution that has decided to treat your heirs like prisoners?
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.
(c) Lynn Brenner, All Rights Reserved
Comments