Dear Dr. Don,
I am one of the beneficiaries of an IRA my mother had. She passed away in November 2006. Each year, I am required to draw out $500. It earned 1 percent interest last year. The balance is around $9,500. Should I continue to leave this money in the bank and earn the 1 percent interest? Or, should I draw it out, take a tax hit and reinvest it?
I am 44 and the widowed mom of one son (age 10). I am in the North Carolina state retirement system with 21 years of service. I can retire in nine years. My house will be paid for in eight years. I earn enough money to meet my obligations and have a little left over. This money isn’t needed in the foreseeable future.
— Kathy Compounding
You should review the custodial agreement with the bank. Not all custody agreements allow a beneficiary to transfer the account. If you don’t have the ability to transfer the funds to another provider, you’ll have to decide whether to keep the money invested at low yields or take the tax hit by liquidating the account.
If you have the ability to do a trustee-to-trustee transfer, you can change how the account is invested without cashing out and taking the tax hit. If the account is portable, you can choose to hold it with a bank, brokerage or mutual fund family. You don’t have to suffer with low interest rates on a bank account or CD. Move the funds by doing a trustee-to-trustee transfer to a new account relationship that better meets investment goals and objectives.
In either situation, make sure there’s not an early withdrawal penalty if the account is currently invested in a bank CD. If there is a penalty, wait until the CD matures before transferring or liquidating the account.
Your decision about where to transfer the account should depend on how your total wealth is invested, not just this $9,500. Because you have no immediate need for the money, other than any required minimum distributions, you can have a fairly long investment horizon.
Since it’s been more than three years since your mother passed away, the tax issues concerning the account should be settled. Still, this column isn’t intended to provide tax advice on the IRA account.
You need to work with your tax professional if you have tax questions, including questions about how the account is titled, minimum required distributions and any beneficiary questions.
Read more Dr. Don columns for additional personal finance advice. To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.”