Dear Mr. Berko: My 70-year-old husband recently passed away, and I am the beneficiary of a $623,000 individual retirement account (statement enclosed), but I don’t know anything about stocks. The broker wants me to sell all the stocks to put the money in an immediate annuity policy that will pay me an income of $37,400 a year for as long as I live. He says that this is guaranteed and that no matter how low the market falls or how bad things get, the annuity will pay me $37,400 every year till I die. That’s very comforting. I am 63 and will soon retire from social work. My retirement benefits are good, and combined with Social Security, I’m very comfortable, so I don't think I’ll ever need the annuity money. I’d like to do this because there is zero risk, but my children insist that I contact you for your blessing.
Dear SS: Wow. Being a social worker in Detroit has got to be a hoot. I’ll wager onions to bunions you have some fascinating stories to tell. Meanwhile, your brokster is one of Wall Street’s famous commission-sucking vampire squids who are taught to squeeze blood from stones and widows. His investment recommendation speaks volumes about a husband’s responsibility to make sure his spouse is money-knowledgeable or able to find a knowledgeable money manager whom she can trust.
Your children saved you from a scoundrel who’d steal the pennies from his dead mother’s eyes and then sell her body parts to medicos in South America. They saved you from making a horrible investment mistake, because when you pass, the insurance company keeps everything and your kids get bupkis. I suggest that you first counsel with a certified public accountant. I’m certain he will recommend — because you are the primary beneficiary of your husband’s IRA — that you roll it into an existing IRA or one you can establish for this purpose. The important advantage to this strategy is that you are not required to take the required minimum distribution on the $623,000 until you become 70 1/2, so the IRA can continue to grow tax-deferred for seven more years.
Your deceased husband received excellent investment advice that included many good dividend growth issues, all of which I applaud. I even applaud the two high-yielding junk bonds and low-rated preferreds that held up solidly, enabling this portfolio to yield 5.4 percent. And because Total SA, Bell Canada, Kinder Morgan, KKR & Co., El Paso Pipeline Partners, Enbridge, AT&T, Johnson & Johnson, McDonald’s, Avista and others are likely to raise their dividends each year, you’re in like Flynn even when the market corrects itself. The 23 issues in this IRA paid out $34,000 in dividends and interest income in 2013, which is $3,000 less than what the annuity guarantees. And this year, because most of those stocks increased their dividends, your income will increase, while the $37,400 annuity guarantee remains flat as a flapjack. It’s important to stay the course; don’t make a single change in the portfolio.
However, quickly transfer the IRA to Charles Schwab or Fidelity and get far away from that brokster. A Schwab or Fidelity broker is less likely to chat you up for a commission.
And because you don’t need the IRA income today, you can let it accumulate until you must take the required minimum distribution in 2021. However, consider living it up a little; take out a few grand from the IRA each year, and blow it on something obscene for you and the kids.
Be certain to name the kids as primary beneficiaries. When you pass, they can’t roll an inherited IRA into their own IRAs (as you can), but they can minimize their taxes by setting up an inherited IRA with your name on the account. They must begin taking the required mimimum distribution by Dec. 31 of the year after you kick the can, and that amount will be based on their longer life expectancies. The withdrawals will be taxable, but the majority of the IRA principal will continue to grow tax-deferred for their retirement benefits.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.