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What's the best thing to do with an inherited IRA?

Also, credit card user who signed up for online billing gets penalized for late payment.

May 09, 2010|Liz Pulliam Weston | Money Talk

Dear Liz: I just inherited about $70,000 in IRAs and checking accounts. I would like to eventually invest it in my next home (upgrade to a bigger home) but want to wait a little until I feel more certain about my job. What is the best thing to do with this money in the interim? Certificates of deposit? Money market?

Answer: If you expect to use the money within a few years, you'll want to keep it safe and accessible. These days, that usually means in an FDIC-insured savings account, since yields on money market funds are pretty miserable.

You'll typically find the best rates at online banks or your local credit union. You also can consider boosting your yields a bit by laddering some CDs. That just means breaking your money into chunks and investing those chunks in CDs with different maturities. If you arrange your ladder so that some money comes due every three months or so, you can take advantage of rising rates while protecting the bulk of your cash from falling rates. Just make sure that your money isn't locked up past the point when you're likely to need it.

But you may want to reconsider your goal for this money. Unless the retirement money you inherited was in a Roth IRA, you will pay income taxes on your withdrawals. You may be better off in the long run by delaying those taxes as much as possible.

That would require putting the IRA money into a new account, called an Inherited IRA, that you open for this purpose. You would be required to take minimum distributions each year, but those would be based on your life expectancy. The bulk of your inheritance would be left alone to grow tax-deferred for many, many years.

Another option, if the original account owner died before age 70 1/2, is to use the five-year rule. That basically means you could leave the money in the Inherited IRA for up to five years. You could withdraw any amount at any time and pay taxes on it, but you must withdraw everything within five years. That would give you the benefit of at least some tax deferral.

Either way, you would need to establish the Inherited IRA by Dec. 31 of the year after the original IRA owner's death.

Credit card user penalized for late payment

Dear Liz: Last year, I signed up to view my credit card account online. I did not realize that they would stop paper billing. My other credit card accounts didn't stop paper bills when I signed up for their online access. I rotate my credit card use and sometimes don't use one for long periods of time, so I didn't realize I had some charges on this particular card that went unpaid (about $5 worth). The issuer contacted me about the delinquency for the first time four months later and I paid the balance, including late fees, over the phone. I found out later that issuer had already canceled my account and lowered my once-800-plus credit score by 80 points. The company has done nothing despite multiple contacts. It seems they would have an obligation to contact me about the delinquency prior to closing the account for nonpayment. The funny thing is they did not close another credit card I have with them.

Answer: Your credit card issuers don't have an obligation to make sure you know that you aren't paying your bills. And your issuer didn't lower your credit score; those four months of late payments did the job.

The reality is that you are responsible for paying your bills, whether or not you get a paper statement. (When you signed up for online access, by the way, you also had the option of electing e-mail alerts that would let you know when a due date was approaching and a payment hadn't been made. Those alerts are a good thing.)

Rather than vent your outrage, you might want to be a bit contrite when you contact the chief executive of your credit card company to ask for his or her help in fixing this mishap. Explain that you didn't realize you were ending paper bills when you signed up for online access and point out your long history of on-time payments. Ask if the CEO would consider "rehabilitating" your account to remove the late payments, which were clearly an oversight. (The $5 initial balance should make it clear that it wasn't a lack of funds that prevented you from paying your bill.)

In this case, asking for help may work better than demanding it. The card issuer played by the rules; you were the one who messed up.

Liz Pulliam Weston is the author of the book "Your Credit Score: Your Money and What's at Stake." Questions for possible inclusion in her column may be sent to 12400 Ventura Blvd., No. 238, Studio City, CA 91604, or via the "Contact Liz" form at Distributed by No More Red Inc.

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