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willwork

Non-spousal 403b Beneficiary With Aig/valic

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I inherited a non-spousal 403B beneficiary account from AIG/VALIC. My relative had the account in a fixed plan plus product. The company said I could

1) Empty the account over a five year period 2) keep the account and take yearly minimum distribution 3) Take a lump sum 4) Change to a different carrier plan.

 

Due to taxes, I am not taking the lump sum. However, I have considered emptying the account over five years because I think there are better choices instead of a variable annuity. Either way, I am going to pay taxes and might as well pay them now while I am in a low tax bracket and have the money working in another IRA for a long period of time (30yrs before I retire).

 

 

A family friend financial advisor suggested taking the minimum distribution (which changes yearly as I age);hence, the rationale was related to the taxes. The VALIC financial advisor agreed. Becauase I am in the aggressive growth stage of my life I can do better than the fixed income. In switching my allocation the financial advisor suggested placing me in the Portfolio Directory with an income lock. He wasn't direct in answering my questions regarding fees. He stated that he was trying to offer the best suggestion for the situation I was in since I did not have the spousal choice of moving it to another 401K. (I think they are working on this option for non-spousal).

Inside the Portfolio Directory, the advisor would put me in the stock index fund with a return of 10%. After researching (the VALIC website is complicated) the so called fees of roughly 2%, my return would decrease to 8%. Then I would also have to subtract the required minimum distribution (2% and I think it increases as I age). The money would grow only 6% (subtracting the % of required distribution).

 

Another last option was to change to a different carrier plan, in which the financial adivisor said it would be Nationwide and another company I am not familiar with (not TIAA-CREFF).

 

What do you think? I am not a big fan of variable annuities but I am not trying to let my bias interefere in keeping my money with AIG/VALIC.

 

I was also looking for a website that offers good calculators because I would like to see the numbers instead of being told how the account will look 30years from now.

 

Thanks

 

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Hi willwork-

 

The IRS publications on this matter are not clearly written for us ordinary citizens who are not CPAs, tax attorneys, or IRS enrolled agents. I looked at Pub 571 and Pub 575, available for download at www.irs.gov.

 

With the caveat that this is my personal opinion and I am not a tax attorney:

 

Option 4 (change to a different carrier plan) may permit you to make a section 1035 exchange (which is a tax-free exchange) for another annuity contract. I would call a low fee annuity company: Vanguard (1-800-522-5555) , TIAA-CREF (1 800 223-1200), or Fidelity (1 800-544-4702) are some options. Fidelity will provide you an annuity cost comparison, at no charge, so you can see the apples to apples amounts for each type of fee charged under the VALIC contract you inherited and fees charged under a Fidelity contract. Fidelity has annuity products with total fees under 50 basis points. According to Lipper data printed on page C8 of the October 23, 2006 Wall Street Journal, the lowest total expense cited on a VALIC variable annuity was 100 basis points. VALIC has multiple options at this expense ratio according to the same reference.

 

Therefore, if option 4 will not give you a tax-free option to gain lower fees and maintain the longest possible tax deferral on your inherited 403b assets, you may wish instead to transfer to one of the lowest fee Valic products available.

 

You mentioned "income lock." Usually such annuity provisions result in an additional fee. If this is indeed the case, you may well wish to avoid paying the extra fee. Based on my readings regarding variable annuity fees, the fees for such add-on features paid by the customers actually go into three bins 1) a reserve to pay for the benefit if it is triggered, 2) additional company profit, and 3) additional remuneration to the annuity sales staff.

 

From reading the IRS publications and the nature of your relatives' annuity at the time of passing, I was unable to ascertain the mandatory distributions you would be required to take. If your inherited amount is large, you may wish to contact the IRS by phone and inquire regarding the mandatory distributions you must take. Keep in mind the two triggers--the calendar year you retire or by April 1 of the year following the calendar year you reach 70 and one half. It would be great if you could defer taxes on the accumulation of your inherited 403b until then--but i am not sure you can. If the IRS does not give you a clear answer over the phone, you may wish to hire a fee-only financial adviser to go through your options. The fee-only adviser part is essential, in my opinion, because the adviser will have no actual or potential conflict of interest in selling you a product for commission remuneration.

 

I invite others here to clarify, correct or amplify.

 

Best wishes,

 

RTS

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"In switching my allocation the financial advisor suggested placing me in the Portfolio Directory with an income lock."

 

Now there's a shocker. Imagine that. According to the prospectus for Portfolio Director, the charge for income lock is .65%. Tack that on to Mortalilty and Expense charges of 1% for the Stock Index Fund. Underlying expenses for the Stock Index Fund are .36% . Add it all up and you have total expenses of 2.01.

 

Wow. 2.01% for an INDEX FUND. 20 times what Fidelity charges! That agent is sure looking out for your best interests, isn't he?

 

Sources:

 

http://www.aigvalic.com/valic2003/aigvalic...le/prosp_pd.pdf

http://www.valic.com/valic2003/aigvalic.ns...rosp_valic1.pdf

 

You asked for a web site calculator. Here is a good one:

 

http://www.finance.cch.com/sohoApplets/Retire403b.asp

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Guest Sierra

I inherited a non-spousal 403B beneficiary account from AIG/VALIC. My relative had the account in a fixed plan plus product. The company said I could

1) Empty the account over a five year period 2) keep the account and take yearly minimum distribution 3) Take a lump sum 4) Change to a different carrier plan.

 

Due to taxes, I am not taking the lump sum. However, I have considered emptying the account over five years because I think there are better choices instead of a variable annuity. Either way, I am going to pay taxes and might as well pay them now while I am in a low tax bracket and have the money working in another IRA for a long period of time (30yrs before I retire).

 

 

A family friend financial advisor suggested taking the minimum distribution (which changes yearly as I age);hence, the rationale was related to the taxes. The VALIC financial advisor agreed. Becauase I am in the aggressive growth stage of my life I can do better than the fixed income. In switching my allocation the financial advisor suggested placing me in the Portfolio Directory with an income lock. He wasn't direct in answering my questions regarding fees. He stated that he was trying to offer the best suggestion for the situation I was in since I did not have the spousal choice of moving it to another 401K. (I think they are working on this option for non-spousal).

Inside the Portfolio Directory, the advisor would put me in the stock index fund with a return of 10%. After researching (the VALIC website is complicated) the so called fees of roughly 2%, my return would decrease to 8%. Then I would also have to subtract the required minimum distribution (2% and I think it increases as I age). The money would grow only 6% (subtracting the % of required distribution).

 

Another last option was to change to a different carrier plan, in which the financial adivisor said it would be Nationwide and another company I am not familiar with (not TIAA-CREFF).

 

What do you think? I am not a big fan of variable annuities but I am not trying to let my bias interefere in keeping my money with AIG/VALIC.

 

I was also looking for a website that offers good calculators because I would like to see the numbers instead of being told how the account will look 30years from now.

 

Thanks

 

 

Effective January 1, 2007 you will be able to roll the money over to an "inherited" IRA (no-load mutual funds) and commence TAXABLE withdrawals based on your personal life expectancy (see IRS publication 590). DO NOT LEAVE THE MONEY WITH VALIC!

 

Joel

 

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Willwork, I would suggest you study the recently passed Pension Protection Act. After Jan 1, 2007 you can roll the Inherited 403 (b) to your own IRA and move it.

 

 

Thanks,

Willwork

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All-

 

Here is the language from the Pension Protection Act of 2006 regarding non-spouse beneficiaries:

 

Pension Protection Act of 2006 (Enrolled as Agreed to or Passed by Both House and Senate)

 

SEC. 829. ALLOW ROLLOVERS BY NONSPOUSE BENEFICIARIES OF CERTAIN RETIREMENT PLAN DISTRIBUTIONS.

 

(a) In General-

 

(1) QUALIFIED PLANS- Section 402© of the Internal Revenue Code of 1986 (relating to rollovers from exempt trusts) is amended by adding at the end the following new paragraph:

 

`(11) DISTRIBUTIONS TO INHERITED INDIVIDUAL RETIREMENT PLAN OF NONSPOUSE BENEFICIARY-

 

`(A) IN GENERAL- If, with respect to any portion of a distribution from an eligible retirement plan of a deceased employee, a direct trustee-to-trustee transfer is made to an individual retirement plan described in clause (i) or (ii) of paragraph (8)(B) established for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary (as defined by section 401(a)(9)(E)) of the employee and who is not the surviving spouse of the employee--

 

`(i) the transfer shall be treated as an eligible rollover distribution for purposes of this subsection,

 

`(ii) the individual retirement plan shall be treated as an inherited individual retirement account or individual retirement annuity (within the meaning of section 408(d)(3)©) for purposes of this title, and

 

`(iii) section 401(a)(9)(B) (other than clause (iv) thereof) shall apply to such plan.

 

`(B) CERTAIN TRUSTS TREATED AS BENEFICIARIES- For purposes of this paragraph, to the extent provided in rules prescribed by the Secretary, a trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a trust designated beneficiary.'.

 

(2) SECTION 403(a) PLANS- Subparagraph (B) of section 403(a)(4) of such Code (relating to rollover amounts) is amended by inserting `and (11)' after `(7)'.

 

(3) SECTION 403(b) PLANS- Subparagraph (B) of section 403(b)(8) of such Code (relating to rollover amounts) is amended by striking `and (9)' and inserting `, (9), and (11)'.

 

(4) SECTION 457 PLANS- Subparagraph (B) of section 457(e)(16) of such Code (relating to rollover amounts) is amended by striking `and (9)' and inserting `, (9), and (11)'.

 

(b) Effective Date- The amendments made by this section shall apply to distributions after December 31, 2006.

 

End excerpt.

 

I note the language refers to " deceased employee" vice "deceased retiree." If willwork's relative was an employee at the time of his passing, then, it appears, willwork can establish an inherited IRA with the inherited 403b assets after December 31, 2006. Alternatively, it is unclear to me if willwork's relative were already retired at the time of his death, if this provision of law permits the eligible distribution of the inherited 403b assets into an inherited IRA.

 

I invite others here to correct, clarify, and amplify further. Special thank you to 403bagent for your contribution of wisdom to this string!

 

Best wishes,

 

RTS

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Guest Sierra

After 12/31/06 a non-spouse beneficiary of a DC plan account may rollover the inherited assets to his/her own IRA. This applies to non-spouse beneficiaries of both active and retired plan participants.

 

Joel

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Guest Sierra

After 12/31/06 a non-spouse beneficiary of a DC plan account may rollover the inherited assets to his/her own IRA. This applies to non-spouse beneficiaries of both active and retired plan participants.

 

Joel

 

If the life expectancy distribution option is offered by the DC plan and the plan has a wide variety of investment choices at low cost I would recommend that the non-spouse beneficiary NOT rollover the assets but leave them with the DC plan.

 

Joel

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After 12/31/06 a non-spouse beneficiary of a DC plan account may rollover the inherited assets to his/her own IRA. This applies to non-spouse beneficiaries of both active and retired plan participants.

 

Joel

 

If the life expectancy distribution option is offered by the DC plan and the plan has a wide variety of investment choices at low cost I would recommend that the non-spouse beneficiary NOT rollover the assets but leave them with the DC plan.

 

Joel

 

 

Valic offers the life expectancy distribution option; however the variety of investments are limited and high cost. The finicial advisor for Valic said that I would be able to get out of the Fixed Income product my relative had the money invested and find something more productive (remember the Portfolio Director option). Thank you for mentioning the Penision Act for 2007. I will review it more thoroughly and hopefully I can roll this product to another carrier with better options and tax deffered.

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