A non-spouse beneficiary has only one option (other than to disclaim the assets) and that is to establish an inherited IRA beneficiary account. If the decedent had already begun IRA RMDs, then the beneficiary is required to take the first RMD for the year following the year of death. This calculation will be made based upon the beneficiary’s life expectancy.  If the original owner of the account died prior to age 70 ½ then the beneficiary has an additional option to delay distributions up to five years without incurring a penalty.  Under this “5-year rule”, a beneficiary can withdraw any or no assets without incurring a penalty as long as the account is depleted by Dec. 31^st five years after the year of death.

For example, your 65- year old aunt dies in 2013 without beginning RMDs and leaves you an IRA which you promptly transfer to an inherited beneficiary IRA account. If you do not take an RMD by Dec. 31^st 2014, you still have until Dec. 31^st, 2018 to deplete the account without incurring a penalty. Many of these decisions will be based upon the need for the money as well as the size of the account. As a general rule, stretching the IRA distributions over the longer life of a younger beneficiary is preferable due to the advantages of years of tax-deferred growth.

An important rule to remember is that a required distribution must be taken from the account by Dec. 31^st in the year of death for the decedent if he/she had already begun taking RMDs (or was due to begin taking  RMDs). Failure to take a required distribution will result in a penalty equal to 50% of the amount that should have been withdrawn (this is true of all missed RMDs).

So, while IRA accounts are deceptively simple during the contribution phase, they have many quirks and rules when it comes to distributions. We recommend that before you transfer any assets into an inherited IRA, you become familiar with the rules and tax ramifications.

Frequently, people forget to update the beneficiaries on their accounts; there is the inactive 401(k) from their first job out of college; an IRA established before marriage vows or little bundles of joy that has your sibling or parent listed as the primary beneficiary. The problem is that even if there is a will or trust that states a person’s wishes, accounts that require a designated beneficiary are contractual in nature and trump anything in the will or trust (but you are covered if the trust is named as the beneficiary). These include IRAs, qualified retirement plans, life insurance policies, annuities, and transfer on death designations on taxable brokerage accounts.  

Note that federal law, under the Employee Retirement Income Security Act (ERISA), presumes the spouse of an employee is entitled to the assets in a qualified retirement plan unless a spousal waiver is signed. When people marry or remarry, this can be surprising to the listed beneficiaries, as the spouse is generally entitled to the assets. This may or may not be what the decedent wished or prudent from an estate planning perspective.

With IRAs, on the other hand, spouses are not entitled to the same protection under federal law (community property states do require a spouse to be the presumed beneficiary unless a spousal waiver is obtained). This is why, frequently, when rolling over money from a retirement plan covered under ERISA, consent is required so that the spouse acknowledges that he/she will not necessarily be entitled to inherit the assets unless the owner of the account specifically names him/her as the designated beneficiary.

A simple rule is that once a year or when a major life event occurs, you do a mental check to see if anything that has changed has an impact on how you want your assets distributed to heirs. If so, contact your estate planning attorney, financial advisor, or custodian of your accounts to make the appropriate changes.

Below we explore some history and the pros and cons of 529s and custodial accounts.

The UGMA was established in 1956 as a simple way to make gifts of cash and securities to minors without the complications and expense of setting up a trust. A major benefit of the UGMA was that it allowed the income from the child’s account to be taxed at the minor’s rate rather than the, presumably, higher rate of the custodian. However, many wealthy families took this opportunity to transfer significant assets into these accounts and, eventually, in 1986, the government enacted the “Kiddie Tax”, effectively putting an end to the substantial tax benefit.

In 1996, the 529 was created to help pay for college and graduate school expenses. Earnings in the 529 account are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. Additionally, two-thirds of states give you some type of deduction for contributions.  

The tax benefits, generally, make 529s the better choice for postsecondary expenses. But the key to remember is that 529s will only pay for postsecondary education and there are other expenses related to children that parents, grandparents, and other family members may like to pay for. Additionally, while there may be a very high likelihood that your child will attend college, there is always the possibility that he/she will choose another path.

UTMA Highlights

• The only restriction on withdrawals is that it must benefit the child. Unlike a 529, you can use the assets for private elementary or high school, a car, or computer at any time (just make sure to document that the expense was for the child).
• With the exception of options and using margin, any stock, bond or mutual fund can be held by an UTMA. This makes it more flexible and also gives the custodian an opportunity to introduce a child to investing and the benefits of saving from a young age.
• Unlike a 529, there is no limit to how much you can fund into the account.

UTMA Negatives

• The gift to an UTMA is irrevocable. As the custodian, you can make investment decisions and withdraw money for your child, but when the child is an adult (18 – 21 depending upon the state) the money belongs to the child. This young adult may have very different ideas about how to spend the money than the way you or other family contributors intended.
• There are no tax benefits to contributing.
• Assets in a UTMA are counted more heavily when colleges consider financial aid since they are considered assets of the child whereas 529 assets are considered owned by the parent. Thus, a large custodial account can potentially significantly reduce the amount of financial aid a student receives.
• The beneficiary cannot be changed. With a 529, unused assets can be used for a sibling or niece or nephew by changing the beneficiary on the account.

529 Highlights

• Earnings and withdrawals are free from tax as long as the funds are used for qualified postsecondary expenses.
• You can front-load a 529 for a child with five year’s worth of annual gifts. For a couple in 2013, that would be $140,000 per child (then no further gifts are allowed for 5 years by the contributor).
• The owner of the account retains control over the funds regardless of the age of the child.
• The beneficiary can be changed if there are unused assets.

  529 Negatives

• There is a 10% penalty on earnings for withdrawals that are not used for qualified expenses.
• The investment options vary from plan to plan but are far more restrictive than the broad array of stocks, bonds and mutual funds allowed in a custodial account.
• You are only allowed to reallocate your investment choices once per year.
• There are expenses associated with managing and administering the account in addition to fees for the underlying mutual funds.

For most people, 529’s make sense if the goal is strictly saving for college. However, custodial accounts still may have a place for smaller gifts over time that will help defray non – college expenses and teach youngsters about the marvels of compound interest.

Most of us are notoriously bad at attaining our self-imposed goals, hence the existence of bridal boot camps and career sherpas. This is what makes saving for next summer’s vacation so much easier than planning for retirement 30 year’s hence. However, today’s post is not about retirement planning but some near-term deadlines imposed by the IRS, which, by their external nature, makes them much easier to follow:

April 1 – If you turned 70 ½ in 2012 and have not taken your first required minimum distribution from your IRAs, you have until April 1, 2013 to take your 2012 distribution or face a 50% penalty on the missed distribution.

Remember you have to take your 2013 distribution by 12/31/2013 as well. So if are turning 70 ½ this year, you may want to determine if deferring the RMD is worth the risk of pushing you into a higher tax bracket next year.

March 15 – Corporate tax returns are due.

April 15 – Deadline to file individual tax returns or to request an extension (except in Massachusetts and Maine, where Patriots’ Day is observed by reenacting The Battle of Lexington at 5:30 a.m. and playing baseball at noon).

April 15- IRA contributions for the prior year are due, regardless of whether or not you filed for an extension.

September 16 – Final deadline to file corporate tax returns if an extension was requested.

October 15 – Final due date to file calendar year 2012 tax returns for taxpayers who received a 6-month extension.

December 31 – Employer-sponsored 401(k)s (including Solo 401(k)s) must be established if you intend to contribute for the calendar year.

And while not mandated by the IRS, don’t forget to set your clocks ahead this weekend.

 We hope to use this forum to educate and, occasionally, entertain you.  

 Your feedback is welcome.

I have been trying to figure out how to start an investment portfolio. I have retirement savings through my company’s 401(k), a Roth IRA and personal savings. I have a small sum (less than $3,000) but I am trying to plan for the long run. Do you have any suggestions on how to start small and grow the investment over time? — Michael C.

Step one is to avoid stashing that cash in individual stocks, says Cheryl Costa, a principal at Forteris Wealth Management in Framingham, Mass. “A portfolio that small invested in just one or two stocks is pretty much a gamble,” she says.

Read the full article with all of Cheryl Costa’s advice originally posted on CNN.com

You can do pretty well when you don’t have rent to pay.

Consider Chris Sturgis, 33, who has been living in his parents’ Methuen, Mass., home since they moved to Japan four years ago. The only housing cost he is responsible for is about $400 a month in utilities.

With his parents likely to return in a few years, “I’m taking advantage of the time,” says Mr. Sturgis, a supply-chain planner at a Boston-based medical-device company who earns a base salary of about $75,000 and a few thousand in bonuses.

Read the full article with all of Cheryl Costa’s advice originally posted on WSJ.com

 Typically, the COBRA continuation coverage is available for a maximum of 18 months for dependents and employees who lose their job or get reduced hours.  However, the coverage period increases to 36 months for dependents when they lose their coverage as a result of divorce or death or when the covered spouse becomes eligible for Medicare. A specific timeline of actions must be carried out by the dependent spouse and/or the health plan administrator to complete the process.  For example, the dependent spouse has 60 days to notify the health plan administrator after a divorce or legal separation and 30 days after the death of a covered employee. Detailed information on COBRA continuation coverage is provided in your current health plan’s Summary Plan Description or you may request information from the plan administrator.

These days, more and more people are opting for 30 year mortgages where the initial interest rate is fixed for 5 or 7 years and then is adjustable after that introductory period expires. The big draw is that the rates for these mortgages are often 3 percent or less. If you have a mortgage of $400,000, a 3 percent rate will save you $225 per month versus a 4 percent rate — that is a nice monthly savings.

Of course, the trick is that if your plans change, and you end up not wanting or having to move, your super low rate in 2012 may jump dramatically in 2017 or 2019 when your rate re-sets. (The first year adjustment may only be 2 percent higher but the rate could rise more in subsequent years — be sure to ask your lender what the maximum per year interest rate increase is and what the maximum total increase is). In summary, it is important to carefully consider how “sure” you are that you will be moving sooner rather than later because locking in a fixed rate of 4 percent for 30 years is a very good deal and you would only want to go for the lower rate if there was little to no chance that you would be staying in your home after the introductory rate period expires.

This post originally appeared in “Managing Your Money” on boston.com

Last year, taxpayers could have distributions from their IRAs paid directly to charities. These distributions “counted” as part of the taxpayer’s required minimum distribution (RMD) but they were not taxable distributions so the taxpayer received a benefit and the charities received a benefit. If you were one of the people who made a qualified charitable distribution (QCD), you need to know how to account for the distribution on your 2011 tax return.

The first thing to note is that the 1099 that you receive from the IRA’s custodian will report the full distribution taken from the IRA. There is no paperwork or form that reports that part of your distribution was sent to a charity and is therefore not taxable. You will need to track that information yourself.

To properly account for the distribution, you will need to report the full amount of the IRA distribution on Line 15a of Form 1040. You will then need to subtract the total of all the distributions made to the charities from this amount and enter the remaining balance on Line 15b of Form 1040. You must also enter the code “QCD” on Line 15b. You should keep proof of the amounts paid to the charity in case you are ever audited.

Finally, because you were not taxed on the distribution that was made directly to the charity, you cannot claim the contribution as a charitable deduction.

The ability to make a contribution to a charity and still have the amount “count” towards your RMD ended in 2011 but there is at least a small chance that it could be turned back on again for 2012. However, if this happens, it will likely occur at the end of the year and that doesn’t leave much time to plan.

This post originally appeared in “Managing Your Money” on boston.com