Question Archive

Is it a good idea to add my daughter's name to my SDCCU® account?
I want to get really serious about saving and investing in 2012. Any suggestions?
I'm thinking about starting a business. Are there any places I can turn for help?
What is a Coverdell Educational Savings Account?
I have a new granddaughter and want to invest some money toward her college. Any suggestions?
I was recently told about some thing called a "stretch IRA." How is this different from a regular or Roth IRA?
My son will be leaving soon for his first year of college. What should I do to protect him from identity theft or other types of personal fraud?
I have several retirement accounts with various brokers and financial institutions. Is it a good idea to consolidate these accounts?
My father recently passed away and I have inherited his retirement account. What do I need to do to transfer the assets into my name?
Do shareholders benefit when a company announces a stock split?
What are my chances of getting audited by the IRS and what deductions could get me in trouble?
What is the best way to check my credit report?
What is the best way to give shares of stock that I own to my children?
Should I convert my IRA to a Roth IRA?
I’m looking to invest in bonds to generate more income. Is it a better idea to buy individual issues or a mutual fund?
I apparently have lost a stock certificate. How do I go about replacing it?
My 401(k) plan seems to be going nowhere fast. Since this will be a big part of my retirement, I wonder what I need to do to see some improvement.
I’m worried that I am not being a very good financial role model for my children. Any tips on how I can do a better job?
Could you please explain how a stretch IRA works and if it is worth considering?
I just received my tax refund and wonder whether I should invest the money or put it to some other use?

Answer Archive

Is it a good idea to add my daughter's name to my SDCCU® account? (February 2012)
This is a common consideration for people who do not have an estate plan in place and want to pass along assets to their adult children after they die.

By making your daughter a joint member on the account you will accomplish your goal: ownership goes to the surviving partner or partners after a person passes away without usually having to go through probate or any other court considerations. However, that minor benefit probably does not outweigh other considerations. For instance, adding a person as a joint member on the account is considered a gift that could have significant tax implications. (Consult your tax advisor.)

But, in my opinion, the biggest problem could arise if your daughter is ever in a car accident that is her fault or perhaps gets sued for other reasons. Since she would be considered a co-owner of the account, any settlement or court ruling could seize her portion of the account. The same would apply if you put her on the title for your home or any other asset.

There are better ways to achieve your goal of distributing your assets when you are gone. Talk to a SDCCU advisor for assistance and, by all means, talk with a legal professional before making any decisions that could have negative impacts down the road.

I want to get really serious about saving and investing in 2012. Any suggestions? (January 2012)
The mere fact that you realize it is time to get serious is a step in the right direction. The best way to develop the habit of saving and investing is to make it as simple and automatic as possible. The more you have to work at it, the more likely you will find an excuse to break the habit.
 
If possible, start where you work. If your employer offers something like a 401(k) plan, consider getting enrolled so pre-tax dollars can be deducted from your paycheck each month and put to work in a savings or investment that matches with your goals and objectives. And, there might even be a chance you employer matches a portion of your contribution, so you get an immediate return on your investment!
 
Another option would be to explore investing in mutual funds that also provides a systematic plan for investing. Most will let you get started with small amounts of money if you agree to commit to an ongoing investment plan. Check with the LPL Financial registered Financial Consultant at your San Diego County Credit Union branch for some suggestions.
 
And, consider investing in some books that will help you understand the nuts and bolts of investing. I am a big fan of "Dummies" books that are easy to read and actually make the subject entertaining.

I'm thinking about starting a business. Are there any places I can turn for help? (December 2011)
You have a variety of options to help you develop a business plan and begin the process of starting or expanding a business. And, best of all, most of these services are free. Well, not exactly free; you've already paid for them with your taxes.

The Small Business Administration (www.sba.gov) operates several programs that will be worth your attention. For instance, San Diego County is home to two Small Business Development Centers (SBDC). One is located at Southwestern College in Chula Vista and the other is at Mira Costa College in Oceanside. These centers offer a variety of classes on topics that will help you get started, such as developing a business plan, marketing and accounting. In addition, counselors are available to work one-on-one with you to get you moving in the right direction.

Another program, SCORE, also provides services. Once referred to as the Service Corps of Retired Executives, the group is now simply called Counselors to America's Small Businesses. The unique feature about SCORE is how it matches you with an experienced professional – often retired – who has experience in the area of your interest. San Diego is fortunate to be home to many top executives who worked in other places around the country but made the smart decision to retire here. That's good news. You may wind up having a counselor from SCORE that is a retired executive from a Fortune 500 company.

What is a Coverdell Educational Savings Account? (November2011)
Think of an IRA and you'll understand how an educational savings account works - with benefits. A Coverdell account is named after the late U.S. Senator Paul Coverdell of Georgia who was a champion of tax-favored educational savings accounts.

Simply, a Coverdell account allows for up to $2,000 to be contributed each year per child. While the contribution is not tax-deductible, the growth of the account will be tax-free if the money is used for qualified educational expenses. Explanations of what types of expenses qualify can be found at irs.gov.

Many people confuse a Coverdell account with a 529 plan. The difference - and it is a big one - is that 529 plans are exclusively for college expenses. A Coverdell, on the other hand, can be used to pay for elementary and secondary school costs. This can include tuition costs at private K-12 schools. Again, check with the IRS website to see what else qualifies.

Deciding how to invest the money you contribute to a Coverdell account on behalf of a child is critical to the potential for growth. Since the entire range of investments are available for these accounts, similar to IRAs, it might be a good idea to consult with a professional to serve as custodian for the account and make suitable investments.

I have a new granddaughter and want to invest some money toward her college. Any suggestions? (October 2011)
First, congratulations on the new grandbaby! It is one of life's most memorable events and having three grandchildren has certainly been one of the biggest joys I have ever experienced.

Starting early allows you and your granddaughter to benefit from the one of investing’s best tools: time. There are a number of ways to put money to work so that when college comes around or other financial needs pop up later in her life there will be money available when you need it.

Here are a couple of suggestions. Keep in mind, each of these items carry some type of risk and reward is often based on the level of risk:

1. Savings bonds have been an excellent tool for college savings because the money grows tax-deferred and, if used to cover qualified expenses, can be withdrawn tax-free. However, the program has changed over the years and the best choice now would be what are called I bonds. The return on these investments is based on the rate of inflation, which many suggest is about ready to rise sharply.
2. Certificates provide the level of safety that many people require. While rates may seem low right now, as is the case with I bonds, those rates could move higher as the economy starts to grow again.
3. Dividend-paying stocks: I must admit this is my favorite for my grandkids. I like companies that pay attractive dividends and, more importantly, have a history of raising the payout each and every year. Explore the possibilities of a group called the Dividend Aristocrats which includes companies that have increased their dividends for at least 25 years in a row. Again, like any other stock, these companies carry a degree of investment risk.
4. Mutual funds provide two important features: professional management and diversification. There are funds that invest in stock, bonds or a mix of both. Given the likely time horizon for investing these education dollars, most mutual funds should perform well over the next 18 years or longer.

I was recently told about some thing called a "stretch IRA." How is this different from a regular or Roth IRA? (September 2011)
A stretch IRA is not a type of IRA; rather, it is a strategy that can be used by beneficiaries to extend the period of time they have to pay the income taxes due on an inherited tax-deferred retirement account.

First, consider what options are available to a person who is the beneficiary of an IRA. One option, of course, is to take a lump sum distribution of all the assets in the account. This will create an immediate tax liability that could consume a large portion of the account. A second choice would be to transfer the assets into an inherited IRA with a five-year time limit for starting distributions. And, finally, you could choose to transfer the balance to an IRA that distributes assets according to the beneficiary's life expectancy. Quite simply, a stretch IRA is implemented when the beneficiary is younger than the account owner or a person that is expected to outlive the owner.

Obviously, there are a number of things to consider in determining which strategy works best in your situation. Extending the distributions over a long period could actually create a bigger tax liability if tax rates rise. And, the immediate needs of a beneficiary might suggest an earlier distribution rather than an extended period would be best. This is the kind of strategy best discussed with a tax and investment professional.

My son will be leaving soon for his first year of college. What should I do to protect him from identity theft or other types of personal fraud? (August 2011)
Good question. Most kids who leave home for the first time are also having their first experience with credit cards and other financial transactions. So, since you are probably linked to these accounts in one way or another, it is smart to take some simple protective steps.

The Better Business Bureau suggests having bank statements, medical reports and other sensitive items mailed to your home rather than your son's address at school. eStatements are another good idea so you can both access them online. You don't want those types of things lying around a dorm room or other spots where they can be snagged by people who can use the information to do bad things.

By the way, when you are doing your back-to-school shopping, it might be wise to include a shredder for your son to have in his room. It is really the first line of defense against ID theft. It is also smart to make sure all computers and other devices have a password, firewall and anti-virus software that would prevent unwanted visitors from accessing files. Most mobile devices and cell phones also have a way to lock keypads so only authorized users have access.

Additionally, it is likely your son is involved with social media like Facebook and Twitter. Remind him to be very careful in sharing personal information including phone numbers, addresses and account information.

Remember, your son has spent his entire life in the safety of your home. Leaving his wallet, car keys and other personal items out in the open has never been a problem. But, now that he is leaving the shelter of home, it is time to be more cautious.

I have several retirement accounts with various brokers and financial institutions. Is it a good idea to consolidate these accounts? (July 2011)
John Bogle, the father of index investing, has long suggested there are two things that can sabotage the best intentions of investors: fees and taxes.

So your idea to consolidate these accounts makes a lot of sense. It is pretty safe to assume that each of the accounts you have charges some type of custodial fee, either quarterly or on an annual basis. Bringing those accounts under one umbrella can save you a lot of money.
 
For instance, if you have ten different accounts and each charges $100 in fees each year, you have spent $1,000. That dramatically reduces the return on your investments. However, if all of the accounts are pulled together into one account you have reduced the costs by 90 percent.
 
Of course, not all retirement accounts can be combined. You should talk with a financial consultant at San Diego County Credit Union to explore the best way totake this important step. Combining various IRAs is a simple process, but putting together 401(k)s or other employer sponsored accounts can be a little tricky. And, if not done correctly, you could get hit with some big taxes and penalties.
 
One final thing: this would be a good time to explore making a conversion from a tax-deferred IRA account into a tax-free Roth IRA. Again, get professional advice in making these changes.

My father recently passed away and I have inherited his retirement account. What do I need to do to transfer the assets into my name? (June 2011)
There are several steps you can take to distribute the funds and each has different tax consequences.

The first thing that comes to mind for many people in your situation is to simply sell the investments in the account and withdraw the money from the account. If you could use the money to pay off debt or if there is some other pressing financial matter, this could be an option. However, it likely will result in a significant tax liability that could eat up a big chunk of your inheritance.

A better alternative might be to transfer the money into a "beneficiary IRA." This allows you to roll over the money into a 401(k) or other employer-sponsored retirement account in your name and continue to defer the taxes that ultimately will need to be paid.

By the way, if your father's money was in an IRA rather than a 401(k), it may be simpler to change the title on the account to your name than to open a new account and transfer the funds. Check with the custodian to see if that is possible.

If your father was over the age of 70 1/2 when he died, he was probably taking mimimum required distributions. You will likely be required to continue to take distributions as well. If he was under that age you may be able to postpone withdrawing the money for a few years, allowing you to benefit from continued compounding.

Do shareholders benefit when a company announces a stock split? (April/May 2011)
On a pure dollars-for-dollar basis, no. As an example, let's say you own 100 shares of a company that is priced at $50 per share. The company then announces a 2-for-1 stock split. That means you now own 200 shares of the company priced at $25.

In other words, the dollar amount of your investment remains the same. However, a stock split is usually a sign of a company that is performing well in the eyes of investors. Most companies usually split their stock when it climbs to a particular price. The move brings the market price of the shares back to a level that is more comfortable for investors.

Companies that have a tradition of stock splits can really enhance value over the long-term. Take, for example, Walmart. An investor who bought 100 shares of the company's stock when it went public in 1970 now owns 202,000 shares of the stock, thanks to a series of stock splits over the years.

There are some companies that never split their stock. Warren Buffett's company, Berkshire Hathaway Inc., comes to mind. Although the price of the shares has soared over the years, Buffett has refused to split the stock. Today one share will cost you somewhere in the range of $125,000!

What are my chances of getting audited by the IRS and what deductions could get me in trouble? (March 2011)
Let me respond to the first part of the question. Your odds of getting audited by the IRS are very slim. The most recent statistics suggest that only 1.5 percent of all taxpayers get investigated each year. And the amount of income you report has an impact on your chances of getting audited.

For instance, only 0.8 percent of taxpayers reporting income of less than $25,000 get audited. In other words, less than one taxpayer out of 100 in that income bracket will likely get audited. However, that jumps to 1.6 percent of taxpayers with incomes over $100,000.

To be sure, there are certain deductions that can lead the IRS to take a look at your return. For instance, individuals who work at home are often asked to document the deductions they take for their business. Also, if you claim tax shelter investment losses on your return the IRS may ask for more details. The size of your deductions in relationship to your reported income can also lead to questions. Large cash contributions to charities that seem inappropriate for your income can raise red flags.

Bottom line, take every deduction that you are legally allowed to claim. But, be prepared to back them up with the necessary documents if the IRS contacts you for additional information. Get the help of a tax professional like a CPA or enrolled agent to help you prepare your taxes. If questions are asked by the IRS, they can help represent you in any discussions.

What is the best way to check my credit report? (February 2011)
There are plenty of credit services out there that would like to suggest they are offering you a free credit report. The only problem is that they usually are just the bait to get you to buy a so-called credit protection service.

Thanks to a program that was set up a few years ago by the Federal Trade Commission and the three major credit reporting agencies, you can now access your report each year at absolutely no cost. A website – annualcreditreport.com – will be your entry to accessing this important information. It is estimated that a quarter of all credit reports contain some erroneous information that could jeopardize the ability to qualify for a loan.

The free reports can also be ordered by calling (877) 322-8228 or writing to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

One other thing, each time you access a credit report through a retailer or other place where you may be requesting credit, it has a negative impact on your credit score which can possibly raise the interest rate you pay, or even qualify for, on a loan. When using this free service, there will not be any impact on your score.

What is the best way to give shares of stock that I own to my children? (January 2011)
Giving the gift of stock is a wonderful way to help children get started as investors or expand on their existing portfolio.

The mechanics of gifting stocks are pretty simple. You could work through a transfer agent which would take a lot of paperwork and time. The best way to handle the transfer would be through a stockbroker.

If your children do not have an existing account, you will have to open one in their name and Social Security Number. After that, you just authorize the transfer and the process will be completed, usually within a week or two.

Also, if the children are minors it will be necessary to set up a custodial account. Any adult can serve as a custodian and often it is a parent or grandparent that handles the account until the child reaches the age of majority.

Of course, once the transfer is completed the shares become their property and they can hold the stock or sell it. If the stock pays a dividend and they intend to hold it for some time, it might be wise to suggest they set up a dividend reinvestment program. Again, the broker can assist in that process.

In addition to gifting the stock to your children, you are also gifting your cost basis. They will need to know what you paid for the stock so they can use that to determine any loss or gain when the stock is sold.

And, remember that the maximum limit for gifting in 2011 is $13,000 per person. While gifting assets does not trigger any tax liability for the person receiving the gift or a deduction for the person making the gift, it does reduce the size of the estate, which could avoid inheritance taxes. Get some professional help in clarifying how this impacts your gifts.

Should I convert my IRA to a Roth IRA? (November 2010)
At the recent seminars I have been holding at San Diego County Credit Union, there have been a number of questions that have come up regarding converting traditional tax-deferred IRAs to tax-free Roth IRAs. Since the clock is ticking down on the opportunity to convert - it expires at the end of the year - I thought it would be appropriate to address a few issues now.

For instance, I'm often asked about the five-year conversion rule on Roth IRAs. Basically, the rule says that money invested in a Roth must stay there for at least five years in order to qualify for the tax-free status of future withdrawals. That, unfortunately, also applies to conversions - but with conditions. Remember, when you make the conversion, you are responsible for tax due on the tax-deferred balance in the traditional account. So, any penalty that you might have to pay in the Roth IRA would be determined by your age. If you are under the age of 59½, any withdrawal would be subject to a ten percent penalty. If you are over that age no penalty would be assessed. There are a few unique issues that might apply in this area so talk with your tax advisor.

Another question I get has to do with mandatory distributions at age 70½. The good news here is that you are not required to make manadatory distributions once your money has been moved to the Roth. Remember it is a tax-free account. One note: if you are already taking mandatory distributions from your traditional IRA, you will still be required to take a distribution this year even if you have already made the conversion. Again, talk to your tax advisor.

Finally, I get a lot of questions about paying the taxes that are due on a conversion. One of the attractions for doing a conversion this year is to spread the tax liability over two years rather than having to pay it all in the year you make the change. Common wisdom is that you should only consider a conversion if you have enough money available without using money from the account to pay the taxes. That certainly is true if you are under the age of 59½ because any money that is used to pay the taxes - and not transferred to the Roth - will be subject to the ten percent early withdrawal penalty as well as the deferred taxes. If you are over that age there would be no penalty so dipping into the proceeds to pay the taxes would not be inappropriate.

Remember, doing a Roth conversion does not avoid taxes on the amount of tax-deferred growth in the traditional IRA. Taxes will have to be paid on the amount sooner rather than later. It is unlikely income tax rates will ever be lower than they are now. So, once again, get some professional advice but don't wait too much longer or you may miss the opportunity to go Roth.

I’m looking to invest in bonds to generate more income. Is it a better idea to buy individual issues or a mutual fund? (October 2010)
A lot depends on how much money you have to invest. As a rule, I would suggest you buy individual issues rather than funds. The fees – both sales charges and ongoing expenses – are much lower than with mutual funds. In addition, you can choose maturity dates that match up with your personal needs.

However, diversification in bonds is just as important as in stocks. It would be prudent to own at least five different bonds and ten would be even better. Since most municipal and corporate bonds are issued in multiples of $5,000, you would need at least $50,000 to build a diversified portfolio.

A mutual fund, on the other hand, gives you immediate diversification. Most bond funds own hundreds of issues and also provide professional management. But, mutual funds are eternal investments, they have no maturity. Considering the volatility that can occur in interest rates and bond prices, that can be a big problem. If you were to buy a bond fund today and interest rates go up, the value of your shares would decline. There is no guarantee that you will ever see the price return to where it was when you made the purchase.

Fees, of course, can be a problem with funds. Even if you choose a no-load fund, there are annual fees and expenses that can be more than one percent. That can eat up a big chunk of your return. By the way, it is important to find out if the yield you are being offered on a bond fund is before or after expenses. Be careful. Brokers make a lot more in commissions when they sell you a bond fund compared to what they get when you buy individual issues.

Buying bonds, either directly or through funds, can be a complicated process and, as I have stated before, as risky as stocks, if not more so.

The best yields come from bonds with the longest maturities. These bonds, by definition, are also the most likely to realize big price swings as rates go up and down. Reducing the maturity from 30 years – normal for most bond funds – to just 10 years can dramatically reduce volatility.

By opting for an intermediate-term or limited maturity bond fund you reduce risk without giving up a great deal in income. Every family of funds that offers bond funds will have these shorter maturity portfolios available.

One other thing: be careful. With interest rates at all-time lows and the possibility of inflation rearing its ugly head sometime soon, bond prices could become very volatile.

I apparently have lost a stock certificate. How do I go about replacing it? (September 2010)
It is not uncommon for stock certificates to go missing or even be stolen. Like any financial document, you need to act quickly to replace the item to protect yourself from any possible financial loss or even identity theft.

The first step is to contact the company that issued the stock certificate. Most companies hire out these services to large financial institutions. According to BNY Mellon, one of the largest transfer agents that provides shareholder services, you will be required to pay up to get a new certificate. Information on the website says, “you will need to provide a bond of indemnity at your expense that protects the Bank from any liability that might be incurred if the original certificates are presented for value at some time in the future.”

The price for the bond is two percent of the value of the security at the time the Lost Instrument Bond of Indemnity forms are submitted, with a minimum of $25. If the value of the stock represented by the certificate is $10,000, it will cost you $200. As you can see, this could get very expensive.

The forms need to be notarized and the institution will require substantial documentation to honor the request for a new certificate. The entire process is time consuming and could create a real problem if you need to sell the stock.

Obviously, the best thing to do is make sure your financial documents, including stock certificates, are kept in a safe and centralized location. Even better yet, you may want to consider having your certificates held in “street name” at your brokerage firm. This will eliminate the possibility of them being stolen and will make things a lot easier if you need to change title or transfer shares to another party.

Another option would be to have the shares held in a depository account offered by many companies. This option would also allow you to set up an automatic investment program for additional stock purchases and reinvest the quarterly dividends.

Of course, all of this will be changing in the near future. More and more companies are ceasing to issue stock or bond certificates. The cost to send shareholders the physical certificate has become prohibitive and companies are opting to handle the paperwork electronically.

My 401(k) plan seems to be going nowhere fast. Since this will be a big part of my retirement, I wonder what I need to do to see some improvement. (August 2010)
A 401(k) plan – or any other retirement account – is only as good as the investments you select. While it doesn’t require a lot of care and attention, there are some simple things you can do to make sure your investments have the potential to meet your objectives.

Surprisingly, most people don’t really know how the money is invested in their accounts. That often means it winds up in low yielding money market accounts or other mutual funds that are inappropriate. So, begin by checking your holdings. The younger you are, the more aggressive you should be. Educate yourself on all of the investment options that are offered in your plan and look out for changes in management or direction.

When things get as hectic on Wall Street as they seem to be right now, it is a natural tendency to get conservative and move to safer investments. That is the fastest way to sabotage the return on your funds. Since, by definition, a retirement plan provides dollar-cost-averaging, you would be best advised to put on the blinders and stay the course. I know that can be difficult, but time is on your side.

It is also a good idea to watch for any new funds that are available in your plan. Administrators add new investments regularly to give workers more choices. And, if there is a fund or fund family you would like to see in your 401(k) plan, speak up. It is not uncommon for the new investments to be included in the plan.

You should also avoid the temptation to put your money in the funds that performed best last year. Past is not prologue and there’s a pretty good chance last year's winners will fail to repeat. At the same time, once you find a good mix of investments, leave them alone. Changing your investments too often can be an expensive mistake.

It can also be a big mistake to overload your retirement plan with company stock. Although it is often offered to employees at a discount from the current market price, it can be dangerous to have more than 20 percent of your portfolio in company shares.

And, finally, make sure you are contributing as much as possible, certainly enough to take advantage of any matching contributions by your employer.

I’m worried that I am not being a very good financial role model for my children. Any tips on how I can do a better job? (July 2010)
As in most other aspects of parenting, the best thing you can do is lead by example.That begins with responsible spending. Kids are very receptive to the way parents spend money. The use of credit cards takes away the image of actual money being used to make purchases and suggests there is this unlimited source of funds attached to the use of plastic.

A good role model also knows when to say no. When a child “wants” something, it can be easy to cave in and make the purchase. But, starting as early as possible, explaining the difference between want and need can teach a lesson that will last a lifetime.

Making kids a partner in financial issues is also important. Whether you put them on a budget or pay an allowance, it is smart to make sure that they contribute some of their own money when making discretionary purchases. Mom or Dad may want to buy a certain pair of shoes for the child, who would rather have a more popular pair. If they are willing to add their own money to the purchase then it may be doable.Remember, it’s all about teaching them the value of money.

That also applies to investing. Thanks to changes in the industry, there are many ways to get started in stocks and mutual funds with small amounts of money. The Mutual Fund Education Alliance (mfea.com) provides a list of no-load mutual funds that can be purchased for as little as $50.

This allows parents to begin the process of educating their kids about the long-term benefits and rewards of investing. To be a good role model, however, you really need to invest with your children, not for them. Kids are bombarded with marketing messages and, sometimes that is not bad. It can impact their decisions as consumers and also open their minds to investment opportunities.

For instance, do they have a favorite breakfast cereal? The last time I looked, cereal by the ounce is almost as expensive as gold. So, why not consider investing with your children in great companies like Kellogg's® or General Mills.

The nurturing instincts of mothers extends to matters of money. A new survey, out just before Mother’s Day this year, finds that 70 percent of children believe that their moms are positive financial role models in their lives.

Could you please explain how a stretch IRA works and if it is worth considering? (June 2010)
Tax-deferred accounts like IRAs and 401(k) plans are the most common tools used by people to save and invest for their retirement. While people enjoy the benefit of letting their money grow inside these sheltered accounts, they rarely take steps to reduce the liability their heirs will face when they die.

Every retirement plan has two critical components: the owner and the beneficiary. As you may know, the owner of the account can leave the money alone until he or she reaches the age of 70 ½ and then is required to begin taking annual mandatory distributions.

It is very common for married people to name their spouse as the beneficiary on the account. Upon the death of the owner the asset can pass to the surviving spouse and it does not need to be touched until that person reaches the age for mandatory distributions.

But, what if the beneficiary is a non-spouse? Under normal circumstances that person would be required to take a distribution of all the deferred funds soon after the death of the owner, creating the possibility of a substantial tax bill.

So, this is when the idea of a stretch IRA comes into play. Lets say a father names his son as the beneficiary on his IRA. When he dies, rather than be faced with a large lump sum distribution, the money can go into an IRA in the name of the son who is required to begin taking annual distributions. However, since the son is much younger, the minimum distribution is much smaller, leaving most of the money in the deferred account to continue to grow.

As a result, not only is the tax liability spread out over a large number of years, but the value of the account can actually grow faster than the rate of distribution, leaving an asset that ultimately could be repeatedly passed on from one generation to the next.

Of course, that assumes the perfect situation. In the vast majority of cases, heirs are often anxious to get their hands on the bulk of the money. So, it is important that you get professional advice on how to best structure a stretch IRA and have a real heart-to-heart talk with your kids about what you want the legacy to accomplish.

I just received my tax refund and wonder whether I should invest the money or put it to some other use? (May 2010)
Getting a tax refund can be a financial windfall and, if used properly, can accomplish a number of things. With that said, I must remind people that getting money back from the government is actually poor planning.

This year the average refund to taxpayers is well above $3,000. That means you have made an interest-free loan to Uncle Sam. Had you adjusted your withholdings that would have meant an additional $250 a month that you could have used to pay bills, save for the future or even fund your contributions to an employer-sponsored retirement plan.

With that said, you now have a check in your hands – or hopefully directly deposited into your SDCCU® account – and now is the time to decide what to do before you gradually let the money slip away.

Obviously, paying off credit card bills or other debt is never a bad thing to do. However, if you clear up a charge account only to run it back up again then you really haven't accomplished anything. If you make the promise to reduce your obligations and not just dig a new hole, by all means, pay off some of what you owe.

Another option would be to use the money for an expense you might otherwise pay for with credit. Buying a computer for the kids to use for their education, putting new tires on your car or even using the money for a summer vacation can be done without having to borrow.

Putting the money to work in a retirement account is a great idea. You have a number of choices to consider including a traditional IRA that allows your money to grow tax-deferred or a Roth IRA that provides tax-free growth. What kind of investments you make with the money should be determined by your tolerance for risk, investment experience and time before retirement.

San Diego County Credit Union has investment consultants that can help you explore these considerations and help you get started saving or investing for your financial future. For younger people, getting started early can allow you to take advantage of the power of compounding. Small investments today can grow into big nest eggs down the road.

Of course, it doesn't have to be one or the other. Putting some money away for retirement and using some to pay off debt and at the same time getting that new computer can all work to your benefit.

See how your savings can add up with our financial calculators. SDCCU offers federally insured Traditional and Roth Individual Retirement Accounts (IRAs). Learn more here.