Money Management Q&As

Delaying the choice of an IRA beneficiary Q. I have a sizable IRA, but I'm not sure whom to name as beneficiary-my wife, our married daughter, or her child- because I can't predict what our family's financial situation will be when I'm gone. How should I deal with this problem?

A. Consider taking the "cascading beneficiaries" route. Name your wife as primary beneficiary, your daughter as secondary beneficiary, and your grandchild as tertiary beneficiary. At your death, your wife can choose to disclaim her right to the IRA. Your daughter would then inherit it automatically, but if she also turns it down, the IRA would go to the grandchild. In that case, distributions could be spread over the child's lifetime, with the account balance continuing to grow tax-deferred.

For this plan to work, you must designate the order of the beneficiaries yourself. The rules don't allow anyone who disclaims a legacy to specify where it should go instead. You'll need to notify the IRA custodian or trustee of your wishes directly, since IRA accounts can't be disposed of through a will. The beneficiary designation form that financial institutions require you to fill out generally distinguishes only between primary and secondary ("contingent") beneficiaries, so you may have to provide a letter of instruction. You can, of course, change those instructions at any time.

A. The maximum contribution by 401(k) participants under 50 is $14,000; those older can add a "catch up" amount of $4,000 (compared with $13,000 and $3,000, respectively, for 2004). Since your employee will reach age 50 during the year, she's eligible to make the catch-up contribution as of Jan. 1, so she can defer the entire $18,000 before her birthday if she wishes.

Where to borrow for a child's educationQ. Rather than sell some investments to pay my college-bound daughter's expenses, I want to borrow the money at a favorable rate, but I wouldn't qualify for need-based aid. What's a good option?

A. Parent loans for undergraduate students (PLUS) are available under a federal program at relatively low rates-currently 4.17 percent through June 2005. The rate changes every July 1, based on the price of the 91-day Treasury bill at the last auction in May. There are no income restrictions and, unlike a home equity loan, no collateral is required, but you must pass a credit check.

You can borrow directly from the government or from a private lender. Fees run up to 4 percent of the amount of the loan, which can equal the total cost of tuition, room and board, supplies, lab fees, and travel-less any financial aid the student receives. For details, go to http://www.studentaid.ed.gov.

Sorting out securities backed by mortgagesQ. I want to diversify my portfolio of fixed-income investments by putting some money into mortgage-backed securities. What are the main types and how do they differ?

A. Most mortgage securities are issued by corporations that are either federally owned (Ginnie Mae) or government chartered (Fannie Mae and Freddie Mac). Known as "pass throughs" or participation certificates, the securities represent a direct interest in a mortgage loan pool. They may also be used as collateral for more complex types of privately issued mortgage securities, such as Collateralized Mortgage Obligations (CMOs), which offer a broader range of maturities and other investment options than direct-participation types do.