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Time is of the essence - Part 6 (Kids Education Savings -Final)

Sun, 06/01/2008 - 05:00 |

Sorry to miss out on posting last week blog. Now I am back on track after a week long vacation break. Yes, a fun Road trip to Chicago from Houston with my family for a get-together and sight seeing. Road Trip, you might wonder at this current high gas price?!

Yep, you don't believe it!! I came out as a winner compared to flying since its a last minute plan. You can expect a blog about it pretty soon. Let me jump right into core topic.

In the last few weeks, I been shedding lot of light and sharing as much information I know about Kids Education savings under Time is of the essence main topic. Starting with a detail analysis , moving on to different investment paths and the previous post with various savings plans available for kids education savings. I have covered many points on Kids Education savings which I feel important and essential under financial planning.

This final post, I am going to share my own realistic approach on the same line. Many of you might know, I always like to walk the talk. It is my core belief. My previous post can stand as examples. Advice is not just for others, its for yourself. You can only advice others if you truly follow your own statement. People will only trust and believe a person if one do things they talk about. Anyway, let me reveal the strategy of my own son's education savings plan.

My Approach

Time to share my secret. I started my son's education savings as soon I heard my wife is pregnant. I opened a 12 month CD with $250 monthly deposit in DCU which yielded around 5% last year. I know its not big return. (I shared this idea when I talked about different investment routes - Kids savings Part 2 post)I just wanted to give a kick start and get to a habit to manage my monthly budget to putting aside this amount every month.

I sticked with my initial plan and it gradually become a part of my budgeting. I renewed the CD one more time last year which just got matured 2 months ago. I didn't really jump to anything as I wanted to start a 529 investment plan.

I analyzed and did my own research, finally ending up opening 2 good funds which can return at least 10% year over year. I opened 2 different funds with 2 different companies in 2 different plans.

I decided to open 2 funds in 2 different companies to diversify and be on a safer side. I also plan to do 2 different plans, coverdell and 529 because I can reap the benefits of both for short term and longer run. That's my idea.

My First Fund Choice

I happen to come across Permanent Portfolio funds currently managed by US Bank corp from Timothy Sykes(hedge fund guy). He recommended from his personal experience, a all time more than 10% return fund, Permanent Portfolio Fund - PRPFX.

I did my initial research and found the fund to be amazingly interesting. I was astonished with their return as of date more than 10% year over year and 100% since the inception. See the chart below.

It had really interesting combination of holdings from Gold, Silver, Swizz Franc, US Stocks and Bonds. Check out the detail fund information from their fund fact sheet. I opened a monthly Automatic investment Coverdell plan with a $100 initial deposit. They charge $35 as opening account fee from that initial deposit. Every month I signed up for auto draft of $150 from my $250 savings.

Second Choice

You all know Vanguard is one among the top 3 fund management companies. They have really good funds and at the same time reasonable growth and return funds. I was initially debating whether to go with Vanguard or TRoweprice since I have International Market fund with them.

After my detail analysis, I found TRoweprice don't have a good fund for 529 which has performance proven for long with good return. So I decided to do Vanguard this time. I planned to do 529 Aggressive Growth Portfolio which is 100% with blend pattern. It also has good return as of last year with 10% year over year. Check out the chart below. Check out the detail performance of the portfolio by check their fund sheet.

Since Vanguard as a Minimum $3000 deposit, I used my matured CD amount directly as opening deposit. My initial 2 years CD savings served a real good purpose as a initial opening amount to kick start 529 fund in Vanguard. I also signed for monthly automatic addition of $100 to this account which totals my $250 allocated in my monthly budget for my son's education savings.

I hope to maintain these 2 funds and use them when needed. i also plan to add one more in the future to be better situation to handle the need. Better to be planned and cautious now then sorry later..

This concludes the series of Kids Education savings blogs. I hope it was useful and informative. Let me know what do you thing. I am planning to shift gear from "Time is of the Essence" topic and post blogs which are in my list for a long while on different areas. Watch out..

Vijaianand's blog |

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Tags: 529 plans, CD, kids education savings, Kids savings 529, Mutual funds, Permanent portfolio funds, PFPRX, vanguard 529 plans, vanguard aggressive growth funds, vanguard funds

Time is of the essence - Part 5 (Kids Education Savings 3)

Sun, 05/11/2008 - 05:00 |

Vijaianand

For the last few posts, I been talking all about Kids Education savings plans by starting with a detail analysis on why its really important to early, continuing with talk on different investment routes to consider. This post I am going to elaborate various savings plans available for education savings and which one is better compared to others.

What savings plan to select?

Of course, you might have heard a lot about different plans in existence for kids educations. 529's aren't the only savings accounts that allow parents to shelter their investments from taxes and to withdraw money tax free for college. You also got Coverdell, UTMA&UGMA plans. Lets see one by one.

Coverdell The so-called Coverdell education savings accounts unlike funds in 529s can also be used to pay for primary and secondary school costs. So you can use the funds invested in Coverdell plan for K - 12 expenses which is really good tax break. But the catch, you can only invest a maximium of $2000 per year to this plan.

Also Congress conspicuously did not extend some attractive features of Coverdells, which are due to sunset at the end of 2010. The benefits include the ability to contribute up to $2,000 a year into these tax-advantaged accounts. After 2010, maximum annual contributions into a Coverdell will fall to only $500.

What's more, K-12 expenses will no longer qualify. As a result, parents now investing their kids' money in Coverdells "need to give strong consideration to the enhancements of 529s," says an analyst from Putnam Investments.

While there are chances federal government could extend these beneficial Coverdell provisions, there are no guarantees. But many anlayst still advocates "putting the first $2,000 into a Coverdell and then putting your remaining savings into a 529." Because under current law, money invested in Coverdells can still be used for K-12 expenses. And unlike 529 assets, Coverdell money is permitted to purchase equipment like computers for kids between kindergarten and 12th grade.

If the K-12 option does sunset in four years, as scheduled, the IRS allows Coverdell owners to roll over their accounts, tax free, into a 529. So why not preserve your options by first funding a Coverdell and then putting the bulk of your money in a 529?

UTMA and UGMA

Let see 2 other plans before I jump into my favorite 529 plan which are UGMAs and UTMAs plan. The Uniform Transfers to Minors Act (or Uniform Gifts to Minors Act) provides an alternative that may be simpler, cheaper and faster than a trust to transfer asset or give gifts to child. It is a custodial account which can help save taxes because this asset is considered as kids and not those of parents. Since kids won't have tax obligations, they don't end up paying taxes for this account. This type of plan is mainly used to give as gifts and transfer assets to avoid big Uncle Sam taxes and not really as route for education savings.

There are lots of disadvantages to this type of accounts according to many analysts.

1. Once you've transferred assets into a custodial account, you're not permitted to take them back. Those assets belong to the child. You probably can't take the assets back even with your child's consent, because your child isn't old enough to give valid consent on such matters.

2. When your child turns 21 (or an earlier age, in some states), the custodian must turn the assets over to the child. Some people are mature and thoughtful at age 21 or earlier; many are not. Do you really want all that money in your child's hands at that age? How will you feel if he/she uses it to buy equipment for her boyfriend's rock band?

3. This is important concern. Some people think of a custodial account as a good way to save for college, and learn only later that the account causes a reduction in financial aid. Under current law, assets owned by the child count much more heavily than parental assets in determining how much financial aid the child qualifies for. By law, a custodial account belongs to the child, so having large amounts of savings in an UGMA or UTMA is detrimental for qualifying for aid. Meanwhile, 529 assets are not considered student money for financial-aid purposes, according to recent federal rulings.

I found an article talked about a recent analysis by T. Rowe Price comparing 529 and UTMA's. Say you put $5,000 a year into a 529 for your daughter, and it earned 8 percent annually through investments in a blue-chip growth stock fund. After 18 years, you would end up with more than $218,000 for her college bills. By using a home-state 529 plan that offers residents a state tax deduction, you'd be likely to amass nearly $224,000, T. Rowe Price found.

Now compare that with what you would save through an UGMA. Under the old rules, a typical parent in the 25 percent federal tax bracket could expect to accrue around $210,000 in the custodial account, according to T. Rowe Price. But under the new rules, you're likely to save even less: $207,700. Plus, UGMAs and UTMAs are terrible from a financial-aid standpoint. As a rule of thumb, it's always better to save money in the parent's name, since Uncle Sam expects only 5.6 percent of parental assets to be used to cover college expenses. By contrast, the government will assume that 35 percent of the student's money can be used to pay for school (in the 2007-08 school year, this will drop to 20 percent).

If you've already started saving through an UGMA or UTMA, don't worry. Parents can roll over these accounts into a so-called custodial 529. While the money will still technically belong to the child, the assets will not be counted as student assets for aid purposes, even though the account maintains custodial status, the federal government recently said. 529 Savings plan 529 plans are the best of its kind next to Coverdell which can used as a nice vehicle to storeaway reasonable amount of money for your kids education. It's doesn't have any drawbacks like UTMA or UGMA but it can only used for College education unlike Coverdell can be used for K-12 expenses as well. There are 2 types of 529 plans. Prepaid plans offered mostly by institutions and states. Saving plans are offered by States and Mutual fund management firms.

The Prepaid plans are getting famous these days. Prepaid tuition plans allow parents to purchase units of future education at today's prices. Earlier this year, the government gave these college savings vehicles a big boost by improving their financial-aid status. Under the old rules, the value of a prepaid tuition plan would reduce a student's aid eligibility dollar for dollar. But starting in July, the government put prepaids on a level playing field with 529 savings plan. Both savings vehicles are now beneficial for qualifying for aid since they are not considered student assets. Even if you intend to use a prepaid plan to save for school, though, you will still probably want to start a 529 savings plan, too. That's because prepaid plans are good only for covering tuition and fees. They don't typically cover room and board. And in recent years, room and board has become nearly as expensive as tuition at many schools.

The ordinary 529 savings plans on the other hand is a transparent plan which you can signup with a Mutual Fund firm or State sponsored plan supported by a fund management company which manages the funds. It is not necessary that you need to get a state sponsored fund to use it in the institutions in that state. Its just yet another fund specialized in certain criteria.

Why 529 plans?

1. Great tax break. Money grows tax deferred and you can withdraw money tax free when you kid is eligible to use it.

2. You are in control and its your money. It's not considered as kids money anytime.

3. It is easy to setup and control with underlaying funds managers who control the growth of the fund.

4. No limitations of income and contributions.

One more tip, when you spend your dollars you can put away a part of it to your kids 529 plans. Its a hidden savings when you signup with UPROMISE. There is no catch. You just need to attach your credit cards and is automatically contributed on special purchases to your account.

The bottom line, no matter what type of college savings vehicle you now use, you probably need to consider opening a 529. The recent changes by the government really made the 529 more attractive relative to all other college savings vehicles out there.

Check out the websites Savingforcollege.com and Upromise.

I will share my 2 special funds which I started for my son in my next and last post on this series. Watch out..