Helping Your Grandchildren with College Expenses

Although most of us don’t have enough financial freedom to completely finance the college education of our grandchildren, there are still ways we can invest some money for their future schooling.

If you are interested in setting aside money for your grandchildren’s education, be careful to consider all the options available to you (savings and investment plans and tax-free gifting). One plan may be perfect for one person but not the best choice for you, so make sure you understand how every option works before making any decisions.

There are three options in particular that many grandparents find beneficial for their savings goals; 529 plans, savings bonds and tax-free monetary gifts.

529 Plans

With a 529, grandparents can put away money for their grandchildren’s education through either a prepaid plan or a savings plan. Prepaid plans allow you to purchase tuition credits. These credits match today’s inflation rates, so their performance is based on how much the cost of tuition rises by the time your grandchild goes to college. Not all states offer the prepaid plan. With a savings plan, all growth is based on the performance of (usually) mutual fund investments. As the beneficiary gets older, the investments in a savings plan become more conservative, just like a retirement savings account.

Distributions from 529 plans to pay for qualified college expenses are exempt from the federal income tax. Investors who contribute to a 529 plan in their state of residence also often receive state tax advantages, exemption from state financial aid calculations and other benefits. Donors maintain control of the account, and most plans allow benefactors to reclaim the funds for any reason, at any time with no penalties. However, if a non-qualified withdrawal is made, the earnings will be subjected to an income tax and an additional 10% penalty tax.

Savings Bonds

Government savings bonds can be given to your grandchildren as birthday or Christmas gifts when they are very young. This gives the bonds plenty of time to mature before they are cashed in for college. The most common type of bond purchased to fund education is the T-note. It earns a fixed rate of interest every six months and is issued in terms of two, three, five, seven and 10 years. This means that you can’t cash in your purchased bonds until they have reach those terms, but the longer you allow them to sit, the more interest they will earn. The minimum purchase amount is $100.The income earned from interest is subject to a federal income tax but exempt from any state or local income taxes.

Tax-Free Monetary Gifts

If you are interested in giving a larger sum of money to a grandchild who will be attending college very soon, you may want to choose the tax-free monetary gift route. Most monetary gifts are subject to a tax, but grandparents can avoid that tax by giving their gift directly to the educational institution their grandchild plans on going to. Donors must make sure that the beneficiary is serious about graduating from that school, though, because there aren’t any hard rules that require schools to return the money if the child drops out. However, if the student has serious plans to graduate, a tax-free gift is the best way to transfer wealth and know that it will be used for its intended purpose.

For more information on college savings plans for your grandchildren, contact your local licensed financial advisor.

Nadia Jones is an education blogger for onlinecollege.org. She enjoys writing on topics of education reform, education news and online learning platforms. Outside of the blogging world, Nadia volunteers her time at an after school program for a local middle school and plays pitcher for a local club softball team. She welcomes your comments and questions at nadia.jones5@gmail.com.

• The Best Way to Save for College: A Complete Guide to 529 Plans 2011-12 - Book Review

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• What College Expenses Do 529 Plans Cover and Not Cover?

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• Roth IRA vs. 529 plan - Which is Better for College Savings?

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Does Investment Bias Hurt Your Investing?

Do you find it almost completely impossible to remove complex thoughts and emotions when choosing investments. If you do you are experiencing "investment bias".

Believe it or not there is a whole field of study called “behavioral finance” and it is devoted to understanding why people make their investment decisions. People who do this as their profession say that we all can't help but have biases effecting our investment decisions.

Does this mean we are forever stuck and handicapped by this bias? No, because when we understand how these biases work we can learnt o avoid them.

Here are a few of the worst biases that effect our decision making when picking and maintaining our investments:

Overconfidence.

Overconfidence fools investors into thinking they know the right times to buy and sell an investment. This behavior also known as market timing can be very expensive if you are wrong too many times. Not only will you be losing money on bad trades but you will be experiencing more investment fees and taxes.

Representativeness.

There is a bias called "representativeness". This behavior shows itself as making investment decisions based on preconceived notions or stereotypes.  If you link stocks to other investments because they are alike in some ways, this is representativeness. The hot stock or sector is another form of this. Basing your investment decisions on the hot tip or rumour just leads you to making mistakes. Having a plan of building a portfolio in a balanced way will avoid this. Having good diversification and setting up a group of stock or better yet index funds that force you to be diversified will help you be more successful in your investments.

Anchoring.

This is similar to the previous bias but this bias makes investors weigh decisions to much on past performance of a sector or stock. If you believe a stock is worth a certain price and it drops, your bias assumes the stock is undervalued. This bias based on your assumptions and having no basis in fact will hurt your investment performance.

Confirmation.

This bias occurs when an investor looks for reasons to back up a decision on an investment. Looking for reasons to back up an assumption is backwards. Trying to find proof for your assumption will kill a portfolio's performance. Again, here a bias that is an idea not based on facts. 

A way to overcome bias.

We are all prone to making assumptions and a bias that is not based on facts, but feelings. If you are aware you have a bias, then you can take steps to be on the look out for it in your investment style. All this bias is hard to stay aware of and one way to to avoid it is to seek out good investment advice with a certified financial planner. They will be able to guide you into making more informed decisions and less emotional ones.

Should You Move Your UGMA/UTMA Accounts to a 529 College Savings Plans

English: Graduation (Photo credit: Wikipedia)

Both UGMA and UTMA accounts, together generally referred to as UGMA accounts because they're so similar, pale in comparison to 529-plan accounts, which were created in 1996.

"The biggest reason is tax savings." says John Wiggins of WhatIsA529Plan.com, "All the earnings from investments in a 529-plan account are tax exempt, while only a portion of the earnings in a UGMA or UTMA account are tax exempt."

Under one scenario, the 529-plan account would actually be owned by the UGMA or UTMA account. Experts in college saving say the tax advantages associated with 529-plan accounts, and the fact that the stock market has been so weak lately, make such a move doubly attractive.

In a 529-plan account, investments grow tax free and, under the Tax Relief Act, distributions for educational expenses are taken tax free as well. Only a portion of the earnings in UGMA and UTMA accounts are tax free.

When a child is under 14, the first $750 of earnings each year is exempt from federal and state taxes, the second $750 is taxed at the child's rate, and the rest is taxed at the parent's rate. If the child is 14 or older, all earnings are taxed at the child's rate.

Liquidating UGMA and UTMA account assets, however, and then taking the proceeds and putting them into a 529-plan account can bring a host of problems - most of them relating to ownership.

UGMA and UTMA accounts are custodial accounts, the contents of which belong to the child, meaning the assets of the 529-plan account purchased with the proceeds of the liquidated assets of a UGMA or UTMA account would belong to the child.

Normally, the assets of the 529-plan account belong to the parent.

UGMA and UTMA accounts also present a problem with respect to financial aid for college. Most financial-aid formulas impose a penalty for assets owned by the student.

They also pose a problem for parents who just need to get ahold of the money in an UGMA or UTMA account. Because the accounts are irrevocable gifts, the assets in them must be used for the child.

A 529-plan account is not irrevocable, although there is a 10% penalty on earnings for taking the money out before the child reaches a certain age.

Of course, issues of ownership can be sidestepped by just spending down an existing UGMA or UTMA, using the proceeds for the child's needs and buying a 529-plan account with new dollars independent of the UGMA, says Joseph Hurley, founder of Savingforcollege.com.

Even Mr. Hurley admits that such a solution might not work for a child from a family that just doesn't have the money to sink into a 529 plan.

Of course, the custodian of a UGMA or UTMA account could just liquidate the account and move the money into a 529-plan account without telling the 529-plan administrator where the money was coming from, suggests one financial adviser.

Such a move would be illegal, and the adviser recommends against it, but because there are no "UGMA or UTMA police," he says, he believes the practice is widespread.

Whatever the approach, it appears that 529-plan accounts are financial advisers' tool of choice for college savings. Consequently, it would be natural to assume that UGMA and UTMA accounts are on their way out. But Mr. Hurley says he doesn't think that's the case.

While many people use UGMA and UTMA accounts to save for a child's education, unlike 529 plan accounts, they are not necessarily intended for that purpose.

"Small custodial accounts still can be very useful," he says. "You don't have to use them for any particular purpose."

Here is a side by side comparison of 529 Plans and UGMA/UTMA Accounts:

	529 College Savings Plan	UGMA/UTMA Account
What you can do	Invest tax-free for college.	Invest on behalf of a minor for any purpose.
Ability to change beneficiaries	Yes.	No.
Controlled by	Person establishing the account.	Custodian, until the child is of age.
Uses	Qualified college expenses.	Any expense that benefits the child.
Impact on federal financial aid eligibility	Considered asset of parent or other account owner.	Considered asset of child.
Contributions state tax-deductible	Varies by state.	No.
State tax on earnings	Varies by state.	Depends on child's age.
Federal tax on earnings	No, if used for qualified expenses.	Depends on child's age.
Penalties for nonqualified withdrawals	Federal income tax plus 10% penalty tax; state penalties vary.	No.
Contribution maximum per beneficiary	$200,000 to $300,000 or more, depending on state.	None.
Investment options	Portfolios consisting of a variety of investments, including age-based options that adjust automatically.	UGMA: mutual funds and securities. UTMA: mutual funds, securities, real estate, royalties, patents, and paintings.
Estate planning impact	Contributions are removed from estate.	Contributions are immediately removed from estate.
Income limitations	No.	No.

Whatever decision you make be sure you contact your financial adviser for consul and help with doing this.

Index Fund Investors Do Better in the Long Run

If your not much of a gambler then index funds are best suited for you. Trying to find the hot stock or mutual fund is a lot of work and the odds that you will pick a winner are extremely low. The returns on index funds are better than the average active funds in every investment category  It's easy to build a portfolio of all index funds because there are funds covering every asset class in every market in the world.

Thirty-five years ago Vanguard CEO John C. Bogle along with his meager staff launched the first publicly available index mutual fund. It was named the Vanguard First Index Trust, later renamed the Vanguard 500 because it tracks the S&P 500 index.

Vanguard has recently released a white paper on performance entitled The Case for Indexing. It documents the poor results of active management versus indexes over the years — a result that worsens over extended periods. The following chart illustrates the decreasing success rate of active management.

A portfolio that holds only index funds in different asset classes has a very high probability of beating a portfolio that holds only actively managed funds in those asset classes. The table below highlights the probability of an all-actively managed fund portfolio outperforming an all-index fund portfolio.

There is a 30 percent chance that a single actively managed mutual fund will outperform an index fund over a 10 year period of time, but that probability drops to 9 percent when three managed funds in a portfolio are judged against three comparable index funds. The results get worse as more active funds are added and as more time passes. A portfolio with 10 active funds held for 20 years has only a 1 percent chance of beating a comparable all-index fund portfolio.

Index fund investing has proven to be the best strategy for most people. A low-cost index portfolio has the greatest probability for meeting long-term financial goals. 

Shopping for Car Insurance Online Has Never Been Easier

insurance (Photo credit: Alan Cleaver)

A survey by the American Automobile Association (AAA) has found that, 62 percent of people looking for car insurance, begin their research on the Internet. Also most car insurance shoppers go to at least two online insurers websites prior to arriving at a decision.

Today we are using the Internet more and more to research most large purchases. With so many car insurance companies competing for our insurance dollars, competition has driven down the costs and it is of great benefit for consumers. The Internet has made it easy to find discount insurance quotes online.

Before doing some online shopping take time to prepare.

1. Get all your important documents together. Your going to need your drivers license. If you had any accidents, have that information ready. Also have your address and social security number ready. You will need the year, make, model, license plate, mileage, and VIN (vehicle identification number) from your car.

2. Use your computer to search for "discount insurance quotes." When you see your search results first check out aany companies you are already familiar with. Also find insurers that will show quotes from many car insurance companies. Some companies represent a lot of different insurance companies. They can compare reates for you and deliver the cheapsest one to you.

3. Choose the kind of coverage you need. It depends on the state you reside in what our options are for what required insurance you need to have. The website will know and walk you through the specifics of your states car insurance requirements.

4. Input all necesary information and get your free quote. There are too many insurance companies that offer free quotes, stay away from websites that require a deposit, credit card number, or any kind of fee.

5. Compare the rates and coverage along with the costs. When you feel comfortable about your selection you can pay with a credit card. You will be able to print out a temporary insurance I.D. car and later a formal one will be mailed to you.

Buying insurance online has been streamlined and simplified for the consumers convenience. Remember if you need to talk to a person or if you have any questions an 800 number is always provided.

Investing in Rental Property Can Be a Profitable Business If Done Right

(Photo credit: Wikipedia)

Investing in rental property seems easy. Buy a rental house, find some tenants, and let the money roll in. It's not as easy as it looks. Before jumping into this glamorous business be sure to investigate and get some buy to let mortgage advise . 

The Upside to Being a Landlord.

For some people, investing in anything but land is dumb. Owning a mutual fund or stock is like owning air, it's intangible you can't hold it or see it. Then we have the land owners who think that a piece of land is a real asset. It's solid, you can walk on it, if it is a house you can paint it or just look at it. It's real. For many, they would have it no other way.

1. Cash Flow.

As a landlord, if you have done it right you have a positive cash flow that puts money in your pocket every month. Your rental income, minus your mortgage and expenses is your profit. Your property is producing something for you.

2. Appreciation.

Your property is increasing in value every year if you purchased it right. Appreciation, though a small amount, over the years it can turn into a substantial amount. Even if there is not appreciation you still are going to experience an increase in the house value because of inflation.

3. Leverage.

Unlike buying a mutual fund or stock, with a rental home you only have to invest a percentage of the homes value. You control the entire investment, but only pay a small fraction of it's cost. The property is the security for the debt and not your personal property. Only the purchased property is at risk.

4. Tax Advantages.

Even if you do not receive a positive cash flow you still are deducting expenses. You are paying down your mortgage and are not paying taxes on this money. There are many types of deductions that can be beneficial in reducing your tax liability overall.

There are some good financial reasons to own rental property. Especially the tax advantages. But there are also quite a few downsides to owning a rental house. 

1. Bad Tenants.

Getting the tenants from hell is a distinct posibilty in the rental business. Many people do not respect other peoples property and treat your lovely rental like it's a dumpster. The nightmare scenarios are infinite.

2. Liability.

If someone gets hurt on your property you are responsible and could be in line for a lawsuit. Having adequate liability insurance is an absolute must or someday your tenants will be owning your nice rental home.

3. Vacancy.

There is the distinct possibility you may not be able to rent the home. Are you able to cover the mortgage and expenses for an extended period of time. It's important to have enough cash in reserve for this occurrence.

Investing in rental property can be a very profitable business but can also be a nightmare if done improperly. Make sure to check out your tenants with a background check. Get all your deposits upfront and have good lease that protects you in all contigencies.