Investing for my Daughter's Future

[kv968]

Well with only that little amount of cash, you probably wouldn't want to do that much trading yourself. Why don't you just buy invest in some mutual funds and get an average of about 9-10% a year? Otherwise stick with federal bonds. Most are tax free!

Government bonds aren't tax free at the federal level.

[Biffard]

Well with only that little amount of cash, you probably wouldn't want to do that much trading yourself. Why don't you just buy invest in some mutual funds and get an average of about 9-10% a year? Otherwise stick with federal bonds. Most are tax free!

I've done a lot of research since first posting here. I think I will go with a mutual fund. In the long run it's kind of a guessing game of what the best choice will be but I feel like I am more comfortable with mutual funds right now.

Thanks for all the info and it was actually a good education for me to research the 529 plans. I'm sure you'll see more questions from me since this is an excellent resource for financial information and hopefully I can contribute some of my knowledge as well.

[kv968]

I've done a lot of research since first posting here. I think I will go with a mutual fund. In the long run it's kind of a guessing game of what the best choice will be but I feel like I am more comfortable with mutual funds right now.

Thanks for all the info and it was actually a good education for me to research the 529 plans. I'm sure you'll see more questions from me since this is an excellent resource for financial information and hopefully I can contribute some of my knowledge as well.

No problem at all with going the mutual fund route. Just make sure that you don't buy one that has a load fee associated with it. You can tell if it does by the class of the mutual fund (i.e. Class "A"). My rule of thumb is if you're investing in a personal account, steer away from funds that have classes (A, B, C, etc...) since for the most part they're on the expensive side fee-wise.

I'd recommend that you look at what Vanguard or T Rowe Price has to offer. Both are excellent companies IMO. Index funds will be the most tax-efficient and Vanguard has some of the best. T Rowe offers more managed funds which may not be as tax-efficient but are good nonetheless.

[YLTL_Dan]

Okay, so your long-term capital gains are taxed at -0-. As long as they are not enough to bump you into the next tax bracket.

I wasn't aware of this so I decided to look it up. It looks like it changed for 2013 and going forward where now it will be 10% long term capital gains +3.25% Medicare tax on the bottom tax brackets for capital gains. For higher tax brackets, long term capital gains has gone up to 20% plus the 3.25% Medicare tax. Is this right? If so, we might start another post on it so everyone knows...

[Biffard]

I wasn't aware of this so I decided to look it up. It looks like it changed for 2013 and going forward where now it will be 10% long term capital gains +3.25% Medicare tax on the bottom tax brackets for capital gains. For higher tax brackets, long term capital gains has gone up to 20% plus the 3.25% Medicare tax. Is this right? If so, we might start another post on it so everyone knows...

That is good to know! Makes me feel a little more confident in my decision to stick with a mutual fund.

I'd recommend that you look at what Vanguard or T Rowe Price has to offer. Both are excellent companies IMO. Index funds will be the most tax-efficient and Vanguard has some of the best. T Rowe offers more managed funds which may not be as tax-efficient but are good nonetheless.

Agreed! Before you posted I had actually narrowed it down to one of these two companies. I'm kind of leaning towards T Rowe Price just purely based on my past experiences.

[kv968]

I wasn't aware of this so I decided to look it up. It looks like it changed for 2013 and going forward where now it will be 10% long term capital gains +3.25% Medicare tax on the bottom tax brackets for capital gains. For higher tax brackets, long term capital gains has gone up to 20% plus the 3.25% Medicare tax. Is this right? If so, we might start another post on it so everyone knows...

Higher long-term capital gains rates and the Medicare tax don't apply to the lower tax brackets.

[kv968]

Agreed! Before you posted I had actually narrowed it down to one of these two companies. I'm kind of leaning towards T Rowe Price just purely based on my past experiences.

I use Vanguard and T Rowe Price and I'm pleased with both. I like the managed offerings that T Rowe has. They're very well managed.

[MonkeyMama]

I think one of the biggest problems with making the best choice for college savings is a person has to make assumptions about what the tax code will be, what their tax rate and income will be 18 years in the future.
In some cases, the state tax break plus the tax deferred earnings from the 529 plan may not be as favorable as taking the federal college tax credit. But, if federal tax credits go away (or your income level prevents you from qualifying from the federal tax credit), or the ROR on the 529 is fabulous--the 529 might be more favorable.

I didn't make any assumptions about what the tax code will be. I only mentioned how they are now. If your tax situation changes, you can always put the money into a 529 plan (or whatever makes tax sense in the future).

Doing a 529 plan now in case taxes might change down the road, doesn't make any sense to me. Especially since you can easily move money into a 529plan at any time?

I am a tax professional - I do not care what the tax code looks like today when it comes to planning 18 years down the road. That would be beyond foolish. That is what rookies usually do. Seriously, I have seen a lot of discussions around here that assume current tax credits will still be around in 20 years. Ha!

[MonkeyMama]

I wasn't aware of this so I decided to look it up. It looks like it changed for 2013 and going forward where now it will be 10% long term capital gains +3.25% Medicare tax on the bottom tax brackets for capital gains. For higher tax brackets, long term capital gains has gone up to 20% plus the 3.25% Medicare tax. Is this right? If so, we might start another post on it so everyone knows...

Nope...

If you are in the 15% tax bracket, your long term capital gain rate is 0% (as long as your capital gains don't push you into a higher tax bracket).

Medicare tax is only on very high incomes - as someone else mentioned.

[cooliemae]

Doing a 529 plan now in case taxes might change down the road, doesn't make any sense to me. Especially since you can easily move money into a 529plan at any time?

Can you help me out with this. Here's the way I look at it. By using a 529 plan, I take the tax question almost entirely out of the equation. However, the longer I wait to invest in a 529 plan the less benefit there is due to the loss of tax free growth (not to mention any tax deductions you might get currently). So while anyone can invest in a 529 plan at anytime, the longer you wait the less benefit you receive.

Unless your thinking is that a 529's tax-free growth status might be jeopardy in the future.

[MonkeyMama]

Can you help me out with this. Here's the way I look at it. By using a 529 plan, I take the tax question almost entirely out of the equation. However, the longer I wait to invest in a 529 plan the less benefit there is due to the loss of tax free growth (not to mention any tax deductions you might get currently). So while anyone can invest in a 529 plan at anytime, the longer you wait the less benefit you receive.

Unless your thinking is that a 529's tax-free growth status might be jeopardy in the future.

In regards to the OP, the OP is not paying any taxes on his investments. So he is taking advantage of tax-free growth without restricting his money. Tax shelters like 529 plans are very resrictive. Tax shelters should only be used if you actually have a reason to use them (to save on taxes). & even then, the costs and benefits should be weighed. The OP does not even think this money will be used for college. His current investment tax rate is basically 0%. If he comes into some wealth later, he can put it into a 529 plan before it is ever taxed. & even then, would still make no sense if it is not to be used for college.

This is the problem. 529 plans are just thrown out as blanket college saving advice, but often do not make much sense given the situation. This is a situation where the 529 advice seems to make no sense. Today. This is easy to rectify if OP comes into some wealth down the road. Then he can re-evaluate his plan.

This is all I am trying to say.

[YLTL_Dan]

Higher long-term capital gains rates and the Medicare tax don't apply to the lower tax brackets.

Thanks for clarifying, I think I read a bad article (or maybe I interpreted it badly)

[Like2Plan]

I didn't make any assumptions about what the tax code will be. I only mentioned how they are now. If your tax situation changes, you can always put the money into a 529 plan (or whatever makes tax sense in the future).

My point was the investor has to make assumptions about what their future situation will be. Sometimes there are "wildcard" tax changes over 18 years that make an investor have to make midcourse corrections (although, sometimes those corrections are not easily done based on previous decisions).

First off, given the OPs goals I think your advice was spot on to invest outside the 529 for now.

Anoter question is the account going to be set up--as a UGMA/UTMA or not? On the assumptions side, there are some things to think about--such as what age does the OP want to give the assets to the child--how much is the goal--will the account grow to the point that it might exceed gift tax levels? The kiddie tax laws have changed dramatically in 1986 and even more radically in 2006(or 7?). As a result of these kiddie tax code changes, I can think of a couple more reasons why UGMA/UTMA accounts are not necessarily a good idea (especially if the money ends up being used for college expenses).

If the parents keep the asset in their own name and their tax situation changes to a higher tax rate (and they don't exceed the gift tax or they don't get caught up in the kiddie tax net), they can always transfer the asset to the child and the child is taxed at their (presumably) lower tax rate (on the gain based on the parents basis) when they sell the asset. (This assumes congress doesn't do any tweaking to gift transfers in the next 20 years).