Look Back Look Forward – New Years Resolutions

JanusIt’s January, the month named for Janus the two-faced Roman God who looked both backward to the past and forward to the future.

Looking back over 2016, I realized that I learned about three types of investment accounts, each of which – depending on your phase of life – might make for a nice New Year’s Financial Resolution.

Maybe best of all, all three investment accounts work well even if you start with small dollar amounts. And they each scale up to larger amounts, if you have the means.

Contemplating the start of a new year prompted me to divide these investment account ideas into three categories, past, present, and future. Or you could categorize them as investment accounts for the young, the middle-aged, and the old. I’ll start with the young.

Millennials – Automatic Deductions – Acorns

People in your twenties: This one’s for you. The number one key to investment success is starting early in life, yet we often don’t for a variety of perfectly good reasons. The Acorns app addresses many of these barriers, through automatic regular deductions into a super-simple, low-cost, diversified portfolio. The app takes about five minutes and just $5 to get started. It’s mobile-friendly and has an intuitive interface. Acorns gives you a picture of your investment value now, but interestingly also shows you graphs of how your investing activity – when you stick with it month after month and year after year – will grow your account over the coming decades. I’m a big fan of anything that shows the awesome power of compound interest.

My Jan 1, 2017 balance, after just 7 months

Automatic deductions from your checking account into an investment account is not just A WAY to invest. It’s really THE ONLY WAY to invest for most people of modest means. In my experience, nobody has a surplus at the end of the month unless we’ve devised a trick to whisk our money out of our account before own greedy little hands spend it. The Acorns App is the latest, best, trick to do that automatic whisking. I set up a $50/week automatic program in May 2016, just before I wrote my blog post on it. This week I have more than $2,000 in my account, and I barely noticed how it got there. This is painless investing, made super simple.

If you are 20-something and wondering how to begin investing, here’s the solution to your New Year’s Resolution. If you have a 20-something in your life, send them an Acorns invitation link.[1]

Parents – College Savings – 529 Accounts are for grandparents

Parents: This resolution is for you if you’re in my demographic. Two kids. Big college bills ahead (should they choose that path.) The more I’ve learned about 529 college savings accounts, the more I’d always recommend parents avoid them and build up tax-advantaged retirement accounts instead of 529s.

mixalotAnd yet, Sir Mix-A-Lot, let me add to that statement a big BUT:

529 accounts make a lot of sense for grandparents who have a surplus. Grandparents who have solved their retirement needs already can use 529s to help the younger generation. Grandparent 529s do not count against financial aid calculations. Also, unlike IRAs and 401(k)s, there’s no age or income limit on making contributions. Finally, 529s are even helpful for estate planning purposes. All of these factors make 529s a better deal for grandparents than parents.

So here’s my New Year’s resolution advice to parents: You might not prioritize 529s yourself (compared to a retirement account) but work to open up an account so that you can invite YOUR parents to contribute toward their grandchild’s college fund. Do it. It’s the right way to approach 529 accounts.

Older generation – Passing on Values – Donor-Advised Funds

I am not yet part of the older generation – at least in my own mind – but opening a Donor Advised Fund (DAF) in 2017 is actually my own personal New Year’s Resolution.

The idea of a DAF is that you can make a charitable contribution this year – reaping an income tax benefit now – while parceling out charitable gifts over a longer period of time, even decades. Investments in the DAF can grow in a tax-advantaged way, while you take your own sweet time to decide who should receive your philanthropic dollars in the coming years.

charitable_givingIf you already have an investment advisor or brokerage firm, you could ask them about the availability and terms for opening up a DAF with them. If they don’t offer DAFs or you don’t like their terms, you should know that a few of the online supermarket brokerages have account minimums as little as $5,000, and charge a reasonable 0.6 percent annual fee. The point is you don’t need $25 million to open up your own private foundation. A DAF makes tax-advantaged philanthropic-giving available to the masses.

But what is the real reason for a DAF, in my mind? And why is this my own New Years’ Resolution, and maybe could be yours too?

Just this: The DAF allows you to appoint trustees, who then share in the decision-making for future charitable gifts. I have in mind appointing my 6 year-old and 11 year-old as fellow trustees of my $5,000 DAF endowment. Could we three generate maybe $250 in investment income every year – a 5 percent annual return – that we then plan together to give away each year? That renewable $250 in annual giving – driven by conversations with my kids – is the real point of the DAF. What I’m really getting for my $5,000 contribution is something of immense value: a conversation-starter.

I know I can’t move the dial of any particular charity with just $250 per year, or even a one-time $5,000, but I can create a vehicle to talk about values with my kids. We can engage in a forward-looking conversation about the uses, and meaning, of wealth.

If you’re in the older generation, with an even bigger surplus, maybe that’s a useful New Years’ resolution for you too.

I wish you peace and prosperity in 2017, and welcome your input into what financial topics you would like to read about in the coming year.

A version of this post ran in the San Antonio Express News and Houston Chronicle.


See related posts:
College 529 Accounts are for Grandparents

This Acorns App rocks

DAFs help you create a pretty cool legacy


[1] And if you sign up using this particular link (rather than the generic one I inserted above in the main section), I get a $5 referral fee and you get a $5 starter fee, because those Acorns people are clever and give out $5 referrals to both inviter and invitee. But I’m seriously not whoring myself and my blog for the $5. This app is good.

Post read (227) times.

College Finance Prep

independence_dayMy eldest daughter has another seven years before she begins college,[1] but I’m a planner. The financial burden of my kids’ college looms large, like those spaceships in the Independence Day movies, threatening to block out the sun, and with them, all hope on earth.

Before abandoning everything, running for the hills, and calling Will Smith, I decided to put on my journalist’s hat and call up an expert source.

“Um, hey Mom? I need to learn about how parents pay for college in this era of extraordinarily expensive tuition.”

My journalistic sourcing is way more legit than it may at first appear. Mom has been a college guidance counselor at a private school in Massachusetts for thirty years.

Mom’s first piece of advice for parents of college-bound children is this: while the child is still just a freshman in high school, go online to look up the Free Application for Federal Student Aid – aka Fafsa to figure out your eligibility for financial aid. What you learn from that can help guide your financial strategies for the next few years.

I did that. I learned in about four minutes that I’m not eligible – I mean my kids are not eligible – for a Federal Pell Grant.

Mom’s second piece of advice was to go online to the “net price calculator” of a private four-year college. It turns out, all colleges have these online now. The College Board website helpfully provides a link to 200 such school calculators. Or you can go to individual colleges sites directly.

I picked my alma mater and entered some data on our savings and family income. This took me only another 4 minutes.

After carefully inputting our household income and savings I saw that, realistically, we should start playing Powerball every week.

I’m kidding, never play the lottery. C’mon, man, you should know that the lottery is just a tax on people who are bad at math.

But I realize this four-year college idea sure started to look terrible, at least financially.

“Hey kid, can’t you just make a living curating your own Instagram feed like everyone else does these days, instead of taking Daddy’s money for college?”

instagram_richI think my Mom’s point, without having to spell it out for me, was to demonstrate how terrible the cost of private four-year college can really be.

Indeed one message she would like middle-class families to know is this: Parents have her permission to JUST SAY NO to paying for private four-year colleges. And she has her good reasons. A middle class family with some savings might have been able to shoulder this burden a generation ago, but no longer. I’m not suggesting your child shouldn’t go to college, but rather that financial reality makes a private four-year college a bad deal for most.

I went to a five different ‘net price calculator’ websites to compare the process across schools: a couple of private universities in Texas, where I live; a couple in Massachusetts, where I grew up. In the process I included a very wealthy four-year college with a reputation for scholarship generosity, and another of a school recently featured for having a terribly small endowment and some financial trouble.

I learned that financial aid questions vary greatly depending on the school.

One school asked about the value of our house and how much we still owed on our mortgage, while other schools did not. Some asked whether I owned my own business, or whether I owned real estate besides my home. One asked for my daughter’s GPA, presumably to take “merit aid” into account in our automatically-generated estimate.

Consistently, all schools exempted retirement savings from household assets in their “net price calculators.” I conclude from that fact that if you want to “hide” your assets from colleges for the purposes of getting your kid the most generous scholarship possible, stuffing your retirement account can be a pretty cool financial move.

Another cool idea, which I mentioned last week, is to be born into the right family. Grandparents’ surplus does not count against a college’s financial aid formulas in any of the calculators.

The bigger picture remains that the extraordinary amount of debt parents and their children now take on rarely makes financial sense in the long run. Parents should not raid their retirement savings. Neither parents nor a child should take on high five-figure debt for college. Low five-figure debt, ok, fine, maybe.

Apart from a small handful of the very richest and most highly selective universities – which do offer generous financial terms for lower- and middle-class families – the aid packages of most private colleges render the traditional four-years-on-campus-best-years-of-your-life idyll an unaffordable luxury. Just because we can take on massive federal student loans does not mean we should take on massive federal student loans.

Instead, Mom advocates flexibility and a hybrid approach. In-state tuition at a public four-year college is one approach, although even that has become less affordable as the price of public universities has soared over the past decade.

My mom frequently tells her clients that a few years worth of affordable community college, followed by a transfer to a more prestigious college for the final two years before graduation, can be a pretty cool financial move.

Never_have_childrenBy now you’ve probably realized the most important take-away from this financial column: Never have children.

But if you do have children, strongly encourage them to build a money-making career creating a YouTube channel account, instead of going to college. I’m just trying to save you some money here.


A version of this ran in the San Antonio Express News and Houston Chronicle.


Please see related posts:


529 Accounts are for Grandparents

Want to See Something Really Scary? College Savings

Ask an ex-Banker: Estimating Savings To Prepare for College

Ask an ex-Banker: Using savings v. debt to pay for school


[1] “Should she choose that path,” my wife and I always say to each other.

Post read (195) times.

529 Accounts for Grandparents

lightning_mcqueenIf tax-advantaged investment accounts were characters from Pixar’s Cars movie, I’d award star-status to the 401K as the Lightning McQueen character voiced by Owen Wilson. Meanwhile, 529 education savings accounts would have to be represented by a grandfather-type character – like the Doc Hudson car from the 1950s – voiced by Paul Newman.

I partly assign these roles based on their relative effectiveness in winning the wealth-creation race. If you have to choose where to put your investment dollars, the 401K will get you a lot farther, a lot faster, than the more limited 529 account. Mostly, however, I think 529 accounts not only resemble a slower investment vehicle, they also seem to me mostly useful for grandparents to benefit their grandchildren, rather than for a still-working generation facing limited resources.

I’ll explain my logic, and some of the severe limitations of 529 accounts, as well as why prosperous grandparents looking to help out grandchildren may find them most useful. And then finally, a nod to the social justice issue of 529 accounts.

Grandma vehicle

Unlike a 401K, or an IRA, or even a health savings account, you do not get any federal income tax benefit from your 529 account contributions. Further, if you earn income in a place like Texas (like me!) that doesn’t have a state income tax, you also do not receive state income tax benefit from your contributions to a 529.

Doc_hudsonSo right off the bat, when choosing a vehicle for investing your surplus, you get better mileage out of almost any tax-advantaged account except a 529 account.

It is true that when you finally take money out of a 529 account to pay for a child’s education, you will not pay taxes on income from investments made within the account. So there is that tax benefit of a 529 account, when compared to a fully taxable investment account.

However, here another disadvantage arises, and suggests 529 accounts work better for grandparents than parents – because of college financial aid formulas.

Colleges using the standardized Free Application for Federal Student Aid – known as Fafsa – count the student’s and parents’ income and savings when considering scholarship aid, but do not consider 529 accounts held by people other than a child’s parents. Meaning: Grandparents, take careful note!

Grandma’s 529 account created and held for the benefit of her grandchild will not hurt junior’s chances at a generous financial aid as calculated on the Fafsa. That therefore arguably makes a 529 account more valuable in the hands of a grandparent, rather than a parent.

A further nuance to the Fafsa system soon arises. The Wall Street Journal noted recently that, beginning in the 2017/2018 academic year, a student who receives benefits from a 529 account must report that benefit as the student’s income the following year, which may then affect Fafsa formulas for scholarships in the academic year after that.

For this reason, grandparents who make tuition payments for grandchildren from a 529 could be advised to wait until the student’s final year(s) of college, in order to minimize affects on financial aid packages.

A few other factors convince me that 529 accounts make the most sense for families with well-off grandparents. Unlike IRAs or Coverdell education plans, 529s have no income or age limits on who can contribute, making them suited for older folks with a grandchild they would like to subsidize.

Finally, bolstering my thesis that 529s are grandparent-vehicles more than anything else is the following estate tax strategy:

fafsaIf you are a grandparent with substantial means, then the 529 accounts are a great way to support the next generation, while reducing future estate taxes. Grandad can contribute up to a maximum annual gift tax exemption amount of $14,000 to junior’s future education. If Grandad really wants to get clever, he could combine up to 5 years’ worth of gift-tax exemptions and contribute $70,000 all at once. And then if Grandad and Grandma combine efforts, they could gift up to $140,000 in one year to one lucky grandchild’s education. With multiple grandchildren, and generous grandparents with means, that’s $140,000 per kid all at once, a whole lot of reasons to fund 529 accounts. I mention all this because my sense is that this is a standard estate-tax reduction technique for well-off grandparents.

Limited resources

In all this focus on grandparents, I mean to make the point really for parents trying to decide – with limited resources and a confusing menu of tax-advantaged accounts – where to invest their surplus. And the simplest thing to say is this: always choose a retirement account like a 401K and IRA before choosing the much less powerful 529.

In addition to the difference in tax treatment, another simple way for parents with scare resources to understand the save-for-college versus save-for-retirement is this: You can’t generally borrow money to retire, but you (or your child) can borrow money for education. If money is tight – and I’m only talking to about 99 percent of you now – then always favor contributions to your retirement accounts over educations savings accounts. If you are part of the 1 percent that has plenty of surplus, well then, by all means fill up that 529.

And…social justice

So 529 accounts mostly make a whole lot of sense for a wealthy older generation ensuring their third generation stays ahead in the education game. Which is awesome, don’t get me wrong.

social_justiceBut from a social justice standpoint – if you care about that kind of thing – you might sort of see how the peculiar design of 529 accounts looks terrible. This is basically why in January 2015 the Obama administration briefly floated the idea of eliminating the tax benefits of 529 accounts, which at the time I thought was mean and unfair of them. Unfair, to me, because I have 529 accounts for my kids. But they had a point. According to the Wall Street Journal at the time, the administration argued that 70 percent of benefits went to households with incomes above $200,000, or the top 4 percent of households.

In a non-surprising development, people don’t like their tax breaks taken away, and the proposal lasted roughly three seconds before the administration retracted it.

My social-justice point here on 529s is two-fold – and thematically resembles my approach to advice on many aspects of personal investing. First, the game of investing for college – or anything! – is kind of rigged in favor of the already-wealthy. Second, if that already-wealthy status applies to you, here you go: have some nice instructions on taking advantage of the game.


A version of this ran in the San Antonio Express News


Please see related posts:

You Want To See Something Really Scary – Saving For College

College Savings v. Retirement Savings

Ask An Ex-Banker: Estimating Monthly Savings To Plan For College

Ask An Ex-Banker: Using Savings Or Debt To Pay For School





Post read (255) times.

529 Accounts and Tax Fairness

Tax changesPresident Obama recently announced a series of tax changes he will propose or at least politically push for in the coming year.

Since the US Congress constitutionally controls the power of taxation, and Congress likes Obama as much as I like Pete Carroll’s Seahawks, I understand that Obama’s priorities may not come to pass any time soon.

Still, I got mad when I read this week that Obama proposes ending the tax advantages of 529 education savings accounts.[1]

I like Seattle like Congress likes Obama

My first thought: “That’s not fair!”

My second thought (and one of my favorite family mottos): “’Fair’ is for kids.”[2]

My third, kind of extended, thought: While nobody actually enjoys paying taxes, a key test of the acceptability of a tax is whether it seems ‘fair.’ And tax breaks, just like taxes themselves, also have to seem, and be, basically ‘fair.’

How do we know if something is fair? It depends a tremendous amount on which taxes one pays and which tax breaks one takes advantage of.

In the case of 529 education accounts, I had always considered them an extremely fair tax break, combining one virtue (long-range savings) with another virtue (higher education) with compound interest (the greatest of all possible things in the known universe).

529 accounts

But of course, 529 accounts are fair, to me, because I’ve started them for my young girls. I appreciate and value the tax break on future capital gains because I have a chance to benefit from them when my girls go to college.[3]

For people who haven’t started 529 accounts, or have no chance of investing for their kids this way, the tax breaks may appear targeted at some unattainable upper-middle class, college-bound elite, and therefore the tax break is inherently unfair.

I was interested to read yesterday in the Wall Street Journal the White House’s argument that 70% of benefits of 529 accounts go to households with incomes over $200,000, or the top 4% of tax returns. I hadn’t known that, nor had I imagined the benefits of 529 accounts were enjoyed by so few.

In the light of that data, my fair tax break seems a little less fair. Or at least, it seems like something that could be eliminated and replaced with something that would have a broader benefit.

Not that it’s going to happen anyway, because Obama doesn’t make tax policy, Congress does.


PS – 4 days after I posted this, Obama backtracked and said he won’t push for a change in 529 Accounts, after taking flak from both Dems and Repubs.


Please see previous posts on 529 Savings such as:

Compound Interest and College Savings

The insanely rising cost of college – Interview with a College Advisor

Is the financial model for college broken – Part 2 of Interview with College Advisor

College Savings vs. Retirement Savings


And previous posts on taxation such as:

Shhh…Please don’t talk about my tax loophole

Adult conversation about tax policy


[1] Importantly, on the issue of fairness, Obama proposed eliminating tax breaks for future investment growth obtained on contributions to a 529 account, not for investment growth on past or existing investments in 529 accounts. In other words, there’s a grandfather clause for existing 529 amounts, a common key ‘fairness’ element to taxation changes.

[2] My favorite kid and ‘fairness’ story in my family, which I’ve mentioned in another post: My then-4year-old niece told us all over dinner “It would be fair, to me, if you gave me a bubble bath after dinner.” She knew fairness mattered to adults, and tried to shoehorn her interest in bubble baths into an adult framework. She’s seventeen now and soon off to college. Cool kid. Ever after, I try to use the “It would be fair, to me…” argument with my family as much as possible.

[3] Here my wife and I always add “should they choose that path.” Because they may decide instead to run away with the circus. My older one is pretty good on the rings at the gym.

Post read (1091) times.

529 Accounts v. Retirement Accounts

future investingA version of this post appeared today in the San Antonio Express News.

People who give financial advice – like me – can be so annoyingly contradictory sometimes.
Some friends of mine with young kids – like me – asked me recently to look over their investment plans, and to give them my opinion on what they were already doing, as well as what they should do next.

They had already embarked on an automatic-deduction investment plan with their financial planner, and they also had an available $5,000, and they wanted to know where to invest it next.
They were doing something I had been urging my fellow parents to do – funding 529 educational savings accounts for their two girls – so, naturally, I told them it was all wrong.

Let me back up and explain.

I already wrote about the panic attack I experienced when I visited a useful College Board website to calculate the future cost of college. At the present rate of tuition increases, in ten years from now college tuition will cost the equivalent of checking your little darlings into a 5-Star Hotel in the fanciest building in Dubai.

Here’s the 7-Star hotel you will send your child to

For. Four. Years.

(*All prices here are my best estimates, using round numbers. Actual results may vary. Always read less than six financial columns in any 24-hour period. If headaches persist, please call your doctor.)
The only way to deal with that impending college tuition catastrophe, of course, is to start eating rice and beans today and send your surplus savings into a college savings account like a State-sponsored 529 Account. 529 Accounts, as you probably already know, typically offer tax-advantages for education savings and investments.

My rice-and-beans-and-529-account advice still holds if you can do it, provided one other condition is already met, which I’ll tell you about in a moment.

So like I said, my friends had set up their 529 account contributions in the name of their 9- and 11-year old girls, complete with automatic deductions.

The problem, however, is that they planned to contribute to these 529 accounts before they maxed out their IRA contributions and 401K contributions.
You see, there’s a clear “order of operations” when it comes to tax-advantaged investment accounts, and it goes like this:

1. Personal IRA – up to $5,500 this year (And more if you’re older than 50)
2. Employee 401K – up to $17,500 this year (and more if your employer matches)
3. 529 Education accounts, or other savings accounts for health or medical expenses

So, I told my friends they have to first contribute $5,500 each to an IRA this year, then make sure they have filled up their 401K bucket to the max. Then – and only then – should they direct any surplus to their girls’ 529 account. Their existing financial advisor had not made this order of operations clear.

If they don’t get into the Seven Star hotel, Try the Six Star hotel in Dubai

Why do I insist they fund IRAs and 401Ks before funding a 529 account?
At least four factors make IRAs and 401Ks a better target for initial investment than 529 accounts.

First, both IRAs and 401Ks offer federal income tax savings on contributions, whereas 529 accounts do not. State-by-state legislation created 529 accounts, and in some states a 529 account offers state income tax relief. Since we all live in Texas, which has no state income tax, their Texas-based 529 account has no income tax advantage. So right off the bat, IRAs and 401Ks beat 529s by somewhere between 20% and 39.5%, depending on your marginal income tax bracket. But even outside of Texas, state income tax relief from 529s pales in comparison to the federal income tax relief of IRAs and 401Ks.

Second, while both a comfortable retirement and a four years college require big chunks of cash, as parents we get the opportunity (misfortune? punishment?) to borrow money for college, but not for retirement.

The student loan industry – all $1 trillion of debt and counting! – stands ready and willing to lend your little darlings what they need to check into Hotel Dubai University (Fight Fiercely Sand Dunes!) at pretty low interest rates too. I know of no similar program to lend to retirees, except halfway-predatory programs like reverse mortgages.

Next, 401K plans often come with an employer match, one of the few real-life examples of free money here on planet Earth.

Finally, compound interest – the secret sauce to the long-term growth of money – works best over the longest time periods. For my friends, they can watch their investments compound for 30 to 40 more years in their retirement accounts, versus merely 10 to 15 years in the 529 accounts for their girls. Always choose the longer time horizon when it comes to investing.

Of course, we know the best option is to fund them all and not have to pick and choose. For my friends, and for most of us, however, we need to choose, and that means picking our investment vehicles in the right order.

In sum: first retirement accounts, then college accounts. Ok? Ok.

By the way, some clever readers will urge maxing-out the 401K first, before the IRA, to take advantage of any employer match. That’s good advice, it just so happens that my friends don’t have 401Ks at their jobs now, so I told them to max out the IRAs first, then pressure the boss to start a 401K plan second, and then fund their 529 accounts third.

Here’s the TL:DR – Place the mask over your own face first, before placing it over your child. Now, just, apply that to investments.

Max out retirement account contributions first, then place the mask over your child
Max out retirement account contributions first, then place the mask over your child


Please see related posts:


College Savings vs Retirement Savings

College Savings and Compound Interest

Interview with College Advisor Part I – The Rising Cost of College

Interview with College Advisor Part II – Is The College Model Broken?


Post read (1922) times.

College Savings v. Retirement Savings

college_fundAn astute reader pointed out some qualifications to my Friday post on 529 college savings accounts – specifically, reasons not to fund them.  The most compelling reason, coincidentally covered in the next day’s New York Times, is that funding your 529 accounts is not as important as funding your 401K retirement account.

The New York Times article, which is worth reading in full, makes the following correct argument: If you have to choose between fully funding your 401K vs. funding your child’s 529 education account, fund the 401K account first.

The first reason for this is that many people can borrow money to fund a college education, but we will have a harder time borrowing to fund our retirement.  Another reason is that the income tax advantages available by funding a 401K – available to everyone subject to federal income taxes – are far greater than the potential state income tax advantages of a 529 account.  In addition, 529 account generally do not trigger employer matches the way many 401K plans can.

In sum, all my big tough talk about funding one’s 529 account only applies after you’ve fully maximized your 401K plan contributions.



Post read (8463) times.