Vetting potential funds, financial advisor, and eventual 529 'conversion'

[jeromedawg]

Hey all,

So my dad has really been pushing me to talk to his financial advisor who he fully trusts. My parents are really well off (living off of pensions as their primary income stream w/ investments as another... to put it simply, they seem to have a lot of 'funny money' floating around). In any case, my dad was talking to me about an account he has setup which, once we have our baby and get a SSN, he will transfer most or all of it over to a 529 for the kid. He sent me details of the account and I *think* he left it mostly to the financial advisor to pick and choose the best funds for him currently (mostly tax free municipal bonds - I guess this kind of makes sense as he's at the wealth preservation stage?)

The expected return his about 4%, which seems pretty decent. I just wanted to get some thoughts and feedback on the current portfolio, and if I should consult his financial advisor once the time is closer for the baby. Or, if I should just not worry about any of that and plan to sell all funds and reinvest in index funds.

It seems like there's a lot going on with the current portfolio - I mean, if the financial advisor picked all those funds, I would *assume* she knows what she's doing haha. Apparently some of these funds require a really high minimum, so the 'benefit' with the financial advisor (and I'm sure this is always the case) is that she has access to these funds because the company she works for buys blocks of them so advisors can have client buy-in.

I've attached a couple screenshots for anyone interested in providing feedback or what not.

[seattlecyclone]

Congrats on the upcoming baby! I would question whether putting nearly $200k in a 529 account for one kid is a good idea. That amount is already more than enough for four years of tuition at almost any school in the country, and that money should grow to be much larger over the next 18 years (provided you invest it in stocks rather than leaving it in muni bonds for the whole time). Investing in a 529 account is great if you're certain you'll need all that money for schooling. You will typically be better off with taxable investing for any money that you may or may not need for college. On the other hand, if you're planning to have another kid, you can always transfer half of the money into an account for kid #2 when they're born.

What state's 529 plan are you considering? Depending on your state of residence, you may get a tax break for using your home state's plan. Otherwise there are a number of relatively low-fee plans (including the Vanguard-branded one that's officially from Nevada).

I wouldn't be too concerned about what funds are currently in the account. The money will be there for a relatively short amount of time, and you'll have to pick from the funds available in your chosen 529 plan once you transfer the money.

[jeromedawg]

Congrats on the upcoming baby! I would question whether putting nearly $200k in a 529 account for one kid is a good idea. That amount is already more than enough for four years of tuition at almost any school in the country, and that money should grow to be much larger over the next 18 years (provided you invest it in stocks rather than leaving it in muni bonds for the whole time). Investing in a 529 account is great if you're certain you'll need all that money for schooling. You will typically be better off with taxable investing for any money that you may or may not need for college. On the other hand, if you're planning to have another kid, you can always transfer half of the money into an account for kid #2 when they're born.

What state's 529 plan are you considering? Depending on your state of residence, you may get a tax break for using your home state's plan. Otherwise there are a number of relatively low-fee plans (including the Vanguard-branded one that's officially from Nevada).

I wouldn't be too concerned about what funds are currently in the account. The money will be there for a relatively short amount of time, and you'll have to pick from the funds available in your chosen 529 plan once you transfer the money.

Thanks! This would be for California, I'm pretty certain. Once the 529 is open and the money is transferred in, will I be subject to capital gains taxes once I start investing in stocks? Or is this essentially a 'non-taxable' account at that point? I think we plan on having at least two but will see. So it would be good to keep that as a separate fund. Although, my wife is of the mindset that we shouldn't have to pay for or worry about our kids' college educations (should they even decide to go). This is simply because she had to pay her way through school and depend on grants, loans, and some scholarships. I came from the other side where I was fortunate enough that my parents could cover it. But I suppose this 'inheritance' is not really one for us but we should view it more as a gift from the grandparents to the grandchildren...

[skyrefuge]

Thanks for sharing, it's always interesting to me to see what "advisers" do on the other side of the curtain. My key takeaway from this is that RULE #1, which they hammer into the skulls of students on the first day of DUMB ADVISER 101, must be:

#1: NEVER PUT YOUR CLIENT IN FEWER THAN 10 FUNDS!!!!

I threw a bunch of these into Morningstar, they barely differ at all in performance, and I'm sure they hold many of the same underlying bonds.

There is no financial reason to hold so many different funds, but every single adviser portfolio I've seen has at least this many funds, so they must put it in as Rule #1 so that their client thinks that they are "doing something".

It's almost a simple way to answer the question "is my adviser any good?" Just ask "do they have you in more than five funds in a single account?" If so, then no, they aren't any good.

I would just love to pepper an adviser with questions: "Why am I 5% in Nuveen California Municipal Bond Fund, and only 4% in Oppenheimer California Municipal Bond Fund? Shouldn't those be reversed? That allocation is going to lead me to financial doom! Please explain to me how you arrived at those percentages, because any dumbass knows it should be 4% in Oppenheimer and 5% in Nuveen!!!"

So dumb. But yeah, probably not egregiously damaging at this point, so, whatever!

[jeromedawg]

Thanks for sharing, it's always interesting to me to see what "advisers" do on the other side of the curtain. My key takeaway from this is that RULE #1, which they hammer into the skulls of students on the first day of DUMB ADVISER 101, must be:

#1: NEVER PUT YOUR CLIENT IN FEWER THAN 10 FUNDS!!!!

I threw a bunch of these into Morningstar, they barely differ at all in performance, and I'm sure they hold many of the same underlying bonds.

There is no financial reason to hold so many different funds, but every single adviser portfolio I've seen has at least this many funds, so they must put it in as Rule #1 so that their client thinks that they are "doing something".

It's almost a simple way to answer the question "is my adviser any good?" Just ask "do they have you in more than five funds in a single account?" If so, then no, they aren't any good.

I would just love to pepper an adviser with questions: "Why am I 5% in Nuveen California Municipal Bond Fund, and only 4% in Oppenheimer California Municipal Bond Fund? Shouldn't those be reversed? That allocation is going to lead me to financial doom! Please explain to me how you arrived at those percentages, because any dumbass knows it should be 4% in Oppenheimer and 5% in Nuveen!!!"

So dumb. But yeah, probably not egregiously damaging at this point, so, whatever!

LOL thanks. I wouldn't be surprised if it was my dad who purchased some of this stuff (like the lower minimum stuff) and only had the advisor get in on the high minimum items. If so, that would explain the 5% and 4% discrepancies... so you can pepper my dad with those questions probably hahahaha! But I guess, as seattlecyclone has pointed out, once the $$$ is transferred into a 529, those funds won't be applicable anyway, right? And at that point I'd have the freedom to invest in a few good index funds instead :)

But yea, I can see how for a client who has little knowledge would think that by seeing a bunch of different funds, it means they are doing well and that the financial advisor is really helping them out a lot. I'm sure the advisor gets some sort of kickback with the more funds she gets client buy-ins on.

[seattlecyclone]

Thanks! This would be for California, I'm pretty certain.

I think California has a pretty good plan. They have a number of low-fee options, including an S&P 500 fund for 0.11% and age-based options from 0.13%-0.21%.

Once the 529 is open and the money is transferred in, will I be subject to capital gains taxes once I start investing in stocks? Or is this essentially a 'non-taxable' account at that point?

You can think of a 529 as being like a Roth IRA for college instead of retirement. You contribute post-tax money. You don't pay dividend or capital gains taxes on any transactions that may occur within the account. When you take money out to pay for college, it doesn't count as taxable income at all. If your kid ends up not going to college or going to a cheap enough school that they don't need all of the money, you can withdraw the surplus. When you do this, you'll have to pay income tax at your regular marginal rate (not capital gains rates) on any gain, plus a 10% penalty in most cases.

I think we plan on having at least two but will see. So it would be good to keep that as a separate fund.

You can designate a new beneficiary for all or part of a 529 account at any time. The money generally remains the property of the person contributing it (meaning your parents). If you have any siblings who might also have kids, your parents would have the ability to split the account for their other grandkids as well. If there's a good chance there won't be another grandchild, they might want to leave half of the money out of the account for now. $100k invested over 18 years should be more than enough for tuition, room, and board at pretty much any college. No need to contribute more.

Although, my wife is of the mindset that we shouldn't have to pay for or worry about our kids' college educations (should they even decide to go). This is simply because she had to pay her way through school and depend on grants, loans, and some scholarships. I came from the other side where I was fortunate enough that my parents could cover it. But I suppose this 'inheritance' is not really one for us but we should view it more as a gift from the grandparents to the grandchildren...

There's plenty of reason to believe that making your kids pay for at least part of their schooling is a good idea, but that's a discussion you'll have to have with your wife and your parents.

[jeromedawg]

There's plenty of reason to believe that making your kids pay for at least part of their schooling is a good idea, but that's a discussion you'll have to have with your wife and your parents.

Oh I definitely agree with this. When I look back, I consider my college years a huge waste of time (and arguably money). I think there's something to be said about someone who has to pay (even partially) for any sort of tuition and how well they actually do. For example, if you pay for your own education, I would think you'd be WAY more motivated to do really well and *not* flunk out of courses or barely pass even.

[PathtoFIRE]

...my dad was talking to me about an account he has setup which, once we have our baby and get a SSN, he will transfer most or all of it over to a 529 for the kid....

To help answer one and maybe all of your questions, we need to know exactly what your parent's are going to do. If they are just going to open a 529 for the benefit of the kid, then you and your spouse don't enter the equation at all. It will be controlled by your parents, and your kid will be the designated beneficiary. Any taxes incurred will be on your parents, not you. There are limits to contributions I want to point out. This is considered a gift, so the annual gift limit comes into play, however 529s have a special exception allowing 5 years worth of gifts accelerated into one tax year, so currently that means $70k this year. Anything beyond that will require either a gift tax or more likely eat into their lifetime estate tax exemption.

If they are going to gift your the money, and you in turn open the 529, again, the issue will be one of gift tax for your parents, I don't see much in the way of tax burden on you. I'm not sure if you are even able to transfer stocks/funds in-kind into 529s, so if you had to sell to fund the 529, then yeah, taxes may come up.

[jeromedawg]

...my dad was talking to me about an account he has setup which, once we have our baby and get a SSN, he will transfer most or all of it over to a 529 for the kid....

To help answer one and maybe all of your questions, we need to know exactly what your parent's are going to do. If they are just going to open a 529 for the benefit of the kid, then you and your spouse don't enter the equation at all. It will be controlled by your parents, and your kid will be the designated beneficiary. Any taxes incurred will be on your parents, not you. There are limits to contributions I want to point out. This is considered a gift, so the annual gift limit comes into play, however 529s have a special exception allowing 5 years worth of gifts accelerated into one tax year, so currently that means $70k this year. Anything beyond that will require either a gift tax or more likely eat into their lifetime estate tax exemption.

If they are going to gift your the money, and you in turn open the 529, again, the issue will be one of gift tax for your parents, I don't see much in the way of tax burden on you. I'm not sure if you are even able to transfer stocks/funds in-kind into 529s, so if you had to sell to fund the 529, then yeah, taxes may come up.

Thanks, I'll have to clarify. My dad is really caught up in avoiding additional taxes, and from how he's talked about setting up accounts for the other grandkids, it sounds like he may do the same in this case (as opposed to giving us the money). He did say that if we needed any of the money for whatever reason, he could transfer it out. But otherwise, I'm just assuming that he will open the 529 on behalf of our kid. Now, why he wants to push us to meet the financial advisor is another thing - I think maybe he feels it would just be a good opportunity because of this new life event and also because he has to make financial moves for gifting in addition to his plans to transfer the deed of our co-owned condo fully into my (and my wife's) name. Considering the gift tax, if he gifts money to us, I'm thinking he may avoid that path as much as possible since it sounds like there are more tax implications for him.

[Scandium]

...my dad was talking to me about an account he has setup which, once we have our baby and get a SSN, he will transfer most or all of it over to a 529 for the kid....

To help answer one and maybe all of your questions, we need to know exactly what your parent's are going to do. If they are just going to open a 529 for the benefit of the kid, then you and your spouse don't enter the equation at all. It will be controlled by your parents, and your kid will be the designated beneficiary. Any taxes incurred will be on your parents, not you. There are limits to contributions I want to point out. This is considered a gift, so the annual gift limit comes into play, however 529s have a special exception allowing 5 years worth of gifts accelerated into one tax year, so currently that means $70k this year. Anything beyond that will require either a gift tax or more likely eat into their lifetime estate tax exemption.

If they are going to gift your the money, and you in turn open the 529, again, the issue will be one of gift tax for your parents, I don't see much in the way of tax burden on you. I'm not sure if you are even able to transfer stocks/funds in-kind into 529s, so if you had to sell to fund the 529, then yeah, taxes may come up.

Thanks, I'll have to clarify. My dad is really caught up in avoiding additional taxes, and from how he's talked about setting up accounts for the other grandkids, it sounds like he may do the same in this case (as opposed to giving us the money). He did say that if we needed any of the money for whatever reason, he could transfer it out. But otherwise, I'm just assuming that he will open the 529 on behalf of our kid. Now, why he wants to push us to meet the financial advisor is another thing - I think maybe he feels it would just be a good opportunity because of this new life event and also because he has to make financial moves for gifting in addition to his plans to transfer the deed of our co-owned condo fully into my (and my wife's) name. Considering the gift tax, if he gifts money to us, I'm thinking he may avoid that path as much as possible since it sounds like there are more tax implications for him.

To avoid gift tax your dad and your mom could each give you and your wife $14,000 per year, each of you. So you could receive $56,000 tax free from them per year to put into your child's 529, or whatever else you want. So over 3 years they could transfer it all to you tax free. Just an FYI if that's what you/they want to to.
http://fairmark.com/general-taxation/tax-rules-for-gifts/

Personally I think $150k in a 529 is a bit crazy much. Assuming some decent growth, it could be over $400,000 there by the time the kid goes to college!

[jeromedawg]

...my dad was talking to me about an account he has setup which, once we have our baby and get a SSN, he will transfer most or all of it over to a 529 for the kid....

To help answer one and maybe all of your questions, we need to know exactly what your parent's are going to do. If they are just going to open a 529 for the benefit of the kid, then you and your spouse don't enter the equation at all. It will be controlled by your parents, and your kid will be the designated beneficiary. Any taxes incurred will be on your parents, not you. There are limits to contributions I want to point out. This is considered a gift, so the annual gift limit comes into play, however 529s have a special exception allowing 5 years worth of gifts accelerated into one tax year, so currently that means $70k this year. Anything beyond that will require either a gift tax or more likely eat into their lifetime estate tax exemption.

If they are going to gift your the money, and you in turn open the 529, again, the issue will be one of gift tax for your parents, I don't see much in the way of tax burden on you. I'm not sure if you are even able to transfer stocks/funds in-kind into 529s, so if you had to sell to fund the 529, then yeah, taxes may come up.

Thanks, I'll have to clarify. My dad is really caught up in avoiding additional taxes, and from how he's talked about setting up accounts for the other grandkids, it sounds like he may do the same in this case (as opposed to giving us the money). He did say that if we needed any of the money for whatever reason, he could transfer it out. But otherwise, I'm just assuming that he will open the 529 on behalf of our kid. Now, why he wants to push us to meet the financial advisor is another thing - I think maybe he feels it would just be a good opportunity because of this new life event and also because he has to make financial moves for gifting in addition to his plans to transfer the deed of our co-owned condo fully into my (and my wife's) name. Considering the gift tax, if he gifts money to us, I'm thinking he may avoid that path as much as possible since it sounds like there are more tax implications for him.

To avoid gift tax your dad and your mom could each give you and your wife $14,000 per year, each of you. So you could receive $56,000 tax free from them per year to put into your child's 529, or whatever else you want. So over 3 years they could transfer it all to you tax free. Just an FYI if that's what you/they want to to.
http://fairmark.com/general-taxation/tax-rules-for-gifts/

Personally I think $150k in a 529 is a bit crazy much. Assuming some decent growth, it could be over $400,000 there by the time the kid goes to college!

Haha thanks for the tip. That's definitely another option. As far as the amount, yea that's a lot LOL. But I guess they're just kind of stashing it up for multiple kids assuming we have more than one.