My Tax-Advantaged Investment Portfolio – August 2012

Previously I posted the content of my taxable investment portfolio. In that same spirit, it’s now time to sneak a peek inside my tax-advantaged accounts. Here’s how everything looks as of August 2012.

Roth IRA – Through Schwab

IM Roth IRA, August 2012

Current allocation: 70% Stocks / 30% Bonds

If one uses the age-in-bonds method to derive asset allocation, then the current split of 70% stocks / 30% bonds in my Roth IRA is tilted slightly to the aggressive side (I’m 33 presently). However, I prefer to consider asset allocation on a per-account basis and not worry about the whole. In my mind, if I take care of each gear, then the machine will run smoothly, and I spend little time worrying about my overall asset allocation. Each account has a purpose: my taxable investments must grow and generate enough dividends to augment my early-retirement income up to age 59.5, and my two tax-advantaged accounts will patiently wait to grab the baton and run from there. Continue reading

My Taxable Investment Portfolio – August 2012

For the past few weeks I’ve been writing articles in which I started fantasizing planning for an early retirement. You can read those articles here:

Especially in Part III, I discussed building a portfolio of passive investments with the ideal goal of having them yield a minimum of $500 in monthly dividends. Before I reveal my decisions about which investments I have chosen, first allow me to make a few points clear. Continue reading

Opening a Roth IRA with No Minimum

Empty pocketsSeveral years ago I wrote an article on Opening a Roth IRA on a budget. That article is basically obsolete now, as some of the options either don’t exist or have been updated. So, here’s an update with better options.

You’ve likely heard about all the benefits of having a Roth IRA, and you want to take advantage of that tax-free growth. But what if you’re a college student working part time, or just started your first job and don’t have the thousands of dollars required to open a Vanguard or Fidelity account? Is it possible to open a Roth IRA with no minimum, and are there any decent choices available? Continue reading

Attacked By Vanguard

I’m writing this out of pure disbelief. Back in November I received a threatening e-mail from someone in Vanguard’s legal department. I would gladly post the e-mail in its entirely, but they will probably sue me if I do since it contains a confidentiality statement. Nevertheless, I will describe enough of the e-mail so that other people can understand what is happening.

The e-mail basically stated that my website is displaying the Vanguard logo, which must be removed immediately due to their endorsement policy. The wording of the e-mail made it sound as though I had stolen the Vanguard logo and was displaying it as my official site logo on every page. It also made it sound as though I were purporting my website as being officially endorsed by Vanguard. Continue reading

The Great Portfolio Pummeling of 2008

A New Year is upon us. At the end of a year, I normally have feelings of pensiveness and of reflective nostalgia about the year past and the inexhaustible marching forward of time.

This time, not so much. Sure, I still have those nostalgic feelings on a personal level, but economically, I’m ready to kick 2008 to the curb. As painful as it is, here is how my meager portfolio fared for 2008. Suffice to say, it got pummeled.

All of my mutual funds are held at Vanguard. I like them for their simplicity, consistently low expense ratios, and selection of no-load index funds.

Retirement – Roth IRA

Here’s an overview of my Roth IRA. I started contributing to it in 2007, so there’s not a ton of money in it yet, and there’s even less after the brutal beating of 2008.

The yellow line is what I have contributed, while the blue line show its actual value. That huge dip in late 2008 is depressing, but perhaps the upward curl at the end is a foretaste of the feast to come? Maybe I’m just optimistic….

Here’s a comparison of year-end values:

At the end of 2007, my Roth IRA had just over $9,000 in it. Fast-forward one year, and my Roth IRA has… just over $9,000 in it. Had I not maxed out my contributions for the year, this would not be so depressing. As it currently stands, all my contributions for the year disappeared. That’s okay. This is long-term money, right? RIGHT?

Taxable Mutual Funds

In addition to my Roth IRA, I also have a meager selection of mutual funds in a taxable account at Vanguard. These funds are not quite as aggressive, but they have still taken a nice pummeling.

Once again, the yellow line represents my contributions, while the blue line represents the current value. Things were going pretty well until the bottom fell out in mid-2008. Phooey.

Here’s a comparison of year-end values:

Yet again, the value of my taxable portfolio ended slightly up, but when one considers the contributions that I made, depression sets in.

All together, my Roth IRA is about -41% into the red for the year, while my taxable funds are about -24% into negative territory. Ouch.

Care to share how much your portfolio has been bruised by the Great Portfolio Pummeling of 2008? Misery loves company, so I’d love to hear that I’m not alone.

Here’s to a better 2009!

5 Reasons Why You Should Open A 529 Account Right Now

My wife and I are both grad students, currently without any children. Even so, I recently opened 529 plans through Learning Quest (Kansas). What is a 529 plan? Essentially, it is a tax-advantaged account meant for future expenses related to higher education.

I’m embarrassed to admit that I thought you could only open 529 plans after you had a child. I was wrong, so here are five reasons why you should open a 529 account right now if you don’t already have one:

1. You don’t need kids to open a 529 account. In fact, you can open an account for yourself, for your spouse, or for whomever you please. With a few clicks, you can change the beneficiary at any time.

My wife and I opened accounts for ourselves even though we’re both nearing the end of our terminal degrees. Essentially, I plan to “launder” money through the 529 accounts – I’ll dump in some cash, let it grow tax free, and then use it for the remaining education expenses that we have. Whatever is left in the accounts will begin compounding away for any children we might have in the future. Yes, I’m kicking myself that I didn’t start doing this sooner! 🙂

2. Money grows tax deferred at both the Federal and State levels while in the account. Provided that you use the withdrawals for qualified education expenses, the earnings are also tax free. So, what are qualified distributions? Many things, including tuition, campus fees, meal plans, room and board, books, and other required equipment. Provided you can prove that it somehow relates to education, most anything goes. Yes, a laptop computer counts. No, a semester’s supply of iced mocha lattes probably does not! 🙂

3. You may be able to claim a state income tax deduction. Some states allow you to claim contributions as income deductions. For instance, the Kansas plan that I use allows me to claim an annual adjusted gross income deduction of up to $3,000 ($6,000 if married, filing jointly) for contributions per beneficiary, per year.

So, not only do I get an upfront state tax break, provided I use the money for qualified education expenses, the earnings are tax free. It’s the best of both worlds.

4. YOU remain in control of the account, no matter the name and age of the beneficiary. Money that you contribute to the account remains YOUR money until you decide what to do with it. If the named beneficiary decides to drop out or skip college entirely, he or she cannot access the funds. The money is then yours to do as you will. Pay the tax penalty and withdraw it all, or simply change the beneficiary to another family member without penalty. Also, all funds in a 529 are sheltered from bankruptcy (in case you run into financial hardship later).

5. Low minimums, high maximums, and low expense ratios (provided you shop around). Depending on the plan, you probably won’t have to commit much money to start the account. The Kansas plan that I chose only has a $250 minimum (Kansas residents only; $1000 for outside residents), or you can open the fund with an automatic monthly contribution of $50 ($25 for Kansas residents).

Keep in mind that you do NOT have to settle for the 529 plan offered by your state. You can open or contribute to any 529 account, no matter the host state, though you may not be able to claim a state tax deduction if you do so. As a Kansas resident, I can invest in any state-sponsored 529 plan and still claim a Kansas tax deduction – be sure to investigate how your own state operates. However, if your state’s plan does not offer a tax deduction at all, please shop around to find a plan with funds and expense ratios that suit you. Speaking of which….

I was pleased to see that the Kansas 529 offering includes Vanguard funds. It’s no secret that I’m a fan of both Vanguard and Index funds, so in my case I opted for the Total Bond Market Index Portfolio, which has a total expense ratio of 0.25%. Unbelievably, this is an even-lower expense ratio than if I were to invest in the same fund from within the Vanguard 529 Portfolio itself (expense ratio – 0.55%)! In any case, be sure to consider the expense ratio (and any other fees) for any funds in your 529 account. Lower is better. The Kansas plan has no fees other than the expense ratio. If your state’s plan has hefty expense ratios plus annual fees, RUN!

Also, the maximum contribution limit for 529 accounts is quite high, usually around $300,000 per beneficiary. As a poor grad student, I can’t imagine having that much money right now, but it’s nice to know that the sky is practically the limit.

One last thing that I want to add: while I think 529 plans are great, I suggest maxing out your IRA before contributing to a 529. In other words, a student can always apply for scholarships and financial aid, but there are no scholarships available for retirement! 🙂

Further reading:

The Essential 529 Guide – http://www.savingforcollege.com

529 Plans – Wikipedia link