Pragmatic Finance

You’ve probably been told or heard countless times of the importance of a college education, especially in regards to the increased earnings. However, saving for the college expenses of your children is a daunting task. I am reviewing a chapter from the The Boglehead’s Guide To Investing that is titled Savvy Ways to Invest for College as part of the BogleHead Project. It covers some of the strengths, requirements, and tax implications of some of the popular methods.
The plans they cover are:

• Personal Savings
• Custodial Accounts
• U.S. Savings Bonds
• Coverdell Educational Savings Accounts
• 529 Qualified Tuition Plans
• IRA Withdrawals
• Other funding options

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Over a month ago I signed up for a TD Ameritrade $500 promotion that also gave 500 free trades for 45 days. I was able to use my 0% balance transfer money. I had a little trouble getting them to credit me the signup bonus and apex status. Eventually I was able to speak to a csr whom promised to call me back within a day after he spoke to the promotional and marketing department. He did and that day I had apex and my bonus. If anyone who signed up for it is having problems I suggest calling and perhaps recommending that they speak or that department or even asking for your call to be transferred there.

Now that the free trade period is over I have to decide what to do with the 10k that I still have in there. You must keep that much in the account to keep the bonus. So far it seems the best two options are to put it into a no transaction fee mutual fund and let it sit there for 9 months or more or purchase a 9 month cd with it. Last month the rate was around 5.3%. Alternative, I could purchase an etf such as SPY that tracks the S&P500. I don’t have enough knowledge or time to try to trade with the account. Right now I am earning about 4.31% apy in their TAP while I decide what to do next.

Overall I had some fun with the free trades. I actually ended up making around $150 from trading. Most of it came from purchasing a gold etf (GLD) when it went down to around 63 and then more when it went down to around 57. I then sold it when it approached 65. Other than that I did a few trades here and there, pretty much getting only a slight return. I kept most of my money in SHY, a short term bond etf that was very stable in price.

If anyone has any suggestions of what I should do with the funds for the next 9 months in the account or which of their mutual funds would be a good idea to invest in I’m all ears.

Earlier this year I made the decision to open an ira.  If you are unsure if you should open one, check out my earlier advice to start investing early with a Roth IRA.  I wasn’t that confident about where and how to open and invest in one. As tax day came closer, with it the deadline for 2005 contributions, I made a decision to invest in target year retirement funds. These are basically funds that set a certain asset allocation based on your retirement date. When you are young they invest heavily in stocks and shift more into fixed income and bonds as you get closer to retirement.

I think that these are a great idea for those that aren’t that knowledgeable about asset allocation, like me, or who just want to put their money away and enjoy other facets of life. I think in the future I will set my own allocation with index funds and possibly ETFs as I learn more and invest larger sums. Until then I think I will stick with the target date ones.

Well, I made a list of what I wanted; I guess I am hard to please.

I didn’t want to pay an annual fee maintenance fee. The account would have to be really good to have this every year.

I wanted a large selection of mutual and index funds for later when I got more experience.

A low expense ratio. The expense ratio refers to the amount they take off the top of your money every year for choosing the assets in your fund. Obviously this is a big deal as this will become very significant after years of compounding.

Trading fees, account and fund minimums, and my general feeling about the company were also important.

So the question, which choice is best?

Well, you can go with a discount brokerage. If you are going to be purchasing etfs then the price per trade could be a big factor. I am probably gonna stay away from them for the time being so there isn’t an advantage here. Also, some will charge fees for purchasing mutual funds as well. This didn’t appeal to me as I want to have the option of dollar cost averaging.

I eventually narrowed it down to three companies and compared the minimum requirements, fees, expense ratios, etc on their funds with a target retirement of 2040-2050.

Vanguard: I have heard great things about the mutual funds at Vanguard so I decided to look at them first. They have the Vanguard Target Retirement Fund 2005 through 2050 in increments of 5 years. The 2040 (VFORX), 2045 (VTIVX), and 2050 (VFIFX) all have expense ratios of around 0.21%. However, it takes $3,000 to open an account and there is a $10 fee for each fund you hold that is under 5k. So great expense ratio, but large minimums to avoid fees.

Fidelity: I had already had a brokerage account from their previous promotion so I was already familiar with their website and had poked around looking at different funds. I knew they had some very low expense index funds so that could be a plus later. They call their target date funds the Fidelity Freedom Funds and have 2005 through 2040. Being in my 20s the 2040 (FFFFX) was the main one I looked at. It has a higher expense ratio of 0.76%. The good thing, though, is that if you can contribute $200 a month you can open what they call a SimpleStart IRA. This allows you to avoid the $2,500 minimum that most of their funds have. This would be great for someone who wanted to start one but didn’t have a lot of savings he felt comfortable putting away at the moment.

T. Rowe Price: I wasn’t too familiar with them but then again a year ago I didn’t know what a Roth IRA was so that shouldn’t stop me from investigating. They have the T. Rowe Price Retirement funds from ages 2005 through 45. I zoomed in on the 2040 (TRRDX) and 2045 (TRRKX) ones. The expense ratios for these are in the 0.80s. It only takes 1k to open an ira with them but like Vanguard, you must pay a $10 fee for every fund that has less than 5k in it unless you have $50,000 in assets there. Overall, they have the same account fees as Vanguard but higher expense ratio. The benefit being an opening requirement in between the two.

I haven’t done much research into the Schwab Target 2040 (SWERX) or JPMorgan SmartRetirement 2040 (SMTAX) after seeing expense ratios of 0.99 and 1.30 respectively. Just seems too high. I might as well get a regular mutual fund for that cost. So is that enough symbols for you yet?

I ultimately went with Vanguard. Honestly, I waited until I had over 4k ready to go before I even started doing research as I wasn’t aware of programs like Fidelity’s Simplestart ira. So overall the main concern was what I wanted long term for the account. I liked the fact that Vanguard has a very low expense ratio on their funds. This will definetely pay over time and make up for that $10 fee I paid earlier. They also have a pretty good reputation for being investor friendly and not just profit friendly. Hopefully this will continue in the future.

I am curious if you have tried any of the choices I listed. If so, what is your opinion of them? Or are there any good choices out there that I missed?

If there is one thing I really regret financially is not starting a Roth IRA years ago. A Roth IRA is a retirement account that grows your investments tax free. The money you place in there is after taxes but you won’t pay any taxes on any of it if you pull it out after your 59 1/2 and it has been open for five years. This is fantastic if you think you are in a lower tax bracket now than you think you will be when you get older. This makes it especially attractive for younger workers that are just starting to save for retirement, such as myself, who will almost assuredly make much more money later in life than they do now.

If you have an employee sponsered retirement program where they match your contributions, such as a 401k, then you will probably want to contribute to that before your ira. You can’t beat free money. If you don’t fit my profile you might want to check out a comparison of traditional versus roth iras. In order to qualify for a roth, your income must be under $160,000 for married filing jointly and $110,000 for single.

For IRA’s you are allowed to contribute $4,000 per year total to all iras, assuming you’ve earned that much income. So, for example, if you contribute 4k to a roth ira, you can’t contribute any to a traditional ira. In 2008 it will increase to 5k. Also, you can fund an additional thousand if you are older than 50. You have until April 15 to fund the previous year’s contribution. This also means that anytime after January 1st until tax day you can fund the current or previous year.

One of the biggest advantages of Roth IRAs is that you can take out your principal contribution at any time without penalty. The only downside being that you won’t be able to go back and replace that previous year’s contribution that you took out. You can also take out up to 10k of your earnings for a first time house purchase.

You can put just about any investment into an IRA, including stocks, bonds, cds, mutual funds, and index funds. Heck, I think there is even ways to put real estate, treasury bills, and limited partnerships into them. If you are just starting out you might want to purchase one of the retirement mutual funds from either Vanguard, Fidelity, or T. Rowe. The retirement funds consist of a mixture of domestic stocks, foreign stocks, and bonds. They have a target date and are adjusted to be aggressive when your young and more conservative as you get older.

For some more information about target year retirement funds check out my post on Simplifying Your IRA. I discuss many of the options available and why I chose Vanguard’s Target Retirement 2045 Fund (VTIVX).

I started this deal last week and it looks really great so far. TD Ameritrade is offering a $500 account opening bonus and 45 free days of trades. You must deposit $10,000 when opening a non-IRA account and qualify for Apex status by making 5 trades per month for 3 months. The deadline is 09/05/06 for the account to be opened and funded. They say you will receive your bonus 3 to 4 weeks after qualify for Apex status and you will keep the bonus as long as you keep $10,000 equity in the account. One thing you must watch out when trading is that you follow day trading regulations. To make a long story short, if you do four or more day trades within a rolling 5 business day period you will classified as a day trader and must keep $25k equity in your account. There is a very long thread at Fatwallet discussing the deal.

I opened this account very earlier last Thursday morning. When I went online around lunchtime my money was already in my account and ready to be traded. A free day of interest on your money never hurts anyone. I made 15 trades and emailed customer service saying that I had made the minimum number of trades and had qualified for apex status. To get the fastest service you should click on the contact us link at the bottom of your account, then select email and put the topic as client services and then apex status. I did this and they emailed me back without an hour or two and told me I had qualified and would get Apex status at the next system update.

It seems that one safe way to do this deal is to buy a stable, low risk stock such as a bond fund. I went with iShares Lehman 1-3 Year Treasury Bond (SHY). Then get your bonus, sell your stocks, and purchase a 9 month CD or a no transaction fee mutual fund with. Your effective interest rate then is 5% + whatever your cd/mutual fund gains. It should be easy to get 8 to 10% interest on your money.

If your experienced and knowledgeable at trading, unlike me, then the 45 free days of trading could be as good or better than the bonus. I played around buying a share or two such as Haliburton (HAL) and Apple (AAPL) and U.S. Oil Fund LP (USO) but I don’t really know what I’m doing at this point Probably best to avoid too much trading if your not experienced.

I put most of my money in SHY. You can also set up your non invested money to be swept into a money market fund through their TAP. You have to mail or fax the Total Asset Plan form to them. There are many choices of Reserve Funds but the Primary Class R seems to be the best for me since I’m not concerned about taxes. You will gain ~4% interest at the time of this post as long as you have 2k in non invested funds. I signed up with it but I’m not sure I will utilize it. I will probably put most of my money into one of their mutual funds, most likely a no fee one, once I start losing money trading stocks.

This is a fantastic deal. Even if you simply left your funds in the Tap account you would be getting about 9% APY for no risk. Of course, you could leave small amount of dough to have a little fun with no commision trading. Just be aware of the day trading rules if you do. If anyone has anything to add, or any tips about maximizing this deal, I’m all ears.

Fidelity appears to still have this deal going on. New customers can open a brokerage account with them and receive a $100 bonus. I had a 529 account with them before I did this and it still considered me a ‘new’ customer for the deal. You need to register through this link and then open your account within 30 days and then fund it with $10,000. You must keep the account open for 6 months to keep your bonus but this isn’t a big deal because there are no account maintenance fees if you sign up for electronic statements. After you get the bonus you can take all your money out. There is also a bonus for United Miles. I have read of people able to get both bonuses so if you are interested in double dipping and have the necessary money for both promotions you might want to call them and see.

I did this about a month ago. Opening the account is pretty easy. Only thing annoying is that it takes about a week to establish a bank account to transfer money in. Once my account was funded I received an email within a day or two confirming I had qualified for the promotion and I received the bonus several days later. I think I got my bonus within 3 to 4 days. You can then take the money out if you want or keep it in if you want to use the account. You can set the default account to fcash or one of their municipal funds that is tax free. I think they are in 3% range right now. After my funds got into the account I bought FDRXX which is a no transaction fee cash reserves fund that is paying 4.63% apy at the time of this post. I left several dollars in as I always do with accounts that I don’t want closed but you should be able to pull it all out.

This account is great if you have their investment rewards card that gives 1.5% back into your account. If you wanted to use the account for investing they seem to have some good expense ratios on index funds but they have high minimums to avoid fees. You will probably want to go elsewhere for stock purchases unless you are funding it with some major dough.

After calculating my networth last week I was a little suprised by how much cash I had, mostly from 0% balance transfer offers. I decided to max out my Roth IRA for the year as I had plenty of non BT money to fund it.  The only choice was to decide if I should funds it in monthly intervals to take advantage of dollar cost averaging or just go with a lump sum. Well, I chose the latter, thinking that now would be a good time to invest as stocks got pounded at the end of last week. I guess you could say I was ‘buying the dip.’

My funds were invested by Tuesday and the Dow quickly lost over 300 points in the next 3 days. Ouch. My contributions for last and this year are in Vanguard’s Target Retirement Fund 2045 so its 90% stocks. Needless to say, in the last week I’ve lost some serious $$ there. I think I am going to read up on dollar cost averaging before next year comes along.