TIAA-CREF Independent 529 Plan

I was reading through a magazine article that was discussing how to pay for children's education expenses and it brought my attention to the TIAA-CREF Independent 529 Plan. Until the Pension Protection Act of 2006, I had been very reluctant to even look into 529 plans, because their tax benefits were set to sunset in 2010, but the act made them permanent. So, I will go over some highlights of this plan, and some general strategies.

Each state in the union offers a 529 plan that allows you to invest money tax-deferred, and withdrawal the money tax-free if it is spent on qualified education expenses. This is similar to how a Coverdell ESA works, but here are some differences:

Coverdell ESA

• Contribution limit of $2000, annually, per child
• Must be used by the time the beneficiary reaches the age of 30 years
• There is an income limit that is based on the contributor, but it can be easily side-stepped by gifting the money to the beneficiary and having him/her contribute.

529

• Annual contribution limit of $30000.
• Funds can be saved indefinitely
• No income limits for contributors

So, there are some nice advantages in 529 plans over Coverdell ESAs. If you plan on sending your child to a private institution, there is no way you can build enough of a nest-egg, with contribution limits of $2000 per year. Now, the Independent 529 Plan, offered by TIAA-CREF, if different from a standard investment, though. Instead of investing money, you pre-pay tuition with a 1% discount off of today's tuition rate. With the current trend of about a 6% annual increase in tuition expenses, the 1% discount, and the tax-deferred and tax-free benefits, the return on investment can be substantial. The plan currently boasts 250 private schools (but not Harvard or Yale, sorry). However, beyond tuition, a 529 plan can cover books, room and board. One strategy is to have an Independent 529 Plan for tuition and a state-sponsored plan for other expenses. This offers a bit of diversification, and a potential out if you child decides against going to any of the member institutions in the Independent 529 Plan. You can also transfer the funds out of the Independent 529 Plan into another 529, but you will lose a lot of gains.

What Would I Do With $1 Million?

Yesterday on Free Money Finance, FMF asked What Would You Do with $1 Million? That is a powerful question. For a lot of people that have financial problems, this situation would seem to be a blessing. However, there are a lot of people who receive windfalls and are soon in the same situation. Remember the old saying, "a fool and his money are soon parted."

So, what would I do? Well, there are plenty of things that I would like to do. Following is a list of the things I would definately do:

• Pay off my mortgage
• Pay off all other outstanding debt, except for my student loans
• Begin gifting $10K a year to each of my three children
• Make a one time gift of $10K each to my mother-in-law and father-in-law
• Begin fully-funding my own IRA and my wife's IRA
• Max out my contributions to my 401(k) (I currently contribute enough to get the full employer match
• Put $50K in some I-Series US Savings Bonds
• Feel much less stress at work

Now, I would definately keep working at my current job, at least until I am fully vested in the profit-sharing match in my 401(k), which is substantial (one more year, here we come). So, in one year, I would be me down about $208K in disposable cash from that $1 million, not considering taxes. But what would I do after that? Well, ~$800K, minus taxes, would not be enough to live off of for the rest of my life, I don't think (even considering that my 401(k) would be about $100K, the $50K in the savings bonds, and my children having substantial cash).

On my future wish-list, I want to complete an MBA and a JD. I am considering Indiana University for each, as they are not Top Ten, but they are very good (Top 25) and very afforable and convenient (within 20 minutes drive), for those programs. However, I always wanted to attend Notre Dame. So, I could see myself pursuing one or both programs at Notre Dame. I already plan to semi-retire at 35 for a few years (nine years from now) in order to attend law school, so this would make it much easier, and possibly sooner.

One of the goals that my wife and I hold is to take care of her parents. While we are fairly young (almost 26), her parents were on their second families when she came along, so they are getting very close to the retirement years and have saved very litte (that is what a combined eight children will do to your savings if you aren't already wealthy). So, we have been looking for land and a home that would give us the space we will want, and need, to live comfortably and have them with us. So, we would probably begin that process. I have this soft spot for not filling up all the land in the world with little vinyl villages. I live in the Metro Indianapolis area, and considering that it is the 13th largest metro area in the US, there is still rural farm land where I live, but it doesn't appear that this will stand true within the next ten years. I want to buy up a decent chunk of land and develop it, but I want to space out the houses and keep mature trees and green area around. The ideal situation would be able to have lots between 3 and 5 acres in size. I would also like to become the "utility company" for this development. I would handle everything expect for natural gas. I would want a decent sized creek on the land and be able to build a dam for some hydro-electric power, and throw up a few solar panels. We would require that all homes be designed for passive solar efficiency, use only CFL or LED lighting, and use Energy Star rated appliances. I would also run Internet, telephone, and television service for the community over fiber-optic cabling. This is a dream that I think I could make happen without a $1 million windfall, but it would be a heck of a lot easier with it in hand (so I wouldn't have to find willing investors).

Early on, I would probably look for a few investment properties near college campuses that could generate a little positive cash flow. These are properties that I think are still quite sound investments, although it really depends on the nature of the campus. Indianapolis has a very large campus and several small campuses in town. However, none of them have a substantial amount of dorm space available, since many students usually live in-town with their parents, or are adults going back to school. This leaves a great opportunity for rentals for college students. Obviously, being college students, there are many potential headaches, but c'est la vie. I would let a property management company handle it as much as possible. And given the nature of the area, the colleges have offices for housing and they deal with rental properties often, given their low number of dorms.

That is probably what I would do. If I did leave my job in a year, however, I would either work for myself or move to an upper-level IT management position, as that is my next work goal, anyhow. And, yes, that probably seems very ambitious, to say the least, for someone that is nearly 26, but I have been working professionally in IT (meaning not as a hobbyist) since three months after I was 18. So, given my age, I have a long work history in my field, and I now have college (mostly... still have three courses left), certifications, connections, and experience under my belt.

More Buzz Around Executive Pay

Well, the 2006 election cycle is in full swing now since the Labor Day weekend. We will probably see a lot of legislative "miracles" in the coming weeks. There have been some serious cries from the Left about executive pay packages. There is a certain appeal involved with being critical of executive pay. Surely, these executives are making more money than they can ever spend, so why should they be getting paid this much when so many people are struggling to get by?

Truth be told, as a stockholder, I am not too thrilled with some of the exhorbinant pay packages for executives. I would like to see more money paid out in the form of dividends. However, I do not hold much weight in corporate voting because I do not hold a large enough stake in any company. Honestly, I only own stock in one company, directly; the rest of my ownership is through mutual funds and index funds. The executives of these companies tend to have a pretty large chunk of stock vested in their employer, so they have considerable pull, themselves.

Senator Charles E. Grassley (R-Iowa) is proposing the repeal of a 1993 tax break that makes executive pay over $1 million to be tax deductible if it is tied to performance. Please note, in most all situations, employee pay is deductible as a business expense, so this is not something that was made especially for executives, and not normal employees; as a matter of fact, this was meant to provide a compromised way to end special legislation made against executives. Effectively, companies are paying their executives with stock options to get around paying a lot of taxes. And further, executives get the ability to have lower tax rates with this approach because they get their personal revenues from capital gains, rather than a salary. This allows them to by-pass a lot of standard income tax, as well as some payroll taxes. This has never been more apparent than in situations where executives are only taking $1 in salary. Strictly speaking, these stunts are mostly public relations tools, and the rest of it is for tax benefits to the employee and the employer. Ironically, the executives that tend to pull the "benevolent" $1 salaries tend to be the more liberal bunch that just want to put on a dog-and-pony show to put them in the good graces of their loyal followers. Examples include Steve Jobs (Apple and Pixar), and Eric Schmidt, Larry Page, and Sergey Brin (Google).

So, the big debate is that more rich people are getting out of paying their "fair share" of taxes. Considering that the absolute majority of taxes are paid the wealthy, I just don't buy that. The politicians on the Left are putting on their own dog-and-pony show pretending that they care about the poor and middle class in an effort to buy votes. While the Democratic Party seems to be leaning to the left, I still think the politicians are out more for their own personal well-being than anything. So, they scream about executive pay and they get their constituents all worked up, and hopefully earn some more votes. But, they are not the only politicians putting a dog-and-pony show. Senator Grassley, a Republican, is doing just that by proposing this repeal. The reasoning cited here is that the government could get more tax revenue from this situation. However, given the findings, it would only generate about $3 billion in additional revenue by taxing the extra $10 billion from these corporations. To average citizens, $3 billion sounds like a lot of money... and it certainly is. However, in the grand scheme of things, the Federal Budget, it is a miniscule drop in the bucket that will have nearly a zero sum effect. So, this is just more evidence that this is another dog-and-pony show. The only effect I can see from this is that the stock market is going to take a hit from it, like it always does when congress is in session; and that is going to hurt average citizens who are trying to save for their retirements in 401(k) and IRA plans.

IRS Telephone Tax Refund

On May 25, 2006, the IRS announced that it would be refunding taxes paid on long-distance services paid after February 28, 2003 and before August 1, 2006. This is a refund of an excise tax that was instituted during the Spanish-American War. The refund is available to all taxpayers who paid this tax (individuals, businesses, and non-profits). It appeared that it would be a difficult task for many individuals, as they may not have saved their bills; that is, until a few days ago.

On August 31, 2006, the IRS announced Standard Amounts for Telephone Tax Refunds. Essentially, this change allows individuals to claim a standard amount of $30 for the telephone tax refund, without itemizing or providing documentation. You can claim $40 if you have two exemptions, $50 if you have three exemptions, and $60 if you have four or more exemptions.

There will be one line to claim this deduction on the 2006 tax forms. And remember, this will only be for 2006. If you have any questions, you can email the IRS at Telephone.Tax@irs.gov, or you can visit the Telephone Tax Refund Questions and Answers page.

Making Extra Money - Part One: Get a PayPal Account

This is the first in a series geared toward making extra money. Some of these ideas are long term plans to make some extra cash. Other ideas are quick one-time shots at making some extra money. In any event, we have to start somewhere. In this article, I will discuss the reasons for setting up a PayPal account.

PayPal is the most popular online system for making transactions. I used my PayPal account extensively. I use it to collect fees from auctions on eBay, accept payment for mystery shopping, and withdrawl funds from various online programs that you can use to get paid to perform tasks.

PayPal was purchased by eBay a few years back. It has been tightly integrated into eBay to the extent that it is easier to buy and sell using eBay than any other method.

When I evaluate a program that can make money for me, I first check to see if it pays via PayPal. Payment transactions with PayPal are immediate. Also, I have a PayPal debit card that allows me to use the funds. This works out well for shipping items, as I receive payment before I ship, and I then use my PayPal debit card to pay for the shipping costs.

So, sign up for a PayPal account, link it to a savings account, and then order your debit card. It will take a week or two for the card to arrive.

Cost of Living Advantages

On Free Money Finance, FMF is discussing the advantages of moving to a city with a lower cost of living. The idea is simple, move to a location that costs much less, but try to keep your salary from decreasing proportionately. My idea is the reverse: move, or just work, in a higher cost of living location, temporarily, and try get your salary to increase more than proportionately.

I live in one of the top 20 largest cities in the country, but the cost of living is very low. For the first time (I don't know why I never thought about it before), I checked the job market outside of my metro area. In this case, I checked New York City. In this case, I found a job similar to mine that paid twice as much (and I am not on the low end of the scale for my location). In New York City, my pay would need to be a little bit more than what that job offered to cover the cost of living increase. So, this is not ideal. Further, I have argued against moving with my wife for some time, and this would be me supported the worst possible situation for my family. If I was single, this could make since because I could reduce my costs drastically just to get by, and then it would work out. If I were able to save the same percentage of my income that I save now, it would be double, in a nominal since. Then, when I had enough of it, I could move back and have twice the money saved than I would have.

So, New York City doesn't look like it would work out. However, being in the Midwest, there is the third largest city in the country: Chicago. Chicago is only two and half hours away. I have known people (and I thought they were crazy) who travelled two and a half hours to work out where I live, this would be about the same thing. Gas prices are outrageous, though, so I might take the fuel costs and apply them to renting a room somewhere, and then just save the wear-n-tear on my vehicle. I could come home on the weekends, and the family could stay with me during the summer. Heck, maybe I could even telecommute a few weeks each year, in addition to vacations, and have more time at home than I expect.

You can use Sperling's Best Places to figure it out for yourself. At a round number, like $50K, someone in my area would need to make over $69K to have the equivalent salary. As a side note, I don't make $50K (and I will not say it is higher or lower... you can speculate). The percentage increase is what is important, and it is 38.6% higher in Chicago to be equivalent to my current location. So, now I will head over to Monster.com to see if I can find a job similar to mine that pays 38.6% or more than my current job.

Well, what do you know? I found a job that certainly had to potential to much more than a 38.6% increase. As a matter of fact, it could be up to a 72% increase! And the skillset is nearly identical to what I do in my current position... and the title is very similar, as well.

While I am not anywhere near ready to leave my current job, it is certainly something to consider when that time comes. With Chicago being so close, I could very nearly maintain my current cost of living. Further, if I could turn it into a Independent Contractor style position, I could write off all of the increased costs associated with traveling on my taxes.

Reaching Retirement: Pulling Partial Benefits or Waiting for Full Benefits

I have been itching to write about this very specific topic for time. As an early post, it may seem ambitious, but I have done the calculations and I am here to tell you this: start pulling your Social Security benefits as soon as possible. However, I have one caveat: invest it.

Since this blog is very early in its life, I must qualify my position on Social Security. It is:

• Unconstitutional
• Unsolvent
• Force
• a Lie (it is not guaranteed: see Fleming v. Nestor)
• Sucking the Financial Livelyhood from Younger Generations
• ...fill in the blank

That's right, I hate it; plain and simple. It goes against personal responsibility; it provides a false sense of security; it provides horrible returns; and what's worse, it is not guaranteed like the government tells you. I think personal accounts are a step in the right direction, but So-so Security really just needs to go away.

Now that we have that out of the way, I can give a brief overview of the different choices required when receiving Social Security benefits. Afterwards, I will give you the basic calculations that prove my point, which is, you should certainly begin receiving your benefits as soon as possible.

Regardless of whatever Social Security was supposed to be, or where it should go, it is now considered a safety net for retirement. When you have paid into Social Security for ten years, you begin receiving annual statements that explain what benefits you may receive. Along those lines, you have two ages that you can begin receiving benefits (unless you become disabled or die). There is an age that you can receive full benefits that starts at 65, but is stepped up based on the year of your birth. You can determine the age at which you can receive full benefits on your own. I am among the last tier that has to wait until the age of 67 to receive benefits. In the coming years, there may be more tiers. However, at the age of 62, you can receive reduced benefits. The reduction is based on the same tiers for full retirement benefits. The idea behind the reduced benefits is that you can receive these lower benefits, but it is probable (based on life-expectation) that you will be paid the same amount of benefits over your lifetime. However, this entire guide is really for those who are approaching that time in the very near future.

Now, I will give you a very simple and conservative set of calculations that will prove to you that you should indeed receive your benefits sooner, rather than later. Given that we are looking for those who will be 62 soon, we need to get the data from the tier for birth years 1943-1954. Full retirement age for these people is 66 and partial benefits will be reduced by 25%. What this means is that for every $100 in benefits you would receive at full retirement age, you will only receive $75 in benefits at partial retirement age. So, we have to make up for $25 for each block. For simplicities sake, we will assume that the full retirement benefit will be $100 per month, and the reduced benefit will be $75 per month. Regardless of the actual benefits, this will apply to your situation as long as the returns are the same.

This plan assumes that you start receiving partial benefits at the age of 62 and invest them getting a very conservative 8% return. What we will do is build an savings schedule. We have four years to meet the goal. If we meet the goal before four years, then you get that as early retirement! The goal is to replace the $25 reduction in benefits.

You can build savings/amortization schedules yourself using time-value software. Let's see the results:

On the 45th month, the interest paid on this money exceeds the $25 reduction. You have two choices, now. You can retire three months sooner with full benefits, or you can wait three more months and get more than full benefits.

Remember, this is based on an 8% return, which is highly conservative, but still not guaranteed. If you choose to do this, it is your own responsibility. I am not responsible for your outcome. That being said, you might exceed that 8% return, easily.

To me, this just proves how ridiculous Social Security really is. Use this to your advantage, because Social Security will be in a deficit situation in about ten years. This may mean a reduction in benefits or outrageous tax increases.

Welcome

Welcome to Rational Cents. The purpose of this weblog is simple: I like to do things for myself, and by doing so, I provide something that is to the liking of some other individuals. This is essentially the "Hidden Hand" theory. If you haven't guessed it yet, I am pro-capitalism and pro-liberty. What can I say, I am an American, and I believe that because of having free markets we developed the largest economy that has provided for the most people.

This blog will discuss fiscal matters, mostly of a personal nature. So, you could classify this as a personal finance blogs. By most accounts, I would say this will be accurate. However, it may get somewhat political... but I will be as reserved as possible.