ready for college
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Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
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Our new baby has received $5,000 from
family and friends. What is the best
investment for this money? We would like to
add to it until he is 18, and would prefer a
vehicle that he can’t touch until then.
KIE TH LATHROP
—Michael Blaz, Elyria, Ohio
YOUR SON IS OFF to a great financial start. I think
the best place for his money is investments that will
help him (and you) afford college. A 529 college savings plan is a smart choice. The money you invest
grows tax deferred, and if you ultimately withdraw
the money to pay for college there will be no tax—a
huge investing advantage.
You can invest in any plan, but to get any state
tax breaks you need to stick with the plan in your
state. What’s nice about the 529 plan is that you,
other family members and even friends can make
contributions over the years. (Gifts of more than
$12,000 per year from any one individual may trigger the gift tax.)
And you, not your child, remain in control of
the money. If he doesn’t end up wanting to go to
college, you can make another child a beneficiary.
Worst-case scenario is that you can withdraw
the money and pay income tax and a 10 percent
penalty. To learn more about 529 savings plans, see
In your top 10 tips for financial freedom, you
advise: Life insurance should not be included
in our taxable estate, look into an irrevocable life insurance trust and we need a revocable living trust with an incapacity clause.
What is an incapacity clause?
—Peter Bingley, Mission Viejo, California
THE IRREVOCABLE LIFE insurance trust can help
your heirs avoid paying a hefty estate tax. In 2007
and 2008 the federal estate-tax exclusion is $2 million; an estate worth more than that will owe tax. By
holding the life insurance inside this trust the value
of the policy (the death benefit) is not counted as
part of your estate. So if you have a sizable estate, the
trust is a smart tax-saving move.
The incapacity clause is one of the most important parts of estate-planning strategy. So often when
we think about wills and trusts we are focused on
what will happen to our assets when we die. We tend
to overlook what will happen to our estate if we
become too ill to handle our financial matters on
our own. That is, What happens if or when we
Given our extended life expectancies and ill-nesses such as Alzheimer’s and dementia, or a debil-
itating coma from an accident, I think it is vitally
important to make plans for someone else to step in
and handle our affairs if we ever become incapable
of taking care of things on our own.
The incapacity clause on a revocable living trust
does just that. If you become too ill to handle your
estate, the incapacity clause kicks into action. The
successor trustee you named for your trust will
automatically take on the job of overseeing your
affairs, following the directions you have laid out in
Our granddaughter, 15, has $20,000 in a Roth
IRA. Assuming she doesn’t need to touch the
money for 50 years until retirement, where
should she invest this money for safe and
—Joe Samuels, Santa Monica, California
THAT’S ONE SAVVY granddaughter. If she never
invests another penny and just lets that $20,000
grow at an annualized rate of 8 percent a year for the
next 50 years she will have more than $900,000
saved up. But tell her to keep adding to the savings!
Let’s say she manages to sock away $3,000 more
a year in her account and she keeps up the annual
contributions until she is 65. She will have about
$2.8 million saved up, assuming the same 8 percent
annualized return. And because all of this is in a
Roth she will never owe any tax; Uncle Sam will not
take any of it.
I suggest that she invest her Roth IRA in either
exchange-traded funds (ETFs) or no-load index
mutual funds. Discount brokerages are the best
place to hold a portfolio of ETFs; you must pay a
commission on every trade, so you want to get that
cost as low as possible.
I think a smart strategy is to have 90 percent of
her money in a broad ETF and the rest in an international ETF. If she is going to invest small sums
throughout the year, ETFs aren’t the way to go: She
will get hammered with brokerage commissions.
Use no-load index funds instead.
I keep hearing something about a change in
the federal capital-gains tax in 2008. Can
—Mike Birdsill, Chico, California
IT IS GOOD news. The low long-term capital-gains tax rates we are all now enjoying— 5 percent
or 15 percent, depending on your income-tax
bracket—were scheduled to revert to 20 percent
after 2008. But Congress voted to extend the low
rates through 2010. C