MONEY Ask the Expert

How to Help Your Kid Get Started Investing

Investing illustration
Robert A. Di Ieso Jr.

Q: I want to invest $5,000 for my 35-year-old daughter, as I want to get her on the path to financial security. Should the money be placed into a guaranteed interest rate annuity? Or should the money go into a Roth IRA?

A: To make the most of this financial gift, don’t just focus on the best place to invest that $5,000. Rather, look at how this money can help your daughter develop saving and investing habits above and beyond your contribution.

Your first step should be to have a conversation with your daughter to express your intent and determine where this money will have the biggest impact. Planning for retirement should be a top priority. “But you don’t want to put the cart before the horse,” says Scott Whytock, a certified financial planner with August Wealth Management in Portland, Maine.

Before you jump ahead to thinking about long-term savings vehicles for your daughter, first make sure she has her bases covered right now. Does she have an emergency fund, for example? Ideally, she should have up to six months of typical monthly expenses set aside. Without one, says Whytock, she may be forced to pull money out of retirement — a costly choice on many counts — or accrue high-interest debt.

Assuming she has an adequate rainy day fund, the next place to look is an employer-sponsored retirement plan, such as a 401(k) or 403(b). If the plan offers matching benefits, make sure your daughter is taking full advantage of that free money. If her income and expenses are such that she isn’t able to do so, your gift may give her the wiggle room she needs to bump up her contributions.

Does she have student loans or a car loan? “Maybe paying off that car loan would free up some money each month that could be redirected to her retirement contributions through work,” Whytock adds. “She would remove potentially high interest debt, increase her contributions to her 401(k), and lower her tax base all at the same time.”

If your daughter doesn’t have a plan through work or is already taking full advantage of it, then a Roth IRA makes sense. Unlike with traditional IRAs, contributions to a Roth are made after taxes, but your daughter won’t owe taxes when she withdraws the money for retirement down the road. Since she’s on the younger side – and likely to be in a higher tax bracket later – this choice may also offer a small tax advantage over other vehicles.

Why not the annuity?

As you say, the goal is to help your daughter get on the path to financial security. For that reason alone, a simple, low-cost instrument is your best bet. Annuities can play a role in retirement planning, but their complexity, high fees and, typically, high minimums make them less ideal for this situation, says Whytock.

Here’s another idea: Don’t just open the account, pick the investments and make the contribution on your daughter’s behalf. Instead, use this gift as an opportunity to get her involved, from deciding where to open the account to choosing the best investments.

Better yet, take this a step further and set up your own matching plan. You could, for example, initially fund the account with $2,000 and set aside the remainder to match what she saves, dollar for dollar. By helping your daughter jump start her own saving and investing plans, your $5,000 gift will yield returns far beyond anything it would earn if you simply socked it away on her behalf.

Do you have a personal finance question for our experts? Write toAskTheExpert@moneymail.com.

MONEY Ask the Expert

Can I Ladder Bonds Using ETFs?

Investing illustration
Robert A. Di Ieso Jr.

Q: I’ve heard that there are bond ETF’s that hold securities that mature on the same date. Can they be used to create a bond ladder?

A: Bond ladders are a time-tested tool for investors looking to lock in predictable streams of income. The idea is to buy bonds that mature at regular intervals. In a simple ladder, for instance, you might divide your fixed-income money evenly among securities maturing in, say, one, two, three, four and five years.

Not only does this approach spread your bets, it is particularly useful now that interest rates are expected to rise.

Why? Rising rates are a threat to bond investors. That’s because when market rates rise, the price of older, lower-yielding bonds in your portfolio fall, eating into your total returns.

However, investors who create a ladder of bonds with different maturities need not worry about short-term fluctuations in bond prices. As long as they hold all the securities in their ladder to maturity, investors will get their fixed payments and principal back (assuming a borrower doesn’t default) no matter what rates do. What’s more, as one batch of bonds comes due every year, investors will be able to reinvest that money into new, higher yielding bonds, thereby benefitting from rising rates.

“A bond ladder makes all the sense in the world right now,” says Ken Hoffman, and managing director with HighTower Advisors. “If you know what you’re doing, you can create a ladder that provides you with the interest payments and maturity that you need.”

Here’s the rub: Putting together a diversified bond ladder requires some serious dough. At a minimum, you’ll need about $10,000 to buy a single bond, and ideally you’d want more than one bond on each “rung,” or maturity date. “I typically don’t recommend a bond ladder unless someone has $500,000 to invest,” says Hoffman, adding that you can construct a ladder with Treasury, corporate, municipal bonds, and so on.

Why not turn to bond funds? Regular bond funds own hundreds of different securities that mature at different dates and that aren’t necessarily meant to be held to maturity. Therefore, it’s impossible to ladder with regular funds.

This is where exchanged-traded funds that hold bonds with the same maturity come in. Two big ETF providers, Guggenheim and BlackRock’s iShares, now offer so-called defined-maturity or target-date ETFs that can be used to build a bond ladder using Treasury, corporate, high-yield or municipal bonds.

Like traditional ETFs, they charge low expense ratios, hold a basket of securities, and trade like stocks. What makes them unique is that the portfolios are made of up a diversified group of bonds maturing at the same time. When those underlying securities come due, target-maturity ETFs liquidate and distribute their assets back to shareholders — much like an individual bond would.

Using Guggenheim BulletShares, for example, you could build a corporate bond ladder with 10 funds maturing every year from 2015 through 2024.

ETFs aren’t a perfect proxy. The coupon rate — or regular interest payment — and the final distribution rate aren’t nearly as predictable as they are with individual bonds. Still, for investors who want the benefits of a ladder but with more liquidity, more diversification, and lower minimums, they’re worth a closer look.

Do you have a personal finance question for our experts? Write toAskTheExpert@moneymail.com.

MONEY Smart Shopping

9 Ways to Score Big at a Yard Sale

Binoculars at a yard sale
Kevin Van Aelst

Use these strategies to help you find the treasures among the castoffs.

Between summer renters unloading stuff, parents clearing out space for back-to-school gear, and teens leaving behind their childhood rooms for college dorms, Labor Day weekend can be a bonanza for yard-sale shoppers. To get the best deals, though, you have to know what to look for. Here are 9 ways to shop a yard sale like a pro.

1. Know your sizes. You don’t want to discover after you get it home that your terrific new end table is three inches too wide for the spot you had in mind. Assess your spaces beforehand and carry a small tape measure in your bag to use while browsing.

2. Think frames, not art. The chances you’ll spot an original Whistler in your neighbor’s yard? Not so good. Frames, on the other hand, can often be worth more than sellers think. “I have found some that were 150 years old selling for chump change,” says artist, designer, and garage sale enthusiast Pablo Solomon. Look for intricate frames made from solid material. For more on what makes frames, art, and other antiques valuable, see the guides at eBay.com.

3. Scout out old china. Yard sales are great for nabbing just-out-of-the-box kitchenware. But vintage bowls and cups may be a better deal—and better quality—than newer items. If you’re interested in a lot of pieces, ask for a bulk discount; sellers are often willing to cut a deal to clear out a bunch of wares at once.

4. For resale, try retro. Yard-hopping for profit? Many traditional antiques are selling for half what they used to because downsizing baby boomers are flooding the market and younger buyers have a different aesthetic, says Patrick van der Vorst, a Sotheby’s veteran and co-founder of ValueMyStuff.com. Today’s hot items are appliances, functional objects, and novelties—such as movie posters or advertisements—from the 1950s, ’60s, and ’70s. Use your smartphone to check how much similar items have recently sold for on eBay before you negotiate.

5. Get goods appraised. Think you’ve found a garage sale gem? ValueMyStuff.com will give you a virtual appraisal for $10. Just submit a photo, and within 48 hours you’ll have an estimate as well as details about the item’s provenance and insight about why something is or isn’t valuable. That’s knowledge you can use to score even bigger on your next scavenger hunt.

6. Test the electronics. Those new-looking portable iPod speakers are a great deal—or are they? Pack an assortment of batteries to test electronic goods, along with a high-powered flashlight or black light to check for cracks or chips on housewares or furniture that may not be visible to the naked eye.

7. Look carefully at costume jewelry. Sellers often think that old costume jewelry made with fake stones and plated with silver or gold isn’t worth anything. Yet “vintage costume jewelry can sell for big bucks,” says Reyne Hirsch, an expert in 20th-century decorative arts and former appraiser for Antiques Roadshow. Look for sturdy settings and clasps; avoid pieces that have chipped or worn enamel.

8. Go for heavy items. Gardening tools, kids’ bikes, fitness equipment, and furniture all may be cheaper at a yard sale than online, since many sellers don’t want to go through the trouble or expense of shipping awkward or heavy pieces. To snag the best price on something mentioned in a listing, try calling the seller the day before; aficionados often circle the block hours before the official sale starts.

9. Know when to steer clear. Mattresses, upholstered furniture—forget ‘em. The risk of bedbugs is too high. Also be careful with baby gear such as car seats and cribs, since safety standards often change. Check the latest safety info on baby items at the U.S. Consumer Product Safety Commission’s website, cpsc.gov.

Adapted from “How to Spot a Yard Sale Deal” in the July 2012 issue of MONEY magazine.

Related:
How to Host a Money-Making Yard Sale
Inside the ‘Pay What You Want’ Marketplace

MONEY Ask the Expert

Why It Pays to Spend Down Your College Savings Plan Quickly

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q. I have enough in my daughter’s 529 to pay her full tuition for freshman year. Should I? — Andrea B., Location withheld

A. Yes, it’s best to use the savings sooner rather than later, says Raymond Loewe, an adviser with United Planners Financial Services. Given that your time horizon is short and the stock market has had a good run, it’s best to realize those tax-free gains now. Plus, spending down the 529 early could improve your odds for financial aid in future years, albeit slightly. Every $100 used can be worth $6 in aid, says Loewe. One caveat: The IRS won’t let you snag an education tax credit and take the 529 tax break for the same expenses. So to get the full $2,500 American Opportunity credit, for example, you’ll want to pay at least $4,000 with other money, says Joe Hurley of Savingforcollege.com.

More on college savings:

MONEY Ask the Expert

How to Know When Your Car is Really a Lemon

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q. My new car has been in the shop for a month. Will a “lemon law” be of help? — Mark Wisner, Morrisville, N.C.

A. Assuming your car is deemed a lemon, you’re entitled to—your choice—either a replacement car or a purchase price refund (see below). The definition of “lemon” varies by state; in your home of North Carolina, a car qualifies if it has been out of service for a total of 20 business days over 12 months or has been ­repaired for the same problem at least four times. The car must have fewer than 24,000 miles on it and be less than 24 months old.

Before submitting a claim, notify the manufacturer in writing of the problem (via certified mail) and give the company a reasonable chance to fix it, says Rosemary Shahan, president of Consumers for Auto Reliability and Safety. Check your state attorney general’s office for details, and carefully document your complaints and attempted repairs.

LEMON LAW

MONEY selling a home

What’s the Best Way to Sell My Home to a Relative?

Q: I want to sell my home to my sister for $1. What’s the cheapest way? Do I need a lawyer? — Stacy C. Bouknight, Glenside, Pa.

A: No, you don’t need a lawyer to unload your home in most states, including Pennsylvania. To transfer the home cheaply, don’t sell it; that would require a title search and insurance to do cleanly, costing several hundred dollars at least. Instead, use what’s known as a quitclaim deed, which transfers your ownership but makes no guarantee the home is unencumbered, says Nolo legal editor Mary Randolph. Fill out the document ($14.99 at nolo .com), have it notarized, and record the transaction with your county land records office.

Have a mortgage? No matter how you turn the home over to your sister, you are still responsible for paying off the note; until you do, your lender has a claim on the house.

MONEY

Closing Out Your Old 401(k)

Q: I got a check closing out my old 401(k). Can I add it to my new 401(k) without penalty? — Matt Gould, New Cumberland, Pa.

A: Yes, and act fast.

Unless you put the money in another retirement account within 60 days of receiving the check, you’ll owe taxes on the sum, plus a 10% early-withdrawal penalty if you’re not yet 59½, says John Piershale, a financial planner in Crystal Lake, III.

Related: Will you have enough to retire?

One hitch: The old plan usually withholds 20% of your account for taxes, so when you make the deposit you’ll have to use other cash to cover that 20% shortfall.

Assuming you get this done within 60 days, you’ll get the withheld money back at tax time.

If your new 401(k) plan doesn’t accept rollovers or will make you wait too long to deposit the funds, put the money in an IRA, advises Lancaster, Pa., planner Rick Rodgers. You can always move it into a 401(k) later.

MONEY Ask the Expert

What’s the Best Way to Pay Bills Automatically?

You have more control paying your bills with your bank's online bill payment service. Photo: Shutterstock

Q: How should I pay bills: have creditors pull funds from my bank account or use my bank’s bill-pay service? — Emmett McAuliffe, St. Louis

A: The answer depends on whether you care more about convenience or control. If it’s control, pay your bills via your bank. That makes it far easier to stop, change, or delay a payment, says Hoboken, N.J., planner Victoria Fillet.

What you gain in control, though, you may lose in convenience, notes Lauren Prince, a planner in New York City.

Related: 7 ways to improve your credit

Though bank auto payments may work well for recurring fixed amounts, you still have to stay on top of bills that vary from month to month — say, from credit card companies or utilities.

If you travel frequently or are forgetful, authorizing reputable creditors to initiate electronic fund transfers for amounts due is better than being delinquent, adds Prince.

MONEY Ask the Expert

Should I Buy Life Insurance for My Child?

Q: Does it make sense to buy a whole life insurance policy for a child? — Michael C., Coatesville, Pa.

A: Hardly ever. Most kids don’t need life insurance, since its chief purpose is to replace income, says Jason Brooks, a financial planner in Berthoud, Colo.

And while whole and variable life policies have a cash value that rises, high fees slow that growth. Breaking even on premiums can take decades.

The only reason to buy is to guarantee insurability later in life, says Cleveland adviser Joe Heider.

Related: Which Comes First: Student Loans or 401(k)?

You can, he notes, lock in a policy — helpful if your child later has an illness, such as cancer or diabetes, that makes insurance expensive or unobtainable.

But such misfortune is rare; only one in 400 children has diabetes before age 20, for example. And the size of most kiddie policies ($50,000 or less) is usually too small to be useful for adults.

A better idea is to save for a more likely need: higher education.

MONEY Ask the Expert

If You’re on Medicare, Do You Also Need Medigap?

If you're considering getting supplement insurance, or Medigap, sign up within six months of enrolling in Medicare.

My father just went on Medicare. Should he buy Medigap insurance? Which policy is best? — Joe, Houston.

If your dad isn’t insured by a former employer, he should buy supplement insurance, or Medigap, which pays for some costs not covered by Medicare.

And, says Bonnie Burns, a policy specialist with California Health Advocates, he should sign up within six months of enrolling in Medicare, when he can’t be rejected for health reasons (some states let you qualify later on for a similar six-month window if your employer plan is canceled).

Since switching policies later may involve a physical, your dad’s best plan is one that suits him over time, not just one that meets his needs cheaply now.

Related: What is Medicare?

All policies must match one of Medicare’s 10 standardized plans — from basic coinsurance to coverage of skilled nursing. Learn more at Medicare.gov.

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