Good deal on good kitchen knives

Okay, so this is kind of a random post for a personal finance blog, but one way to save money is to cook for yourself. To do that, you need some good kitchen knives.  90-100% of those knife needs can be handled by 2 implements: A Chef’s knife and a paring knife.  I recently came across a good deal for 2 high-quality versions of each (both of which I’ve purchased; they work great!)

Make sure you get a sharpening steel as well, like this one from Chicago Cutlery or this one from OXO.  This is so you can sharpen the knives yourself when they inevitably lose some of their edge.

Here’s a useful site that discusses how to pick good kitchen knives.  He goes over the various types of steel, but I haven’t figured out how to know which knives contain which steel!

3.25″ Paring knife:

paring knife

8 Inch Chef’s knife:

chefs knife

UPDATED: Saving for college – Where should you put your money?

The 60 second recommendation

The 529 Savings plan is usually the way to go.  It allows you to sock away money in an investment account which grows tax-deferred.  If the beneficiary you designate (say, your child, or yourself if you’re going back to school) spends the money on approved higher-education costs like college tuition, books, or lodging, they can withdraw the money tax-free as well.  (This tax treatment is akin to the Roth IRA, but for education rather than retirement.)

First, check to see if your state’s 529 plan has any special benefits that might make you choose it (note to Washington residents: our 529 plan doesn’t have anything special as of this writing, so you can safely ignore it).  (There’s also these even more detailed plan feature comparison that you can check.)

If your state does NOT have any such benefits (like state income tax breaks on contributions, say, or matching dollars from the gov’ment), then head on over to Vanguard, my favorite financial services firm, and open their 529 plan.

For investments, I recommend the ‘set it an forget it’ age-based options.  Of these, I think the ‘Aggressive’ one is the most appropriate choice.  It starts off as all-stock for the first several years of your child’s life, and shifts into bonds as they approach college age.

The ‘full treatment’

It’s a given that your kids should go to college.  How are you going to pay for your kid’s education?  (Or your own, if you’re planning on going back to school.)  College tuition has been rising at an obscene rate, much faster than inflation.  To meet your education savings goals, you need to invest, and you need to start right away to give your money a chance to grow.  How early you invest is the biggest factor in your future wealth. Read the below and start socking away money for education today.

Whether you want to send Junior to an Ivy League private institution or a public state school (where serious students are powerless against the drunken jock-ocracy), I can tell you where to put your college nest egg to get the most bang for your buck.

There is really only one worthwhile education savings vehicles to choose from:

The state 529 savings plan.  This can be any state’s plan, not just your own.

(I used to include the Coverdell ESA as a worthy second option, but its benefits are so mediocre now, that it’s not even worth mentioned.  The material I had in this post on the Coverdell ESA can be read at the very bottom of this post if you like.)

How the 529 Savings plan works

The 529 Savings plan allows the money you contribute for a designated beneficiary (like your child) to grow tax-deferred.  The distributions (money you later take out of the account) are tax-free as long as they are then spent on qualified education expenses (defined later.)  (Unlike, say, a 401k, there’s no option to deduct your contributions to these education plans from your taxable income.)

– 529 savings plan distributions are only tax-fee for post-secondary expenses (like college.)

– Unlike the Coverdell ESA, you can contribute for a beneficiary of any age (even yourself or your spouse!)  If plans change, you can transfer the account to an eligible beneficiary.  These  include the beneficiary’s kids, grandkids, siblings, parents, neices/nephews, aunts/uncles, in-laws, first cousins, and all those folks’ spouses (including the beneficiary’s.)  (Step-family count too.)  This means you could start a 529 for yourself to go back to school, and if you don’t use all the money, give it to your spouse, kids or even grandkids.

– These plans are offered by states, and you can invest in ANY state’s particular plan (not just your home state.)  It pays to shop around, and you should always at least glance at your home state’s plan to see if there are any special benefits in it for residents (like state income tax breaks.)  I checked in my home state of Washington, and there’s no special benefits for residents.  So if you live in Washington state, see the Utah plan below.

In order to save you some virtual leg-work, I particularly recommend Vanguard’s plan (the Utah 529 plan is also great; but since most of your assets should be at Vanguard anyway, because Vanguard is THE BEST, I would go with Vanguard.)  It’s rock-bottom fees and excellent investment options just can’t be beat.  If go with the Vanguard plan and you want to pick a low-hassle, target-fund approach, I recommend choosing the age-based ‘Aggressive’ option.  That way, you don’t have to worry about rebalancing your portofolio from stocks to bonds as your child gets closer to needing the money.

ALWAYS, check out the asset allocations of any investment choice you’re considering to make sure you’re comfortable with the amount of risk/volatility.  You should take a lot of ‘risk’ (= all stocks; higher average return, but volatile) when the child is young, and less risk (= mostly bonds; lower average return, but stable) when the child is a few years from college.

– Morningstar also recommends a list of state 529 plan choices for 2009 in this article.

– There are no income limitations for contributors, so you can make millions and still contribute to a 529 plan.  Also, you can contribute as much as you like, but only up to the gift tax exclusion limit ($13,000 per person; $26,000 for married couples filing jointly, as of this writing) to avoid paying a federal gift tax.

How 529 Savings plans affect federal financial aid

For federal financial aid planning, both Coverdell ESAs and 529 Savings plans count as parental assets.  This is a good thing because in Financial Aid’s eyes, parent’s are only expected to contribute ~6% of their non-retirement, non-home assets, while kid’s are expected to contribute 35% of theirs.

(Note that this exclusion of retirement assets in financial aid calculations is a good reason to have your kid start a Roth IRA once they have some high school job earnings.  The IRA will exclude their assets from financial aid calculations, whereas a savings account or taxable stock account wouldn’t.)

[529 Pre-Paid Tuition plans (versus 529 Savings plans, which I discuss below) are counted as the student’s assets, and thus diminish financial aid eligibility.  This is one reason I don’t recommend them.  Another reason is that the plans guarantee to cover only in-state public school tuition amounts.  Also, many plans only cover tuition, which is often just a fraction (albeit a large one) of the total cost of attending college.]

How do I choose the right education savings option for me?

Generally, for college, the 529 savings plan is the way to go.  It’s tax-deferred growth, great investment options, and transferability to others (maybe Kid 1 rebels and shies away from college; no worries, change the beneficiary to Kid 2!) all make it a great option.

If you’re still not sure, take a look at these what-if scenarios:

– If you need money for pre-college education like private elementary or high school, a Coverdell ESA might be the way to go, as you CANNOT make tax-free withdrawals from a 529 Savings plan for elementary or high school.

– If you have significant state tax benefits from your state’s 529 savings plans, you probably want to use that.

– If the savings are for you, the 529 plan is great since it has no age limits for contributions or withdrawals.

If you’re unable to use any of the above to make your decision, here’s a link from Vanguard to help you choose.  It asks you a few questions and spits out an answer.

So do a little homework, and then start funding the plan you choose ASAP, even if you can only afford to put in a little bit each month.  We didn’t tackle how much to save in this article, so use this college savings calculator to get an idea.

Happy education savings!

Other resources:

Great info on saving for education, including a 529 savings plan comparison tool: http://www.savingforcollege.com.  Their very useful plan feature comparison tool is here.

Fool comparison of 529s and Coverdell Education Savings Account (ESA).

Motley Fool FAQ on 529 plans

* – “Unless Congress acts, certain ESA benefits expire after 2010. K -12 expenses will no longer qualify, the annual contribution limit will be reduced to $500, and withdrawals will not be tax-free in any year in which a Hope credit or Lifetime credit or Lifetime Learning credit is claimed for the beneficiary.” From: Savingforcollege.com

Hopefully Congress will renew these benefits.  I’ll update this post after a decision is made.  Don’t worry though, if the Coverdell benefits fall through after 2010, you can rollover your Coverdell into a 529 plan.

Addendum – What if my kid gets a scholarship

1) The typical 10% penalty that applies to withdrawals NOT used for approved educational expenses would be waived for taking out money equal to the amount of the scholarship earned.  However, there would be income taxes on the earnings (see next question.)

In short from http://www.savingforcollege.com/articles/20100409-7-myths-and-realities-of-529-plans:

“Myth 2: If my brilliant or athletic kid gets a full ride, I lose the money in my account.

Reality: As with the previous example, you can transfer the money to another beneficiary. But if your kid’s so talented that colleges are willing to pay to get him or her in the door, you won’t be heavily penalized, says Mary McConnell, director of college savings products for Charles Schwab in San Francisco. “If a child gets a scholarship, the penalty for making nonqualified withdrawals is waived, and there will be income tax only on the account’s earnings.” ”

In detail from http://www.kiplinger.com/columns/ask/archive/2007/q0423.htm:

We have three daughters, ages 15, 13 and 11, and have accumulated about $35,000 in state-sponsored 529 college-savings plans for each of them. They are all doing very well in school and could be on the road to scholarships. What happens to our college savings if they receive full-tuition scholarships? Can we use the funds to pay for room and board?

If one of your children is fortunate enough to win a scholarship, you’d be eligible to take a penalty-free withdrawal from her 529 account up to the amount of the award. You would, however, have to pay federal and state income tax on the earnings portion of the withdrawal. To avoid those taxes, you could name another family member as beneficiary of the plan.

 Not to worry, though. Even if your child gets a full-tuition scholarship, you’ll probably still have plenty of other bills that qualify for tax-free withdrawals from her 529 plan — including required fees, books, supplies and equipment. As long as your daughter attends school at least half-time, room and board count, too. And if she lives off campus, you can take a qualified withdrawal up to the cost of on-campus housing at that institution, says Doug Chittenden, head of education savings for TIAA-CREF, which administers 529 plans for many states.

In the unlikely event that any money remained after all your children were educated, you could let them use it for grad school, use it yourself, transfer it to another family member, or take it back and pay income taxes on the earnings plus a 10% penalty.

For more information about 529 withdrawals, see IRS Publication 970 Tax Benefits for Education. For details about each state’s 529 plan, see our 529 map.

2) Q: Are the withdrawals post-scholarship taxed at the parent’s income level, or the child’s (beneficiary’s)?

A: Earnings (but not contributions) on the amount you withdraw would be taxed at the scholarship recipient’s tax rate (your child’s, which is good!), but will not be subject to the 10% additional federal tax penalty.

http://www.collegesavings.org/commonQuestions.aspx

3) Q: Is there are timeline for when the withdrawals can be taken out penalty-free? For example, if the child/beneficiary receives a $10,000 scholarship for calendar year 2012, can the parent take out $10,000 in 2013 (or 2014, etc) penalty-free, or must they, say, take out the $10,000 in the same year as the scholarship (2012) in order to get out of paying any penalties?

A: There is currently no set timeline for when you can withdrawal penalty free. You can withdrawal as early as the same calendar year but unfortunately, the tax law is not clear on whether the penalty exception for scholarships applies only for the calendar year in which the scholarship is provided and each state has developed their own guidelines for withdrawals.

http://www.bankrate.com/brm/news/529/20050306a1.asp

http://www.get.wa.gov/

Coverdell ESA ‘archive’ material

Let’s start with the Coverdell ESA

– Coverdell’s have contribution limits of $2,000 per year per beneficiary (= child) in 2012, but that amount drops to $500/year starting in 2013!  This means that you have to make sure that ALL the people (grandparents, parents) who contribute to a Coverdell for a child  don’t contribute more than $2,000/$500 combined in a given year.  You must make these contributions by April 15th (tax day) of the following tax year (same rule as for IRAs.)  This means you can make a 2012 Coverdell contribution as late as April 15th 2013.

– Coverdell ESA’s, like Trix, are for kids.  You can only make contributions for any person who is under 18, unless that person is a special needs beneficiary.  Also, the beneficiary must use all of the money for qualified education expenses before age 30 in order to avoid taxes and penalties.  Alternately, you can transfer the account to another eligible beneficiary who is under 30.

Eligible beneficiaries include the beneficiary’s siblings, parent’s (presumably YOU), kid’s, spouse, in-laws, aunts/uncles, first cousins or any of the prior folks’ spouses.

– In order to contribute the $2,000 max to a Coverdell, your modified adjusted gross income (MAGI) must be less than $95,000, or $190,000 (as of 2009) if you’re married filing jointly.

– You can contribute to Coverdell’s for as many separate beneficiaries as you like.  For example, if you have 5 kids, you can contribute up to $2,000 for each of them in separate Coverdells (Mormons take note.)

– If you’re thinking about private elementary or secondary schooling for your precocious youngster, the Coverdell is the way to go*.  Elementary and secondary school expenses count for tax-free distributions.  (The 529 plans only allow for postsecondary  expenses, like college or vocational school.)  For all levels of education, these qualified expenses include required tuition, fees, room and board, books, supplies and equipment.

For elementary or secondary education ONLY:

Add to the above academic tutoring and even computer equipment & internet service “if it is to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in elementary or secondary school.”

Also, add in the following if they are required or provided by the school:  transportation and “supplementary items and services (including extended day programs.)”

– You can invest in pretty much whatever you want: stocks, bonds, mutual funds, etc.  I recommend you invest regularly into a market-tracking stock index fund like Vanguard’s VTMSX, and then reallocate some of that money to a bond fund (like VBMFX) once the beneficiary gets within 3-5 years of starting college.  If you don’t want to worry about doing the reallocation yourself (or you’re afraid you’ll forget), use a 529 savings plan that offers target-date funds that automatically changes your investment from aggressive to conservative as the child gets closer to college.   (So far, I haven’t found a target date fund made for college that individuals can buy outside of a 529 plan, but if you see one, let me know!)

– You can rollover a Coverdell ESA to a 529 savings plan (but you CAN’T rollover a 529 to a Coverdell.)   So if you think there’s a good chance you’ll want education savings for private elementary or high school, invest that money in a Coverdell.  If your kid doesn’t use it for St. Mary’s Academy, roll it over to a 529 if you like (or just leave it in the Coverdell.)

For federal financial aid planning, both Coverdell ESAs and 529 Savings plans count as parental assets.  This is good because parent’s are only expected to contribute ~6% of their non-retirement, non-home assets, while kid’s are expected to contribute 35% of theirs.  (Note that this exclusion of retirement assets in financial aid calculations is a good reason to have your kid start a Roth IRA once they have some high school job savings.  The IRA will exclude their assets from financial aid calculations, whereas a savings account or taxable stock account wouldn’t.)

[529 Pre-Paid Tuition plans (versus 529 Savings plans, which I discuss below) are counted as the student’s assets, and thus diminish financial aid eligibility.  This is one reason I don’t recommend them.  Another reason is that the plans guarantee to cover only in-state public school tuition amounts.  Also, many plans only cover tuition, which is often just a fraction (albeit a large one) of the total cost of attending college.]

Why everyone should go to college

A better alternative than dropping out of school to get into that rap game

2006 stats from the U.S. Census Bureau:

  • Average annual salary without a high-school degree: $19,915
  • Average with a diploma: $29,448
  • Average with a bachelor’s degree: $54,689
  • Average with a master’s degree or higher: $79,946

Read this to find out how to pay for college.

(Source: The Motley Fool.)

%d bloggers like this: