Wealth Management Blog | WrapManager | Doug's Quiz Corner (3)

Doug's Quiz Corner: College Savings

Posted by Doug Hutchinson | CFA®, Director of Research and Trading

January 17, 2017

Quizmaster, Doug Hutchinson, presents his quiz for the month.
Here, Doug discusses strategies for saving for college.

Consider this Scenario:

Your friends Martha and Jack are planning on setting up a college savings investment plan for their toddler, Max. They are examining a few different options for this investment plan and have asked for your help.

One option they are considering is to start contributing now with a $4,000 initial contribution and then adding $1,000 per year for the next 17 years. Assume the contributions occur at the beginning of each year including the first year.

The other option they are considering is to start contributing 5 years from now with a $5,000 initial contribution and then adding $1,500 per year for the next 12 years. Assume the contributions occur at the beginning of each year including the first year.

Assume the investments return 7% per year for each of the 17 years. Also assume that Martha and Jack are using a tax deferred investment account.

Which option will lead to the highest value at the end of 17 years when Max is ready to start college?

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Doug's Quiz Corner college savings

Doug's Quiz Corner: Tax Efficient withdrawals

December 13, 2016

Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug discusses strategies for tax efficient withdrawals. Consider this Scenario: Your friend Robert is a retiree who is facing an unexpected expense of $4,000. To meet this unexpected expense, he will need to take a withdrawal from either his taxable investment account or his tax deferred Individual Retirement Account (IRA). Robert’s taxable account and his IRA are the same size and have the same allocation of investments. Robert faces an income tax rate of 25%. Assume any capital gains realized in a taxable account are long term gains and are taxed at 15%. Assume his cost basis of holdings in his taxable account is 10% below the potential sale price of the holdings. Assume Robert is 72 years old and has already fulfilled his Required Minimum Distribution (RMD) for his IRA for the year. Robert asks you: “Should I take the $4,000 withdrawal from my taxable account or from my IRA? Or should I be indifferent on where the $4,000 is coming from?” [+] Read More

Doug's Quiz Corner: Tax-Efficient Charitable Donations

November 15, 2016

Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug discusses strategies for tax efficient investing. Consider this Scenario: Your friend Elizabeth would like to donate to her favorite charity before the end of the year. Elizabeth is debating whether to donate appreciated securities or to donate by liquidating a different security at a loss (and realizing a tax benefit by doing so) and then donating the proceeds from the sale of that security. She owns $2,000 worth of ticker ABC at a cost basis of $1,500. She purchased this investment over a year ago. Assume that the appreciated stock is fully deductible. She owns $2,000 worth of ticker XYZ at a cost basis of $2,200. She has $200 in realized short-term gains from a different investment. Assume she has an income tax rate of 30% and a long term capital gains rate of 15%. What is the most tax efficient option to donate $2,000 to her favorite charity? [+] Read More

Doug's Quiz Corner: Tax Efficient Investing

October 10, 2016

Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug discusses strategies for tax efficient investing. Consider this Scenario: Your friend Stacy is considering purchasing the following investments: A high yield bond with a 8% coupon that is currently trading at $100 A tax exempt municipal bond with a 2.5% coupon that is currently trading at $100 An actively managed mutual fund with high turnover that typically generates short-term capital gains Stacy has enough funds available in her traditional Individual Retirement Account (IRA) and her taxable individual account to purchase 1 or 2 of these investments in either account. Stacy asks you “I’d like to purchase all three of these investments, but which account should I put each of these investments in? I’d like to be as tax efficient as possible.” [+] Read More

Are Tax Exempt Municipal Bonds Better Than Corporate Bonds? - Doug's Quiz Corner

September 13, 2016

Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug considers whether tax-exempt municipal bonds are a better investment than corporate bonds. Consider this Scenario: Your friend Ricky is considering purchasing a bond and is deciding between a taxable corporate bond and a tax-exempt municipal bond. The taxable bond has a yield to maturity of 4.10% and the tax-exempt municipal bond has a yield to maturity of 3%. Assume both bonds have a similar credit quality and a similar maturity. Assume that Ricky has a federal tax rate of 25% and a state tax rate of 5% and assume that the interest from the tax exempt municipal bond is exempt from both federal and state income tax. Which bond will give Ricky the higher after tax yield to maturity?? [+] Read More

Doug's Quiz Corner: Early IRA Withdrawal

August 16, 2016

Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug provides a an example to show the cost of taking an early withdraw from your IRA. Consider this Scenario: Your friend Ken is entering a Fantasy Football tournament and is considering funding his entry fee by taking an early withdrawal of $2,000 from his Traditional IRA. Assume Ken has a federal income tax rate of 28% and a state income tax rate of 6%. Assume Ken will face an early withdrawal penalty of 10% (there are certain situations where an early withdrawal can be taken without the 10% penalty, but for the purpose of this example assume that Ken faces the early withdrawal penalty of 10%). Ken is 25 years old and is planning to retire in 40 years at age 65. Assume that his IRA will return 7% each year for the next 40 years. What would be the total cost of Ken’s early withdrawal considering both the immediate penalties/taxes and the growth in his IRA that he will miss due to taking an early withdrawal? [+] Read More

401(k) Diversification– Doug's Quiz Corner

July 18, 2016

Quizmaster, Doug Hutchinson, presents his quiz for the month. This time the topic is 401(k) diversification. Keep reading to find out if Gina is going down the right path with her strategy. [+] Read More

Factors in Bond Performance: Time or Interest Rates?– Doug's Quiz Corner

June 15, 2016

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Meaningful Diversification and Mutual Funds – Doug's Quiz Corner

May 18, 2016

Quizmaster, Doug Hutchinson, has come up with another great quiz. This time he discusses creating a meaningful and balanced diversification strategy. Good luck! Consider this scenario: Your friend Ben has been saving money and he has $10,000 that he would like to invest. Ben owns 47 different mutual funds and he is considering investing his $10,000 in a 48th mutual fund. "My goal is to be diversified," Ben tells you. "You can never have too much of a good thing so adding the 48th mutual fund to my portfolio will get me evenmore diversified. The more holdings I have, the greater the diversification benefit that I'll receive." Is it reasonable to expect that Ben will get a meaningful diversification benefit by adding a 48th mutual fund to his portfolio? [+] Read More

ETF Currency – Doug’s Quiz Corner

April 13, 2016

Quizmaster, Doug Hutchinson, has come up with another great quiz. This time he tests our knowledge of how currency risk can impact an investment. Good luck! Consider this scenario: Your friend Katrina bought $10,000 of an Exchange Traded Fund (ETF) that tracks the performance of an index of Japanese equities. [+] Read More