AskDong

I really liked your saving priority list. I found it very helpful and have a
saved it to my desktop as a reminder. In addition, I have had two questions
I’ve been meaning to ask you.

QUESTION 1
I recently heard about credit cards offering a percentage back towards funding
529 plans. Fidelity offers one that give 1.5% back. I am interested in this
type of card but wanted to know (1) can I fund a 529 account for children that
are not yet born? Perhaps I put the fund in my name till I have children? (2)
Is there a card that you recommend? (3) Can I still claim a tax credit for
contributions made to the 529 via the credit card?

QUESTION 2
Have you used mint.com? What are your thoughts about the utility of this
website?

-m

I’ll answer the 2nd question first because it’s more straightforward.  Yes.   I do use Mint, but not that much.  I’m still more of a fan of Yodlee as it has better overall coverage.   What Mint offers is a simpler view, and pitches of money saving alternatives.   For some individuals the offers are useful, but not me.  Generally speaking, I’ve already done my shopping when it comes to accounts.  The simplified view is nice, and I would be more apt to use if I were just starting with account aggregation.

In truth however, I’m looking at PageOnce.   PageOnce offers a very similar service to Mint, but like Yodlee is much  comprehensive.  In addition, PageOnce also offers an iPhone App.

529 Accounts

Yes, you can still can claim the tax (state) credit even if it’s funded from you Credit Card. I don’t believe the source of funding matters.  For the tax deduction it has to be a state sponsored plan for your state of Virginia.  I don’t believe Fidelity runs any of those plans, so it’s unclear in reality how you would be able to fund the 529 plan with a credit card.

While you cannot sponsor a 529 plan in the name of child that yet to be born, you can sponsor a plan under the name of another relative, and switch the plan’s beneficiary at another date.  The age of whom can be named beneficiary vary’s state by state.

A reader recently wrote,

Dong, Having stood in line at 7:30 a.m last Sunday for a wii I had to wonder if I was just being tooled with via Nintendo’s marketing department or whether or not there truly is a shortage.
-JC

I did JC one better and stood in line at 6 AM in the dead of winter. I’ve had the Wii for over a year now, and there are still shortages. Nintendo’s new “game”, Wii Fit is even harder to find. Recently, I was lucky enough to obtain Wii Fit despite the shortages. I didn’t get it through any effort of my own, but via a good friend who always has his finger on the pulse of the Internet. Circuit City online had the game in stock - for about ten minutes. It seems like all things Nintendo are hard to come by. It’s really quite amazing. The Nintendo ADRs haven’t been too shabby either.

Is the Shortage Real?

I think it is. Recent sales data consistently points to incredible sales of the console. However, that is not to say there isn’t anything going on. Nintendo has not increased production of the Wii as much as demand might warrant. Nintendo is intentionally playing it conservative. Some of this is related to how the company lost it’s mojo in the late 90s. Nintendo of course denies that it’s intentionally creating a shortage. Call me naive, but I believe that Nintendo did not set about creating a shortage when the launched the Wii nearly two years ago. This is not to say that I believe that Nintendo is not contributing to the shortage today. They may not be holding back on supply, but their conservative customer expectations are leading to the shortages. It’s in Nintendo’s interest to make sure as many consoles as possible are in the hand of consumers. Ultimately, Nintendo makes more money from game licenses than it does from hardware sales.

Wii Fit Shortage
Part of the reason for the shortages in the U.S. for Wii Fit, is the weak dollar. Nintendo has chosen to shop 4 times as many products to Europe instead of the U.S. The strong Euro makes it much more profitable to sale there than it does here. It’s still a profitable product in the U.S., and if Nintendo could it would be selling more here.

While shortages may drive demand in the short run by bestowing the “IT” factor on a product, in the long run shortages on a product that requires market penetration hurts console makers. Success breed success. You can have the best game system in the world, but if no one has it, no games will be made. Nintendo is not in this position as the Wii has sold better than the XBox 360 and Play Station 3, but there’s nothing such as excess market domination. The name of the game is to crush your enemies and hear the lamentations of their fanboys.

I have a question from a reader of AskDong.

i’m doing my own taxes this year for the first time in my life. what is the best software to help me? i would like to download turbotax, but want to get the right one. my taxes should be very simple. i have one salaried job, and a few bank accounts earning interest. will the free version of turbotax be enough, or should i get deluxe?

thanks!

-R

Intuit in effort to increase sales and extract extra margins had 4 different versions of TurboTax, and the online cost vs purchasing a physical copy of the software.  The physical versions are more expensive but allow those who are concerned with privacy to hold their own data, and also allow the completion of different returns. Using TurboTax online is cheaper than buying the actual turbotax software for the computer, but limits you to filing only one return.  For a family that might have many different taxes to file, the online solution might not make sense.  Intuit still charges for each electronic filing, so it still profits from each additional tax filing unless of course you decide the mail the filing.

Free - $0/Not Available. The free version of Turbotax is only available online.
Basic - $14.95/$19.95
Deluxe - $29.95/$44.95
Premiere - $49.95/$74.95
Home & Business - $74.95/$89.95

This year I got premiere, but in years past I’ve stuck with Deluxe. I know from experience now that Deluxe doesn’t differ much from Premiere. Premiere does handle rental properties, investments, and business income slightly better than Deluxe.  However for most individuals especially those who don’t have rental or business income,  Deluxe is more than adequate.

The real question is when is standard enough? Since I’ve never used either the Free or Basic version before, I decided to give them a quick run though online. There’s hardly any difference between the Free and Basic version. The Basic version has a slightly more interactive interface, and guides the user better with questions.  In terms of content I believe they are identical. I would say if you’ve used the 1040EZ in the past, and/or rent instead of owning then the free version of TurboTax is probably enough. I don’t see much of point in ponying an extra $15 for the basic version.  The big addition to the Deluxe version of TurboTax is that it handles mortgage interest deductions.

We are in the season of giving, so in that vein I’m answering this question from a reader.

I am thinking about putting money in a Donor Advised Fund, but don’t really know what the pros and cons are of using a Donor Advised Fund versus givingn money directly to charity. What do you think?

-S

I looked into Donor Advised Funds a few years ago as vehicle for my charitible giving, but decided I didn’t have enough of idea of how I wanted to give to warrant setting up such a fund. I imagine many of you are scratching your heads just like I did a few years ago. Donor Advised Funds? A Donor Advised Fund is basically a mini foundation. It used to be purely the tool of the very rich who wanted to be like the uber rich. However Donor Advised Funds are actually relatively affordable to get into today. Fidelity let’s you open a account with the Fidelity Charitable Gift Fund with as little as $5,000. Schwab recently followed Fidelity’s lead and lowered their minimum on their Schwab Charitable Fund. from $10,000 to $5,000 as well. Vanguard lags behind both Schwab and Fidelity, requiring $25,000 to open account with the Vanguard Charitable Endowment

While the charitable funds are “run and operated” by the likes Schwab, Fidelity, and other financial institution, the accounts work very much like a standard brokerage account that you might have. You pick what funds you want to invest in, and you pick what charities you want to give gifts to. However, once the funds which can be cash, stock shares, and mutual funds are handed over, they are turned over irrevocably. The gift is made, and the money is no longer yours. This is both a minus and plus. Technically speaking the money is “owned” by the the charitable fund/endowment, and as a donor one only make recommendations for grants. One of the big benefits is that fund takes care of the paperwork of giving, and will also research different charities to make sure they meet minimum standards.

Because the gift is irrevocable, the deduction can be taken immediately. Like a standard gift of shares, the full value of securities is tax deductible. Being able to take the deduction immediately is great if you want to make a charitable gift, but haven’t decided to whom. In addition once the funds are in the account they are sheltered from any tax complications. A donor can effectively buy and sell without tax consequences to him or her personally and more importantly the money available for giving.
So what are the drawbacks to a Donor Advised Fund? The main one is that you can’t change your mind about giving. The money is gone. I don’t think this is actually a big drawback, however, as this is always the nature of giving (or at least it should be). However when most people set up Donor Advised Funds, they are often handing over money that they plan on giving for years to come. That fact highlights the major difference between giving to charity year to year and a Donor Advised Funds. Setting up Donor Advised Fund is sustained commitment to giving. It’s not a tool to be used to give gifts in any one year, but rather for a lifetime of giving. In addition there are some restrictions on grants. Grants cannot for instance be used for admittance to Galas, or used as part of personal commitment to ride or walk event. Generally speaking the limited and reasonable restrictions are in place from preventing donors from using the funds for his or her own benefit.

Dave Asks:

What do you think of buying gold, via index fund or other means, given inflation concerns? I’ve lately been considering $ exposure and am thinking of going more international to hedge the $ (via index fund) and buying gold to hedge inflation. What are good ways to buy gold? What are your thoughts?

This is a bit of a doozy of question. And before I answer it I want to make it clear I’m not a financial advisor or any kind of investment guru. What follows is purely the opinion of a thirtysomething who probably shares with Warren Buffet only one thing, a preference for drinking Coke.

I think Dave is right to be worried about a continued slide of the U.S. dollar. A few weeks ago I made a few suggestion of things to do to hedge against the sliding dollar. This week The Economist, one of my favorite magazines, is showing calm concern as the “crashing” dollar made its cover.  While I don’t harbor Wall Street’s enthusiasm for interest rate cuts, I certainly don’t think the Fed will raise interest rates. Given interest rate policies, there is far too much going on that tips the scales towards continued detoration of the dollar. That said, I do think we’re not so far off the bottom. I don’t see the dollar losing more than 25% against the Euro in the next two years.  Though it lost much more than that in the past five. In 2002, the Euro could only buy $0.86. Today it’s worth $1.48, almost double.

International funds and gold are all good hedges against a continued dollar slide. As investments, these “hedges” have already been appreciated by a good amount in the past couple years. Gold is near all time highs. Though, adjusted for inflation it’s still nowhere near the highs it hit in the early 80s. While I have my doubt that both gold and foreign stocks can continue to perform as well as they have, as hedges against the dollar they are good bets. In the case of gold, it’s also critical to know when to get out. The people who bought gold in the 80s certainly kicked themselves when gold tumbled in the late 80s and 90s as inflation was beaten down. For that reason, I personally prefer international investing to commodity investing. Holding international stocks is a good investment period, not just a good investment if you’re worried about inflation or a declining dollar.

I believe conventional wisdom suggest that individuals should have about a 20% exposure to foreign stocks. I’m personally around 25% and have been steadily increasing that exposure.  I believe 30%-40% is probably more appropriate for those younger than 50.

The more interesting question is what foreign markets? Emerging markets especially the BRIC (Brazil Russia India China) have had an incredible run in the last few years.  I’m skeptical if these markets (especially China and Brazil) can continue rocketing up without some type of correction. If I were buying right now, I’d look at some of the following regions (I’ve listed the corresponding Barclay’s iShare ETFs that tracks of each of those markets).

Emerging Market:

• Mexico (EWW)
• Taiwan (EWT)
• South Africa (EZA)
• Latin America (ILF)

Mature Markets

• Europe (IEV)
• Japan (EWJ)
• UK (EWU)
• Canada (EWC)

Of course a good bet is always the Vanguard’s ex-US all World ETF, VEU. Not to forget gold, Barclay’s offers IAU, a gold index ETF. There also plenty other ETFs that track foreign markets, but I’m familiar with Barclay’s iShare family and Vanguard.