2009 Stimulus Check

Don’t rely on your firm’s stock for college funds

Q: Do you think I should continue to fund my employee stock purchase plan or put money into a 401(k) (no match) to save for my 9-and 12-year-old children’s college expenses?

The stock plan guarantees a 15 percent rate of return every six months with a same-day sale option. During the last six months the stock returned 30 percent. Also, can funds be withdrawn from a 401(k) plan before retirement age without penalty if the money is used for college expenses?

A: Employee stock purchase plans can be an excellent way to acquire shares at a discounted price. If your company offers you a plan that guarantees you can sell the stock for a profit each six months, even better.

My main concern with employee stock purchase plans is lack of diversification. I’ve seen people who have their entire savings tied up with one company. That’s never a good idea, regardless of how well the company has been doing. But as long as you can maintain a diversified portfolio, using the stock purchase plan is a great way to build wealth.

Assuming all of your college savings are in the stock purchase plan, you can simply give your children a portion of your shares when they are ready for school. That way, any capital gains due would be taxed at your children’s tax rate, not your own.

The gamble you are taking with the employee stock purchase plan is that you are betting that your employer’s stock will be high when your children enter college. It may be, but it could be in the toilet as well.

Continue to participate in the stock purchase plan, but rather than continuing to accumulate the shares, sell your newly purchased shares every six months (to lock in your profit) and place the proceeds in a 529 plan. By doing so you will be removing the risk from your employer’s stock and using a tax-favored college savings program.

With regard to your 401(k), you cannot withdraw money for college expenses without incurring penalties unless you are at least age 59 1/2. Because of this, a 401(k) is not a great vehicle to save for college expenses.

Q: I have recently received a sizable inheritance in the form of mutual fund shares. My portion is roughly 7,000 shares with a capital gain of about $4 per share using the date of death. My question is: Would it be better to sell the shares, pay the tax on the capital gain and reinvest the proceeds in the diversified investments that I currently hold, or leave the investment where it is (all in a balanced fund). My marginal tax rate is roughly 34 percent, including federal and state.

A: Far too often people are reluctant to sell securities that they have inherited. Many times people think that if the investment was good enough for Dad or Uncle or whomever, it must be good enough for them as well. But any investment held should reflect the individual investor’s goals and risk tolerances, which may or may not be consistent with the inherited investment.

As with any investment, you should always ask yourself this question – would you buy it today?

If you would, then keep the investment. But if you would not, get rid of it (or at least part of it). You’ll be better off by paying a small capital gains tax today so you can build a portfolio that is best suited for your goals and objectives.

Q: My adult kids and I are thinking about selling each of our small houses and buying a bigger house together. We figure that our equities total around $100,000 to $200,000 apiece. My son-in-law makes around $60,000 a year, and I’m on disability. My disabilities hamper my ability to live alone. Here are some questions:

How should the title be on the new house? If it is just in their names, would they have to qualify for the loan all by themselves? If the kids claim the interest and property taxes on their income taxes, can I claim a renter’s credit on mine? Would my equity be considered a gift to the kids if the title is only in their names? If all our names are on the deed, what happens when I pass away?

A: You have a number of questions that need to be answered before you buy a house with your kids. And there is no perfect way for you to structure the transaction. If you title the home jointly, you lose the ability to claim rent. If you title the home in your kids’ names only, you lose control.

Before you do anything, I advise you to meet with a real estate attorney who is well-versed in estate planning to review all of your options.

I never recommend getting into any type of business relationship without having some type of legal agreement in place, particularly when the business is with family.