Q: We have two children (ages 3 and 5) and we’d really like to plan for the cost of college. Unlike us, our hope is to leave them with as little debt as possible. What would you recommend in terms of the amount to save and the type of account to use?

A: Your children are lucky to have parents who want to plan for their future. That’s not something they’ll recognize immediately. They will someday, probably!

Addressing the “how much” question is different for every family. Some parents hope to just pay for the cost of tuition, fees and books. Some want to provide for an in-state public university. And, others hope to pay the full cost of a private college or out-of-state university. Defining the exact goal is obviously the first step.

For an in-state, public university, the cost of tuition and books are about $15,000 per year. Room and board will run you another $10,000 per year, as a very rough estimate. So, for a four-year degree, that adds up to over $100,000. And, remember, these figures are measured in today’s dollars. Keeping pace with college cost inflation is a great reason to put away money early.

In your case, with about 14 short years until college starts, providing them with four years of college might require you to save about $8,000 to $10,000 per year for each child. If this level of saving isn’t possible within your budget – and, let’s be honest, it is not for most people – it’s fine to scale back your goals. Remember, scholarships, grants and student loans are all viable financing tools. We also have a very good community college here, too.

Now, once you’ve decided on the amount you can actually save, my recommendation is to use a 529 plan for each child. The State of Michigan’s plan is called the Michigan Education Savings Program. Go to www.misaves.com to read about it.

The investment earnings inside a 529 plan are not subject to any taxes as long as the money is eventually used for “qualified” education expenses. On top of this tax benefit, your savings can result in an immediate state tax break of up to $425 per year.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

As I wrote a few months ago, July 15th marks the start of something new. Automatic monthly government checks are coming to the bank accounts of millions of families with kids. But, without some deeper understanding of the new child tax credit, some may be in for an unpleasant surprise at tax time next year.

With Biden’s signing of the American Rescue Plan in early March, major changes were made to the tax credit families receive for having children. To put this into perspective, child tax credits are provided to about 90% of families with kids. It’s a truly far-reaching feature of our tax code.

Unless you really inspected your tax returns, the child tax credit used to operate silently in the background. The new child tax credit now has a much more visible role.

Prior to the American Rescue Plan, the child tax credit was $2,000 for each child under age 17 and $500 for full-time college students. Married filers with modified adjusted gross income below $400,000 received these tax discounts. For single and head-of-household filers, the eligible income threshold is cut in half.

Under the American Rescue Plan, there are two major changes.

First, the law introduced a new intermediate income threshold of $150,000 for married filers with kids. This first income threshold now operates alongside the higher $400,000 threshold. For people who make less than this lower threshold, the tax credit was also boosted to $3,000 for kids between age 6 and 17 and $3,600 for kids under age 6. For those earning between the first and second income threshold, the smaller $2,000 per kid tax credit still applies.

Second, the law introduced the concept of monthly checks. Starting on July 15, parents are going to receive automatic, monthly deposits into their bank account or mailbox. For families below the first, lower income threshold, they will now get monthly deposits of $250 to $300 for each of their children. Smaller monthly deposits will also arrive for those making between the first and second income thresholds.

Now, here’s the catch.

Unless Congress steps in, these monthly deposits will stop in January. And, perhaps more importantly, these are actually “advance payments” of the child tax credits. This part deserves a little more explanation.

In the past, child tax credits were received only at tax time. For many, they help to create big tax refunds. Many households plan on their tax refund to help pay for upcoming vacations or pay off old Christmas bills. Without the windfall created by the “all-at-once” child tax credits, tax refunds might look considerably smaller at tax time next year. In other words, the already-spent monthly deposits might result in an unpleasant cash flow surprise for millions of families.

Once started, automatic monthly checks are a tough thing to take away. I expect Congress to act soon to continue them into 2022 and beyond. If they don’t, millions of families might have to develop a plan to save some of the monthly checks to blunt the impact of next year’s smaller-than-usual tax refund.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Q: With inflation readings spiking in recent months, we’re starting to worry about its long-term effects on our portfolio. We remember the 70’s and runaway inflation has been a concern of ours for some time. Should we be this worried?

A: Inflation’s impact on your wealth is not unimportant. In the end, wealth is defined by how much you can buy with your money. Inflation can be an invisible threat. Sometimes, like the 1970’s, it can feel more than obvious. Lately, the recent attention-grabbing headlines reflect the fact that inflation has been on the rise.

But, I think it’s very important to note that today’s inflation readings are a direct result of a drop in prices from March to July of last year. The effects of the shutdown during the pandemic’s early days has thrown the inflation data for a serious loop.

While not a perfect analogy, it’s a lot like comparing the weather last June to the sweltering heat we’ve experienced this year. For the first ten days of June in 2020, the average high was about 67 degrees. In comparison, this June has averaged a high temperature of about 86. I wouldn’t read a lot into that trend when trying to guess about the weather for the rest of this summer.

To smooth out the pandemic’s impact on prices from last spring, it might help to compare today’s prices to 2019 or even 2018. Instead of seeing inflation rate readings of 4% and 5%, the annualized inflation rate over the past two or three years is sitting at about 2% or so. The dip in prices last year, like the cooler start of June of 2020, is undoubtedly distorting today’s inflation data.

Like the Fed, I think the next six-to-twelve months will smooth out the pandemic’s unusual effects and there certainly have been a few!

Q: I couldn’t help but notice that Bitcoin and other crypto-currencies have declined a lot in just the last few weeks. Do you think they are “ready for primetime” as a true investment vehicle for regular people, like me?

A: You’re right, Bitcoin took a 40% nosedive from mid-April to late-May. Ethereum, the other major crypto-currency of note, also crashed about 50% over just twelve days from mid- to late-May. Those are some wild swings.

In my view, crypto-currencies are not even close to being “investable” assets for regular people. They’ve become trading vehicles for those willing to gamble with their money. For those who choose investments based on some measure of fundamental value, this digital currency game is something to safely ignore.

Frankly, I’d lump the current obsession with crypto-currencies with the equally crazy trading of “meme” stocks like Gamestop, AMC Entertainment, and now, Clover Health. The financial media loves to talk about this stuff, that’s for sure. It catches eyeballs. Ultimately, advertising revenue follows. While it might be fun to gawk at it all, it shouldn’t be confused with investing in any traditional sense.

Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Tax time has come and gone. Even with the delayed tax deadline, I suspect procrastination was still the order of the day. Understandable? Yes. Costly? Maybe.

With my normal review of tax returns for clients, I spot an error every so often. But, I can tell you tax preparers do their best in the very limited time they’re given. Imagine having a client drop a pile of papers on your desk with their half-completed tax organizer sitting on top. From my vantage point, it’s not an easy job.

Now, imagine if the government adds to the complexity and confusion? Let me highlight one example.

When you reach 70 ½, you can start using your IRA as a tax-smart charitable tool. When you donate to charities out of your IRA, those distributions aren’t considered taxable income. This stands in stark contrast to IRA withdrawals that you use for your normal life expenses.

Remember, your IRA money has never been taxed. You were given a tax break when you contributed to your IRA. You then invested that money, possibly for decades, without paying any tax on the income you earned. When you do eventually withdraw money from your IRA, you finally have to pay tax on it. That is, except when you give money directly to charity. Those donated distributions don’t count as taxable income.

Even better, the amount you give to charity from your IRA helps to satisfy your required minimum distribution (RMD) for the year. In other words, what you give to charity from your IRA can help to lower your taxable income. Doesn’t that sound suspiciously similar to getting a charitable deduction? It certainly does and it’s a very nice tax break (for those age 70 ½ or older) who take the standard deduction and would otherwise lose out on deducting their charitable donations.

Unfortunately, things can and do go wrong with this tool.

Brokerage firms, such as Schwab, Fidelity and Vanguard, are tasked with sending out a tax report – called Form 1099-R – to both you and to the IRS. Form 1099-R lets everyone know how much you took out of your IRA. However, there is no breakdown of the amount you used for yourself and the money you gave to charity. Instead, they just report to the IRS the full amount that exited your IRA. The IRS doesn’t even require brokerage firms to remind everyone that some of your withdrawals possibly went to charities and, therefore, shouldn’t be considered taxable income.

Unwittingly, many taxpayers who wisely make charitable donations directly from their IRA may be paying tax on the money they’ve given to charities. So, if you only do one thing today, pull out your old tax returns to see if an amended tax return is in your future. Just when you thought tax season was over!

Like clockwork, I once again spent a good chunk of this past weekend watching the Berkshire Hathaway annual meeting. It might sound terribly boring to some, I know. Since my first father-and-son trip to Omaha over twenty years ago, Warren Buffett and his long-time sidekick, Charlie Munger, manage to get my attention during the first week of May. At age 90 and age 97, respectively, I suspect this tradition will only last a few more years.

In a world infatuated with shiny objects, the annual Buffett and Munger show has surprisingly maintained its relevance. We should all be so lucky to have such command of our wits at their age. Remarkably, they manage to match their wits with more than a dollop of wisdom. Right along with their billions, after nearly seven decades of investing, their collective wisdom is still piling up. They’ve seen it all. Well, almost.

Throughout the years, the Berkshire Hathaway meeting has offered an annual check-up on the ever-changing investment environment. Back in 2000, the tech-stock bubble was finally bursting. In 2006, the crazed housing market was starting to roll over. By 2009, the Fed dove headfirst into its zero interest rate policy. Each year’s meeting has offered a chance for Buffett and Munger to share their insights for hours on end.

This year, what caught my ear was their fascination with how our current economic “movie” will play out. While they didn’t share the name of the movie they’re watching, for years now I’ve felt we’re deep in Wonderland, walking shoulder-to-shoulder with Alice herself!

At the center of their curiosity is the conundrum of super-low interest rates. It certainly has been my obsession. Will interest rates stay this low? Have they permanently elevated stock prices? Do bonds still have a rightful place in conservative portfolios? Can we really print trillions without major consequences? Seeking answers to these important questions, and many more, will lead you right down the rabbit hole, of course. As enticing as it is, just throwing up your hands doesn’t really seem like a viable option.

For Buffett and Munger, the current movie inevitably inches closer to their final scene. I imagine their calm sense of wonder at this year’s meeting reflects their own demographic reality (and their unimaginable personal wealth is possibly a contributing factor!) For me, however, today’s environment is just one more fascinating scene in a story that’s still very far from complete. Calm wonder, I’m afraid, feels like a luxury. Embracing a little bit of their attitude, though, might in fact be the only rational way to manage through it.

As I reflect on this year’s meeting, the lesson from Buffett and Munger certainly wasn’t about the nuts-and-bolts of investing. Rather, I think this year’s lasting lesson is to always stay curious. After all, in a world that seems about as mad as the one Alice tumbled into, things are bound to get curiouser and curiouser!