WELCOME 2021! Give the Gift of Education to a Deserving Kid This Year

I mark the end of the year/beginning of the new year with my recommendations for educational gifting options, practicing patience during perceived threats of market crashes and 401(k) transfer options.

With a new year less than 24 hours away (as I write this), I am happy to welcome 2021 for many obvious reasons but also strangely nostalgic about leaving 2020. It was a year that forced many difficult changes on us, but not all were bad.

I hope that 2021 brings you and your family peace, prosperity and a much-needed break from difficulties you may have faced in the past 365 days. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Q: This year, I want to gift my young nieces and nephews with $$$ that goes toward their education - whatever form that takes in the future. Should I go with mutual funds, savings bonds, stocks, UTMA, or cash with instructions? Recommendations needed and welcomed!

A: Upfront, let me stress maintaining control of your financial gifts because of the young ages involved. No doubt, your heart is in the right place, but I assume you want a positive outcome for such generosity. It is a great idea to help the older kids establish a Roth IRA. Just remember, contributions to Roth IRAs must be made with “earned income” dollars…yours through gifting or with the recipient’s own earnings. It doesn’t need to be your niece or nephew’s $2,100 that is contributed. As long as he/she has sufficient earned income to justify the $2,100 contribution, there's no reason why you can't gift the contribution to him/her, who can then contribute the money to the Roth IRA In short, you cannot make contributions directly to another person's IRA. Each IRA is linked to one person's Social Security number; thus, only that person can contribute to that account.

The same earned income rules would apply to the next younger kin, but on the chance that they won’t have much, if any, earned income you might set aside portions of your own holdings (e.g., 15% of mutual fund X) as an addendum to your will specifying when and how the recipients would gain access to the changing value of those set-asides. This allows you to retain control of fund investments until specified dates of disbursement are reached… for whatever purpose. I like this increased bit of control over younger, less mature recipients.

Regarding the youngest kids, you might consider 529 education funds (with you as custodian… again, control) because they are still young enough for 529 investments to achieve meaningful gains by the time they reach college age. And if the youngsters decide not to pursue additional education, you can direct the money to other kin seeking higher learning.

Q: The market seems overbought. Should I sell my investments before the COVID-19 causes the economy to crash?

A: Absolutely. And please call me the day before the crash so that I can dump mine, too. My apologies… sometimes I can’t resist being a wise guy. My point is simply this. Not even the Omaha Oracle can time the market. Granted, some folks are luckier than others in that particular guessing game, but the game I play is to “not join the thundering herd”. I stay invested and exercise patience. In fact, I keep investing on a dollar-cost-averaging basis during a correction on the premise that an investor has to be there to enjoy the benefits of investing. True, it’s painful to endure the stress of a downturn, but historically the long-term trend is up.

Q: I’ve decided to move my 401(k) funds from my former employer to my new employer’s company. With 60 days to deposit these funds into my new account, should I wait or deposit the money now?

A: Let’s discuss 401(k) rollover options. Having decided to transfer money from one company’s 401(k) plan to another, an individual has two options: a direct rollover or an indirect rollover.

In a direct rollover, the money is transferred directly to another retirement account, untouched by the owner of the account. No taxes or penalties on the money being transferred are assessed and the transfer is done.

‍Indirect rollovers (as in your case) are more complicated…and more risky. instead of the money going straight into the new account, the cash goes to the individual. And, yes, the individual has 60 days to deposit the funds into a new retirement plan. But failure to do so will trigger withholding taxes and early withdrawal penalties. My question is why take the chance? Most 401(k)s offer at least one very liquid, very safe, cash equivalent (i.e., money fund) option. Why not park your money there until you decide what to do?

I understand your reluctance to reinvest in a strong market, but you risk certain opportunity costs by not doing so. Strong markets have upward momentum. Ask yourself this question. How many additional market highs have I missed since the day I “cashed in”? My point is this. You’re either a market timer or you’re not. And in order for the market to optimally work on your behalf, you have to remain invested in it.

In the short-term, the saw-tooth shape of the trend line will cause you occasional anxiety, but as it smooths out over the long-term, enjoy the fact that you exercised the needed patient to allow the Amazing Power of Compounding to work on your behalf. Good luck, whatever course you follow.