Clarification on 529 fund
Yes, maybe.  The 529 is pretty cool in that you can open an account for yourself, and change the beneficiary as you wish, or not. In theory, one can start a 529 for children or grandchildren yet unborn.  Back to you - a 529 is not deductible on your federal return. It grows tax deferred, and tax free if used for approved education. Some states offer deductions depending on the state. There is a list of states that offer such a deduction. You are faced with a dilemma. If you use a 529 plan to fund your education, the short timeline of a few years will limit your returns that are tax free. Most people who use a 529 plan either purchase years of tuition via lump sum, when the child is young; or they  put aside money on a regular basis that will grow tax deferred/tax free. Some states do give a tax break when the contribution is made by a state taxpayer into a plan run by the state. The long term plans generally use a risk profile that starts off heavily weighted in stock when the child is young, and becomes more fixed income as the child reaches their high school years. The idea is to protect the fund from big losses when there is no time to recover. If you choose the plan with the least risk the issue is that the amount of gains that are being protected from federal tax is small. If you pick a more aggressive plan the risk is that the losses could be larger than the state tax savings. Look at some of the other tax breaks for tuition to see if you qualify Credits An education credit helps with the cost of higher education by   reducing the amount of tax owed on your tax return. If the credit   reduces your tax to less than zero, you may get a refund. There are   two education credits available: the American Opportunity Tax Credit   and the Lifetime Learning Credit. Who Can Claim an Education Credit? There are additional rules for each credit, but you must meet all   three of the following for either credit: If you’re eligible to claim the lifetime learning credit and are also   eligible to claim the American opportunity credit for the same student   in the same year, you can choose to claim either credit, but not both.   You can't claim the AOTC if you were a nonresident alien for any part   of the tax year unless you elect to be treated as a resident alien for   federal tax purposes. For more information about AOTC and foreign   students, visit American Opportunity Tax Credit - Information for   Foreign Students. Deductions Tuition and Fees Deduction You may be able to deduct qualified education expenses paid during the   year for yourself, your spouse or your dependent. You cannot claim   this deduction if your filing status is married filing separately or   if another person can claim an exemption for you as a dependent on his   or her tax return. The qualified expenses must be for higher   education. The tuition and fees deduction can reduce the amount of your income   subject to tax by up to $4,000. This deduction, reported on Form 8917,   Tuition and Fees Deduction, is taken as an adjustment to income. This   means you can claim this deduction even if you do not itemize   deductions on Schedule A (Form 1040). This deduction may be beneficial   to you if, for example, you cannot take the lifetime learning credit   because your income is too high. You may be able to take one of the education credits for your   education expenses instead of a tuition and fees deduction. You can   choose the one that will give you the lower tax.
"Oddly enough, in the USA, there are enough cost and tax savings between buy-and-hold of a static portfolio and buying into a fund that a few brokerages have sprung up around the concept, such as FolioFN, to make it easier for small investors to manage numerous small holdings via fractional shares and no commission window trades. A static buy-and-hold portfolio of stocks can be had for a few dollars per trade.  Buying into a fund involves various annual and one time fees that are quoted as percentages of the investment.  Even 1-2% can be a lot, especially if it is every year.  Typically, a US mutual fund must send out a 1099 tax form to each investor, stating that investors share of the dividends and capital gains for each year. The true impact of this is not obvious until you get a tax bill for gains that you did not enjoy, which can happen when you buy into a fund late in the year that has realized capital gains.  What fund investors sometimes fail to appreciate is that they are taxed both on their own holding period of fund shares and the fund's capital gains distributions determined by the fund's holding period of its investments. For example, if ABC tech fund bought Google stock several years ago for $100/share, and sold it for $500/share in the same year you bought into the ABC fund, then you will receive a ""capital gains distribution"" on your 1099 that will include some dollar amount, which is considered your share of that long-term profit for tax purposes. The amount is not customized for your holding period, capital gains are distributed pro-rata among all current fund shareholders as of the ex-distribution date. Morningstar tracks this as Potential Capital Gains Exposure and so there is a way to check this possibility before investing. Funds who have unsold losers in their portfolio are also affected by these same rules, have been called ""free rides"" because those funds, if they find some winners, will have losers that they can sell simultaneously with the winners to remain tax neutral.  See ""On the Lookout for Tax Traps and Free Riders"", Morningstar, pdf In contrast, buying-and-holding a portfolio does not attract any capital gains taxes until the stocks in the portfolio are sold at a profit.  A fund often is actively managed.  That is, experts will alter the portfolio from time to time or advise the fund to buy or sell particular investments. Note however, that even the experts are required to tell you that ""past performance is no guarantee of future results.""" Your friend would have only been liable for a tax penalty if he withdrew more 529 money than he reported for qualified expenses.   That said, if he took the distribution in his name, it triggers a 1099-Q report to the IRS in his name rather than his beneficiaries.  This will likely be flagged by the IRS, since it looks like he withdrew the money, but didn't pay taxes and penalties on it, not the beneficiary.  In other words, qualified education expenses only apply to the beneficiary, not the plan owner/contributor.  In this case, the IRS would request additional documentation to show that the expenses were indeed qualified.   To avoid this hassle, it's easiest to make sure the distribution is payed directly to the beneficiary rather than yourself.  Once he or she has the check, then have them sign the check over to you or transfer it into your account.  Otherwise you trigger an IRS 1099-Q in your name rather than your beneficiary. One other advantage of a 529 versus a simple investment account (like an UGMA/UTMA) is that the treatment for the purposes of financial aid is more advantageous (FinAid.org). Even if it is a custodial account (in which the student is both the owner and beneficiary), it is treated as a parental asset when completing the FAFSA. That means the amount that will be considered available each year towards the Estimated Family Contribution (EFC) will be greatly reduced. To be sure, this does not help with all colleges (often ones that use the CSS/PROFILE in addition to the FAFSA). Some will simply assume that 25% of the 529 will be used each year. I worked for a company who managed money for Braeburn. They are managed more like a foundation than a hedge fund. They invested in a fixed income separate account.   Yes, they definitely try to avoid taxes as the entity was domiciled in a Ireland and their offices were in Reno.   The goal of Braeburn is to maintain that huge amount of cash on the balance. avoiding taxes is an efficient way to do that. Please either remove the $50 going to the 529 plan or move it into a ROTH IRA instead. You can always use your ROTH contributions to pay for college expenses in the future if you want to. I suspect you may not have enough saved up for retirement to have the luxury to help with college though. Thanks for the huge insight. I am still a student doing an intern and this was given as my first task, more of trying to give the IA another perspective looking at these funds rather than picking. I was not given the investors preference in terms of return and risk tolerances so it was really open-ended.   However, thanks so much for the quick response. At least now I have a better idea of what I am going to deliver or at least try to show to the IA. First, I suggest that the route gives you the discount. You work the block with goldman and they say that if you work 20 blocks with them you get 50bps back, regardless of the issue.  Also, as a hedge fund you have a very different model than an ETF or MF.  That said, how exactly would that this be disclosed to the investor? Is there a standard in place for that? "First off, leaving money in a 529 account is not that bad, since you may always change the beneficiary to most any blood relative.  So if you have leftovers, you don't HAVE to pay the 10% penalty if you have a grandchild, for instance, that can use it.  But if you would rather have the money out, then you need a strategy to get it out that is tax efficient. My prescription for managing a situation like this is not to pay directly out of the 529 account, but instead calculate your cost of education up-front and withdraw that money at the beginning of the school year.  You can keep it in a separate account, but that's not necessary.  The amount you withdraw should be equal to what the education costs, which may be estimated by taking the budget that the school publishes minus grants and scholarships.  You should have all of those numbers before the first day of school.  This is amount $X. During the year, write all the checks out of your regular account.  At the end of the school year, you should expect to have no money left in the account.  I presume that the budget is exactly what you will spend.  If not, you might need to make a few adjustments, but this answer will presume you spend exactly $X during the fall and the spring of the next year. In order to get more out of the 529 without paying penalties, you are allowed to remove money without penalty, but having the gains taxed ($y + $z).  You have the choice of having the 529 funds directed to the educational institution, the student, or yourself.  If you direct the funds to the student, the gains portion would be taxed at the student's rate.  Everyone's tax situation is different, and of course there is a linkage between the parent's taxes and student's taxes, but it may be efficient to have the 529 funds directed to the student.  For instance, if the student doesn't have much income, they might not even be required to file income tax.  If that's the case, they may be able to remove an amount, $y, from the 529 account and still not need to file.  For instance, let's say the student has no unearned income, and the gains in the 529 account were 50%.  The student could get a check for $2,000, $1,000 would be gains, but that low amount may mean the student was not required to file. Or if it's more important to get more money out of the account, the student could remove the total amount of the grants plus scholarships ($y + $z).  No penalty would be due, just the taxes on the gains.  And at the student's tax rate (generally, but check your own situation). Finally, if you really want the money out of the account, you could remove a check ($y + $z + $p).  You'd pay tax on the gains of the sum, but penalty of 10% only on the $p portion. This answer does not include the math that goes along with securing some tax credits, so if those credits still are around as you're working through this, consider this article (which requires site sign-up).  In part, this article says: How much to withdraw -    ... For most parents, it will be 100% of the beneficiary’s qualified higher education expenses paid this year—tuition, fees, books, supplies, equipment, and room and board—less $4,000. The $4,000 is redirected to the American Opportunity Tax Credit (AOTC),... When to withdraw it -    Take withdrawals in the same calendar year that the qualified expenses were paid. .... Designating the distributee -    Since it is usually best that the Form 1099-Q be issued to the beneficiary, and show the beneficiary’s social security number, I prefer to use either option (2) or (3) [ (2) a check made out to the account beneficiary, or (3) a check made out to the educational institution] What about scholarships? -    The 10 percent penalty on a non-qualified distribution from a 529 plan is waived when the excess distribution can be attributed to tax-free scholarships. While there is no direct guidance from the IRS, many tax experts believe the distribution and the scholarship do not have to match up in the same calendar year when applying the penalty waiver. If you're curious about timing (taking non-penalty grants and scholarship money out), there is this link, which says you ""probably"" are allowed to accumulate grants and scholarship totals, for tax purposes, over multiple years." He has included this on Schedule D line 1a, but I don't see any   details on the actual transaction. It is reported on form 8949. However, if it is fully reported in 1099-B (with cost basis), then you don't have to actually detail every position. Turbotax asked me to fill in individual stock sales with proceeds and cost basis information. ... Again, it seems to be documented on Schedule D in boxes 1a and 8a. See above. I received a 1099-Q for a 529 distribution for a family member. It was   used for qualified expenses, so should not be taxable. Then there's nothing to report. I believe I paid the correct amounts based on my (possibly flawed) understanding of estimated taxes. His initial draft had me paying a penalty. I explained my situation for the year, and his next draft had the   penalties removed, with no documentation or explanation. IRS assesses the penalty. If you volunteer to pay the penalty, you can calculate it yourself and pay with the taxes due. Otherwise - leave it to the IRS to calculate and assess the penalty they deem right and send you a bill. You can then argue with the IRS about that assessment. Many times they don't even bother, if the amounts are small, so I'd suggest going with what the CPA did. "The root of the advice Bob is being given is from the premise that the market is temporarily down.    If the market is temporarily down, then the stocks in ""Fund #1"" are on-sale and likely to go up soon (soon is very subjective).     If the market is going to go up soon (again subjective) you are probably better in fictitious Fund #1.    This is the valid logic that is being used by the rep.   I don't think this is manipulative based on costs.    It's really up to Bob whether he agrees with that logic or if he disagrees with that logic and to make his own decision based on that. If this were my account, I would make the decision on where to withdraw based on my target asset allocation. Bob (for good or bad reasons) decided on 2/3 Fund 1 and 1/3 Fund 2. I'd make the withdraw that returns me to my target allocation of 2/3 Fund 1 and 1/3 Fund 2. Depending on performance and contributions, that might be selling Fund 1, selling Fund 2, or selling some of both." It says expense ratio of 0.14%. What does it mean? Essentially it means that they will take 0.14% of your money, regardless of the performance. This measures how much money the fund spends out of its assets on the regular management expenses. How much taxes will I be subject to This depends on your personal situation, not much to do with the fund (though investment/rebalancing policies may affect the taxable distributions). If you hold it in your IRA - there will be no taxes at all. However, some funds do have measures of non-taxable distributions vs dividends vs. capital gains. Not all the funds do that, and these are very rough estimates anyway. What is considered to be a reasonable expense ratio? That depends greatly on the investment policy. For passive index funds, 0.05-0.5% is a reasonable range, while for actively managed funds it can go up as much as 2% and higher. You need to compare to other funds with similar investment policies to see where your fund stands. The 2 and 20 rule is a premium arrangement that hedge funds offer and venture capital funds offer, and they also offer different variations of it. The 2 is the management fee as percent of assets under management, the 20 is the profit cut, which they only get if they are profitable. There are 0/20, 1/15, and many variations. You're assuming that nobody offers this arrangement because it isn't offered to you, but that's because nobody offers it to people that aren't wealthy enough to legally qualify for their fund. When you park 6 or 7 figure amounts in bank accounts, they'll send your information out to the funds that operate the way you wish they operated. Like an S&amp;P 500 ETF?  So you're getting in some cash inflow each day, cash outflows each day.  And you have to buy and sell 500 different stocks, at the same time, in order for your total fund assets to match the S&amp;P 500 index proportions, as much as possible.  At any given time, the prices you get from the purchase/sale of stock is probably going to be somewhat different than the theoretical amounts you are supposed to get to match, so it's quite a tangle.  This is my understanding of things.  Some funds are simpler - a Dow 30 fund only has 30 stocks to balance out.  Maybe that's easier, or maybe it's harder because one wonky trade makes a bigger difference?  I'm not sure this is how it really operates.  The closest I've gotten is a team that has submitted products for indexing, and attempted to develop funds from those indexes.  Turns out finding the $25-50 million of initial investments isn't as easy as anyone would think. Michigan's 529 plan offers a wide variety of investment options, ranging from a very conservative guaranteed investment option (currently earning 1.75% interest) to a variety of index-based funds, most of which are considered aggressive.   You said that you are unhappy with the 5% you have earned the past year, and that you thought you should be able to get 8% elsewhere.  But according to your comment, you have 30% of your money earning a fixed 1.75% rate, and another 40% of your money invested in one of the moderate balanced options (which includes both stocks and bonds).  You've only got 30% invested in the more aggressive investments that you seem to be looking for.  If you want to be invested more agressively (which is reasonable, since your daughter won't need this money for many years), you can select more aggressive investments inside the 529. Michigan's 529 offers you the ability to deduct up to $10,000 (if you are married filing jointly) of contributions off your Michigan state income tax each year.  In addition, the earnings inside the 529 are federally tax-free if the money is spent on college education. I found out about Google checkout today, it looks like it may meet my needs, but I'd still be interested to find out about other options.