Month: September 2018

Interest rates are rising, but rates are still relatively low, and many investors are looking for conservative investments – such as bond funds – that will generate a suitable level of income.

How can you find one?

The U.S. Federal Reserve raised the federal funds rate target in June for the second time this year and the seventh time since the end of the financial crisis. The last time the rate topped its current level – 2% – was late in the summer of 2008, when the Fed was cutting rates. They would remain near 0% for years.

But that’s still low. The federal funds rate topped 20% in 1981 and was around 5% leading up to the financial crisis. So if you are looking for a bond fund that will generate a suitable level of income, you may want to look at one of two commonly quoted yield figures.

The first, dividend rate (also called distribution yield), indicates what a bond fund pays in distributions. The figure is typically calculated by taking a bond fund’s income in the most recent month, multiplying by 12, and dividing by a recent fund share price.

Because that number assumes that a fund’s distributions remain constant for a year, which may not be the case, you may want to consider SEC yield.

This seeks to accurately reflect a bond fund’s income-producing potential over time by looking at the “yield to worst” of all the individual holdings in the fund’s portfolio.

Both figures provide useful information, but which is a better indicator of a fund’s actual yield depends.

SEC yield takes into account the eventual decline of a higher-trading bond. However, it includes some worst-case assumptions, so some investors prefer dividend rate.

Which figures you rely on can depend on personal preference and your individual portfolio. A financial professional can help you understand what kind of yield you should look at and help you accurately compare and contrast the figures.

529 savings plans offer a compelling means of tax-advantaged savings – but are they right for you? Named after a section of the U.S. tax code, 529 plans allow you to save money before it is taxed, with earnings that are also free from taxes.

What’s the catch? The money you save must be used to pay for qualified educational expenses, which include tuition and room and board at an accredited educational institution (and supplies and approved equipment the student needs in order to study at the college).

That may be compelling, given that the average annual cost of college tuition, fees, and room and board for the 2017-2018 school year was $20,770 for a four-year in-state public college and $46,950 for a four-year private college, according to the College Board Advocacy and Policy Center.

Typically, a parent or grandparent will open a 529 account and name a child or grandchild as the beneficiary. Unlike a custodial account, which eventually transfers ownership to the child, a 529 plan gives the account owner (not the child) control.

The IRS doesn’t specify annual contribution limits to 529 plans, but the annual gift-tax exclusion applies. In 2018, up to $15,000 gifted per person qualifies for the tax exclusion. So if you and your spouse have two grandchildren, you can gift a total of $60,000 without tax consequences.

If this piques your interest in 529 plans, ask a financial professional about these options. He or she can guide you through your state-specific 529 plans and help you set up a winning strategy to cover future education costs.