Forum Mailbag – Target Date Funds, Best Fidelity Small-Cap Fund, 529 For K-12 Expenses, And More!

[If you are a resident, fellow, or doctor fresh out of training, come join the Wall Street Resident Physicians Facebook group. I want to make it the best place for physicians-in-training to talk personal finance and investing with other residents and fellows. All new members who join by August 31st will be entered in a drawing to win a copy of the White Coat Investor book. In addition, a copy of the White Coat Investor book will be given to a random member who creates a post or leaves a comment to a post by August 31st. I hope you’ll join the discussion with fellow residents in the Wall Street Resident Physicians Facebook group! -WSP]

There is so much great information on personal finance forums. I participate on several message boards, including the Bogleheads and White Coat Investor forums. Here are some of the discussions happening around the internet.

1. Bogleheads: Are Target-Date Fund Investors Unsophisticated?

Question: Ankledeep and his spouse currently max out their Roth IRAs in Vanguard Target Retirement 2055 funds. However, he read one Bogleheads forum member call investing in target-date funds “unsophisticated” and wanted the broader forum’s opinion on this statement.

WSP’s Take: On Wall Street, unlike in other industries, being more sophisticated doesn’t mean that you’ll get better returns. Often, the reverse is true.

Target-date funds provide simplicity over a portfolio of index funds because you get the benefits of automatic rebalancing and readjustment of your asset allocation as you get older, all within a single fund. The downsides of target-date funds are that you have to pay slightly more in fees, and you don’t have the flexibility of customizing your asset allocation.

It’s up to the individual investor to determine whether the pluses of target-date funds outweigh the minuses, but you certainly aren’t an unsophisticated or bad investor if you choose to use target-date funds.

In any event, since the question is for management of a Roth IRA, the reader can choose to start with a target-date fund, and if after reading a little bit more, they want to tweak their portfolio slightly differently than the asset allocation of a target-date fund, then he can swap out the target-date fund for individual index funds without tax consequences.

2. White Coat Investor: Best Fidelity Small-Cap Index Fund

Question: Zback wants to know the best index fund to invest in small-cap stocks at Fidelity.

WSP’s Take: If you want a mutual fund, I would invest in the Fidelity Small Cap Index Fund, where the premium shares have an expense ratio of only 0.05%. If you like to invest in ETFs, then I would recommend iShares Core S&P Small-Cap ETF (IJR), which has an expense ratio of 0.07%.

3. White Coat Investors Facebook Group: Paying K-12 Expenses with 529

Question: A reader on the White Coat Investors Facebook group asks whether anyone has considered paying for K-12 private school tuition with money from their 529. Specifically, she was wondering whether anyone has tried to contribute to a 529, take the state tax deduction offered in many states, and then withdraw the money to pay for private school tuition.

WSP’s Take: One of the provisions of the Tax Cuts and Jobs Act (Trump’s tax plan) that was added by Ted Cruz late in the drafting of the legislation was the ability to use 529 money to pay for private K-12 school tuition. There is a $10,000 annual limit on qualified withdrawals for private K-12 tuition.

Since the ability to deduct state taxes from 529 contributions is determined by each individual state’s 529 plan, only certain residents will be able to benefit from this. Even fewer are the states where this could be relevant, since the same parents who are potentially paying for private high school will eventually need to pay for their child’s college. Since these parents are often already maxing out the state 529 tax deduction in order to save for college, contributing additional money to the 529 to immediately withdraw it may not be beneficial.

This loophole is potentially already available for parents directly paying for their child’s college education, and according to Kathryn Flynn from SavingForCollege.com in this New York Times article, only Montana and Wisconsin currently penalize parents for trying to do this with college tuition.

The interaction of federal and state law is interesting, as some states are disproportionately hurt by a federal tax law that they had little direct control in creating. In fact, many states are fully aware that the addition of K-12 private school as an eligible education expense for 529 plans could affect withdrawal patterns and tax receipts.

In my opinion, it is too early to try to take advantage of this possible loophole. Many ambiguities of the new tax law need to be ironed out by the IRS or state 529 plans. Remember that many people stood in line for hours in order to prepay their housing taxes to try to save some money in anticipation of the new tax law, only to have the IRS issue guidance saying those prepayments may not be tax-deductible. I would wait a few years to allow the new tax law to get implemented and allow other people to try this strategy, and then act accordingly.

4. White Coat Investor: No Foreign Transaction Fee Credit Cards

Question: Jayzsurgery put down a deposit for a foreign hotel using a credit card and noticed that a 3% foreign transaction fee was charged. He was wondering whether there were any good credit cards that had no foreign transaction fees.

WSP’s Take: There are many credit cards that offer no foreign transaction fee, but many of them also have an annual fee. One good option that might appeal to many consumers is the Amazon Rewards Visa Signature Card. You get 3% cash back on Amazon and Whole Foods purchases, 2% on restaurants, gas stations, and drug stores, and 1% on anything else. If you are an Amazon Prime member, your cash back on Amazon and Whole Foods purchases is 5%. This might be a useful credit card to have if you shop frequently on Amazon and you don’t have another credit card that has no foreign transaction fee.

For those who want an all-around cash-back card, Capital One Quicksilver offers 1.5% cash back on all purchases and also charges no foreign transaction fees.

I personally have the Chase Sapphire Reserve, which also has no foreign transaction fee, but that credit card has a $450 annual fee (effectively $150 after the $300 annual travel credit).

Wall Street Shares: 5 Articles To Read This Week

1. White Coat Investor: List of Physician Financial Blogs — WCI listed and ranked the top physician personal finance blogs (by Alexa site traffic). Wall Street Physician is ranked #6 out of 52 active websites. I’m honored to be so high on this list, and I encourage you to check out the many other excellent physician finance blogs out there.
2. Physician on FIRE: Student Loan Case Studies # 4, 5, & 6 — POF and WCI forum member DMFA team up to tackle three physicians’ student loan questions.
3. Wealthy Doc: The Six Money Mistakes Investors Make — A review of Tony Robbins’s book Unshakeable
4. Crispy Doc: Are We On The Verge Of A Generation Of Hyper-Risky Investors? — Some new investors who have only been investing since the end of the 2007-2009 financial crisis may become overconfident.
5. Fifteen Minute Financial Fitness: You need to get comfortable with risk — Some investors, for any number of reasons, never jump into the stock market.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?