I was reading an article recently about how many college savings plans are totally under water following the plunge in the stock market. These plans theoretically offer significant tax benefits and so look quite attractive. A few years ago my broker was using this as the argument why we should put some money into them. But I had previous bad experience with doing something primarily for tax reasons that wound up really backfiring (converting an LLC to be treated like a C-Corp) and made sure to focus on other factors first in looking at these plans, such as how big are fees, who is managing the money, what restrictions apply on redemptions, etc. The upshot was that the plans didn’t stack up all that well and given the performance of the plans my broker was suggesting, I am very glad I stayed away. It also turns out that a bunch of companies and municipalities that have gotten themselves into trouble with derivatives did so over deals that were primarily or sometimes exclusively done to avoid taxes. So now my operating principle has become to optimize for taxes last, if at all. I focus first on whether something makes sense strategically and financially. Once I have that squared away if there are alternatives with clear tax implications I will consider it, but even then only if I completely understand the mechanism.

I was reading an article recently about how many college savings plans are totally under water following the plunge in the stock market. These plans theoretically offer significant tax benefits and so look quite attractive. A few years ago my broker was using this as the argument why we should put some money into them. But I had previous bad experience with doing something primarily for tax reasons that wound up really backfiring (converting an LLC to be treated like a C-Corp) and made sure to focus on other factors first in looking at these plans, such as how big are fees, who is managing the money, what restrictions apply on redemptions, etc. The upshot was that the plans didn’t stack up all that well and given the performance of the plans my broker was suggesting, I am very glad I stayed away. It also turns out that a bunch of companies and municipalities that have gotten themselves into trouble with derivatives did so over deals that were primarily or sometimes exclusively done to avoid taxes. So now my operating principle has become to optimize for taxes last, if at all. I focus first on whether something makes sense strategically and financially. Once I have that squared away if there are alternatives with clear tax implications I will consider it, but even then only if I completely understand the mechanism.