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Family Finances

Stocks Are an Investment in Your Child's Future

If your child won't need the money for 15 years, stocks are the best choice to produce solid returns.

My 3-year-old son's gift money, totaling about $700, is invested in Schwab S&P 500 Index. Since he has his whole investing life ahead of him and can handle more risk, is there a fund that might offer a better return over time? -- Allison Ross, Richmond, Vt.

SEE ALSO: Teaching Kids About Investing

Great attitude. I assume that this is money for college and your son won't need the money for 15 years. If so, stocks are the best choice to produce solid returns over that long a time horizon -- although they will also provide plenty of thrills and spills along the way.

If your son had more money, I'd point him toward the Kiplinger 25, the list of our favorite funds. But the minimums for almost all of those funds exceed $700. One of the nice things about Schwab is that the initial minimum for most of its mutual funds is just $100.

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Schwab's S&P 500 Index fund (symbol SWPPX) gives your son a stake in large, U.S.-based companies. So you should think about diversifying into stocks of smaller companies and foreign stocks. You could, for example, add Schwab Small Cap Index (SWSSX) to cover shares of small companies. For foreign exposure, add International Core Equity (SICNX), an actively managed fund, or Schwab International Index (SWISX).

But if you want to shoot for really big gains, put a slug of money into Schwab Fundamental Emerging Markets Index (SFENX). Emerging-markets stocks were awful in 2011, but developing nations are growing much faster than their counterparts in the developed world and should produce better returns over the long haul.

Trim IRA fees

Both my husband and I have several traditional and Roth IRAs. Some of these accounts charge an annual maintenance fee. Can we consolidate them to reduce the cost? -- Becky Fontes, Maysville, Ky.

Yes, each of you can set up a traditional IRA and a Roth IRA and consolidate all of your funds into those accounts. Not only will you save money by trimming maintenance fees, but it will be easier to keep track of your investments.

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Some firms, such as TD Ameritrade, charge no annual maintenance fees for IRAs. But even if you choose a firm that usually charges a fee, you might be able to avoid it by keeping a certain amount of money in your accounts.

Vanguard, for example, charges $20 a year for all IRAs with balances of less than $10,000. But you can avoid the charge if your household has more than $50,000 in total assets with Vanguard or if you sign up to receive statements and other documents electronically.

Track down lost money

I just read that the IRS wants to return more than $150 million in undelivered tax-refund checks. Is this a scam? And if it's legitimate, is there a way to track down money from other government agencies, too? -- H.T., Milwaukee

Although there are plenty of scam artists who claim to be from the IRS, this announcement is for real: The IRS is holding on to $153.3 million in unclaimed funds from tax-refund checks that were returned because of mailing-address errors. The average check is $1,547. If you believe that some of that money may be yours -- particularly if you have moved in the past few years -- search for it by using the IRS's Where's My Refund? tool at www.irs.gov.

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But don't stop there. You may also discover unclaimed money by searching for old U.S. savings bonds. Billions of dollars in savings bonds have stopped earning interest but haven't been cashed. Go to www.TreasuryHunt.gov to look up savings bonds issued in 1974 or later.

State governments may be holding some of your money, too. State treasuries hold billions of dollars in unclaimed property from uncashed dividend checks, returned utility deposits, uncollected insurance benefits, old savings accounts and other money that was returned to financial institutions after being sent to a defunct mailing address. Investigate at the Web site of the National Association of Unclaimed Property Administrators as well as www.missingmoney.com.

Boost your credit score

I'm 26 years old, and I always make the payments on my student loans and credit card bill on time. I generally charge $700 or less per month on my card, which has a $2,500 credit limit. Yet when I checked my credit score, I was surprised that it was just 708. What can I do to improve my score? -- C.L., Phoenix

Your 708 score is a proprietary score from Equifax, one of the three major credit bureaus, and it's on a different scale than the more common FICO score. When we helped you order your FICO score, it was 731, putting you in the "very good" category. As long as you continue to pay your student loans and credit card account on time and you don't open too many new credit accounts, your score should continue to rise as your credit history lengthens.

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But you might be able to boost your score even faster by asking your bank to increase your credit limit, says John Ulzheimer, president of consumer education for SmartCredit.com. Almost one-third of your FICO score is based on the amount owed, including your "credit utilization ratio," which is the amount of your available credit limit that you've used. Charging $700 on a card with a $2,500 limit gives you a utilization ratio of 28%. It's usually a good idea to try to keep that ratio to 25% or less.

Social Security earnings-cap rules

I am 62 years old and plan to start collecting Social Security benefits this year while working part-time. Can I reduce the amount of income subject to the Social Security earnings cap by contributing to a 401(k) plan? --M.G., via e-mail

No. Your gross wages, before any deductions for taxes or 401(k) contributions, determine whether your Social Security benefits will be reduced under the earnings cap.

The full retirement age for people like you who were born from 1943 through 1954 is 66. If you collect Social Security before that age and continue to work, you will lose $1 in benefits for every $2 you earn above $14,640 in 2012. The earnings limit is higher in the year you turn age 66: You lose $1 in benefits for every $3 you earn above $38,880 until the month you reach full retirement age. Once you turn 66, the earnings-limit restrictions disappear. For more information, see How Work Affects Your Benefits.

My thanks to Manny Schiffres for his help this month.