Why max 401k before 529?

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KlangFool
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Re: Why max 401k before 529?

Post by KlangFool »

solarcub wrote: Sun Jan 03, 2021 11:44 pm Ok, thanks for the responses, everybody. Here is my current thinking:

First of all, based on my current age and 401k/IRA balances, I think I have enough to retire in 10 years or so. I'm not worried about putting in the maximum possible amount to my 401k. From that starting point, it seems like

1) Spending 401k money on college would be bad, because of the penalty.
2) Spending Roth contributions on college is ok, but not the earnings.

Based on this, I think we will max out our Roth IRAs every year. We will do this by moving some money from the Wellington, (wow, you guys really did your homework on that one), to reduce taxes.

I will keep getting the full employer match on the 401k, but probably not max it out until we get to around $100k in the 529. This is 1/3 of my very rough estimate of college costs for 2 kids, so I doubt it will be too much. We live in CO, so we get a state tax break of 5% on the contributions.

Maybe this is not optimal, but with so many unknowns, it's a compromise that works for me.
solarcub,

<<First of all, based on my current age and 401k/IRA balances, I think I have enough to retire in 10 years or so. I'm not worried about putting in the maximum possible amount to my 401k.>>


You missed the whole point. Why do you choose to pay more taxes by not maxing up the 401K? You have the money in your taxable account.

<<I will keep getting the full employer match on the 401k, but probably not max it out until we get to around $100k in the 529. This is 1/3 of my very rough estimate of college costs for 2 kids,>>


Why do you need to do that when you have a lot more in your Roth IRA contribution?

Why do you enjoy paying 25% taxes on the 100K to the 529? Aka, 25K? All those money could be used to max up the 401K. Don't you enjoy spending your own money instead of paying more taxes?


401K and Roth IRAs are tax-advantaged accounts. They are not retirement accounts. They are used to reduce taxes.


I have 500K in my taxable account. When my kids went to college, I get to spend from my taxable account and max up my 401K. I save 20+% taxes in the process.


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Soon2BXProgrammer
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

solarcub wrote: Sun Jan 03, 2021 11:44 pm Ok, thanks for the responses, everybody. Here is my current thinking:
Again you will get a lot better answers, if you provide a lot more detail about your situation.
WhiteMaxima
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Re: Why max 401k before 529?

Post by WhiteMaxima »

If you want to start 529 . Start when kid is just born. Do it will have 18 years to grow. While 401k has 40-50 years to grow.
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teen persuasion
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Re: Why max 401k before 529?

Post by teen persuasion »

You missed the whole point. Why do you choose to pay more taxes by not maxing up the 401K? You have the money in your taxable account.
This is so important!

Put more earned income into 401k (reduced AGI and taxable income now) or Roth IRA (tax free forever, no more tax drag) by selling a bit of your taxable assets to replace $$ for expenses. Either move also improves your SAI on the FAFSA, because retirement accounts are not reported as assets while taxable (and 529 balances) ARE included in financial aid calculations.

Investment income from taxable accounts can also make you ineligible for EITC, which is a refundable credit. Between CTC, EITC, AOTC when we had kids in college, and state versions of each, we had refunds large enough to fund Roth IRAs for both of us. We lowered our w2 wages and AGI thru 401k contributions, which increased our EITC. The phaseout rate on EITC is 21% (and our state matches 30%, so the total phaseout rate is 27.3%), quite a bit above our nominal tax bracket. Saving in tax deferred payroll accounts like 401k and HSA are very important to our overall savings rate - we have more to save, because of tax savings and increased refundable tax credits. We don't save in taxable, because we haven't reached that stage, yet (haven't exhausted tax deferred account limits), and because investment income would make us ineligible for thousands in refundable credits annually.

And then there's the bonus that FAFSA SAI calculations reward having assets in retirement accounts / not in taxable, and having reduced AGI from higher retirement contributions.

I don't know your numbers, you haven't provided any, but you seem determined to do things the hard way and pay full price for college expenses and invest primarily in taxable accounts, lightly in retirement accounts (based only on your low hypothetical tax deferred contributions, yet insistence you have enough for retirement). But you are fixated on the limited tax advantages of 529 accounts. I'm choosing to use the much greater tax advantages of other tax advantaged buckets, and not pay full price for college.
bling
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Re: Why max 401k before 529?

Post by bling »

solarcub wrote: Sun Jan 03, 2021 11:44 pm Maybe this is not optimal, but with so many unknowns, it's a compromise that works for me.
do the math. even in the best case scenario where your kids go to college and every dime is used for educational expenses you will have less money overall after taxes by not maxing out your 401k.

why are you asking for advice if you're going to ignore all of it?
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solarcub
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Re: Why max 401k before 529?

Post by solarcub »

Sorry, everybody, I think I should have posted this in “Theory” instead of “Personal Investments”. My real question was not about my situation in particular, but more generally, why should you “always” max out 401k and Roth before funding a 529. I was imagining someone who ended up with, say, $2M in 401k and nothing in the bank to pay for college, then has to use the 401k for college, and pay penalties, which negates the whole point of the 401k. (I had forgotten about the ability to withdraw Roth contributions without penalty.) Anyway, getting into my personal situation muddied the issue considerably.

And yes, you have all given me lots of good information on this, so thank you for that. In my particular situation, it looks like I should max out my 401k by drawing down the Wellington. To answer a few other questions, I am almost certain my kids will go to college, based on family history and their own academic talents. Yes, I expect them to work while in college, but probably not a lot. I would rather have them work on getting into a good graduate school if that’s what they want to do. Finally, yes, I am confident I will have enough for retirement; I am just trying to figure out the best way to pay for college, not whether I can pay for college.
Soon2BXProgrammer
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

solarcub wrote: Mon Jan 04, 2021 9:40 pm Sorry, everybody, I think I should have posted this in “Theory” instead of “Personal Investments”. My real question was not about my situation in particular, but more generally, why should you “always” max out 401k and Roth before funding a 529. I was imagining someone who ended up with, say, $2M in 401k and nothing in the bank to pay for college, then has to use the 401k for college, and pay penalties, which negates the whole point of the 401k. (I had forgotten about the ability to withdraw Roth contributions without penalty.) Anyway, getting into my personal situation muddied the issue considerably.

And yes, you have all given me lots of good information on this, so thank you for that. In my particular situation, it looks like I should max out my 401k by drawing down the Wellington. To answer a few other questions, I am almost certain my kids will go to college, based on family history and their own academic talents. Yes, I expect them to work while in college, but probably not a lot. I would rather have them work on getting into a good graduate school if that’s what they want to do. Finally, yes, I am confident I will have enough for retirement; I am just trying to figure out the best way to pay for college, not whether I can pay for college.
In context to your theory question. It comes down to if one can max everything every year, they can probably cash flow a lot of college. but if things go bad, then they can qualify for need based aid because all their assets are hidden. Either way they win.

Only if one is spilling their investments into taxable, because they are maxing everything everywhere, and already paid their house off and have zero debt, does it start to make sense to invest in a 529.

This is contrary to all the normal thinking because everyone says your a bad parent if you don't ear mark the dollars for your children.
KlangFool
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Re: Why max 401k before 529?

Post by KlangFool »

Soon2BXProgrammer wrote: Mon Jan 04, 2021 9:45 pm

This is contrary to all the normal thinking because every one says your a bad parent if you don't ear mark the dollars for your children.

Soon2BXProgrammer,

In reality, most parents are bad as per that definition. I live in a very affluent neighborhood with a median annual household income of 150K. Some parents do not pay for their kids' college education. Most of the kids ended up with student loans. We are the only small minority that fully paid for our kids' college education.

If this is true for my very affluent neighborhood, the numbers for the less affluent neighborhood could only be worse.


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bling
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Re: Why max 401k before 529?

Post by bling »

solarcub wrote: Mon Jan 04, 2021 9:40 pm I was imagining someone who ended up with, say, $2M in 401k and nothing in the bank to pay for college, then has to use the 401k for college, and pay penalties, which negates the whole point of the 401k. (I had forgotten about the ability to withdraw Roth contributions without penalty.)
how you get there matters.

and you seem to be ignoring the fact that for some people they can do in-service 401k rollovers to an IRA, avoiding the penalty altogether.
H-Town
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Re: Why max 401k before 529?

Post by H-Town »

Soon2BXProgrammer wrote: Mon Jan 04, 2021 9:45 pm This is contrary to all the normal thinking because everyone says your a bad parent if you don't ear mark the dollars for your children.
This is not always true. I worked 3 jobs and paid my way through college and grad school. Never have I thought that my parents are bad because they didn't pay for my college. Instead of paying for my tuition, they taught me disciplines and perseverance. Living below my means is my second nature because I lived it growing it. There is so much more intangibles that parents could pass down to their kids in lieu of money.

I'll take a present parent over a rich parent any day.
Soon2BXProgrammer
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

H-Town wrote: Mon Jan 04, 2021 10:57 pm
Soon2BXProgrammer wrote: Mon Jan 04, 2021 9:45 pm This is contrary to all the normal thinking because everyone says your a bad parent if you don't ear mark the dollars for your children.
This is not always true. I worked 3 jobs and paid my way through college and grad school. Never have I thought that my parents are bad because they didn't pay for my college. Instead of paying for my tuition, they taught me disciplines and perseverance. Living below my means is my second nature because I lived it growing it. There is so much more intangibles that parents could pass down to their kids in lieu of money.

I'll take a present parent over a rich parent any day.
I didn't mean to imply that kids would think their parents are bad parents. Its parent peer pressure is what i see with other parents.

the conversations have started at our elementary school about who is doing what. Are you doing the WA 529 plan? The prepaid one? or the investment one? Or an out of state plan?

and those that aren't seemed to get shamed. In reality who knows how much any of them are doing. One of my good friends i tried to convince to pack their 401k/Roth IRA, but they just couldn't get over the fact that they felt like they would be shafting their child, even when i showed them they could cash flow it.

They said, but if we lose our jobs or fall on hard times, our kids wont have money, and they are more concerned about paying for their kids then them eating cat food.

so they signed up for the maximum amount of WA prepaid credits and financed it through WA state at the outrageous interest rate to lock in the current credit value.
H-Town
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Re: Why max 401k before 529?

Post by H-Town »

Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:02 pm
H-Town wrote: Mon Jan 04, 2021 10:57 pm
Soon2BXProgrammer wrote: Mon Jan 04, 2021 9:45 pm This is contrary to all the normal thinking because everyone says your a bad parent if you don't ear mark the dollars for your children.
This is not always true. I worked 3 jobs and paid my way through college and grad school. Never have I thought that my parents are bad because they didn't pay for my college. Instead of paying for my tuition, they taught me disciplines and perseverance. Living below my means is my second nature because I lived it growing it. There is so much more intangibles that parents could pass down to their kids in lieu of money.

I'll take a present parent over a rich parent any day.
I didn't mean to imply that kids would think their parents are bad parents. Its parent peer pressure is what i see with other parents.

the conversations have started at our elementary school about who is doing what. Are you doing the WA 529 plan? The prepaid one? or the investment one? Or an out of state plan?

and those that aren't seemed to get shamed. In reality who knows how much any of them are doing. One of my good friends i tried to convince to pack their 401k/Roth IRA, but they just couldn't get over the fact that they felt like they would be shafting their child, even when i showed them they could cash flow it.

They said, but if we lose our jobs or fall on hard times, our kids wont have money, and they are more concerned about paying for their kids then them eating cat food.
(Most) parents are great! I can't blame mine for anything.
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anon_investor
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Re: Why max 401k before 529?

Post by anon_investor »

Soon2BXProgrammer wrote: Mon Jan 04, 2021 9:45 pm
solarcub wrote: Mon Jan 04, 2021 9:40 pm Sorry, everybody, I think I should have posted this in “Theory” instead of “Personal Investments”. My real question was not about my situation in particular, but more generally, why should you “always” max out 401k and Roth before funding a 529. I was imagining someone who ended up with, say, $2M in 401k and nothing in the bank to pay for college, then has to use the 401k for college, and pay penalties, which negates the whole point of the 401k. (I had forgotten about the ability to withdraw Roth contributions without penalty.) Anyway, getting into my personal situation muddied the issue considerably.

And yes, you have all given me lots of good information on this, so thank you for that. In my particular situation, it looks like I should max out my 401k by drawing down the Wellington. To answer a few other questions, I am almost certain my kids will go to college, based on family history and their own academic talents. Yes, I expect them to work while in college, but probably not a lot. I would rather have them work on getting into a good graduate school if that’s what they want to do. Finally, yes, I am confident I will have enough for retirement; I am just trying to figure out the best way to pay for college, not whether I can pay for college.
In context to your theory question. It comes down to if one can max everything every year, they can probably cash flow a lot of college. but if things go bad, then they can qualify for need based aid because all their assets are hidden. Either way they win.

Only if one is spilling their investments into taxable, because they are maxing everything everywhere, and already paid their house off and have zero debt, does it start to make sense to invest in a 529.

This is contrary to all the normal thinking because everyone says your a bad parent if you don't ear mark the dollars for your children.
I wouldn't go so far as to say you need to have a paid off mortgage for 529 makes sense. But I think a 529 really does only make sense for someone that has maxed out all their tax advantaged accounts (401k, IRA, HSA, etc.), is already investing in a taxable account; because the choice is really taxable vs. 529 plan, and if those funds were going to be earmarked for kids college anyway, might as well get the best tax advantage available.
Soon2BXProgrammer
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

anon_investor wrote: Mon Jan 04, 2021 11:22 pm I wouldn't go so far as to say you need to have a paid off mortgage for 529 makes sense. But I think a 529 really does only make sense for someone that has maxed out all their tax advantaged accounts (401k, IRA, HSA, etc.), is already investing in a taxable account; because the choice is really taxable vs. 529 plan, and if those funds were going to be earmarked for kids college anyway, might as well get the best tax advantage available.
money is fungible. The decision is actually between:

1) reduce the loan they took secured against their house so that they can buy equities in their retirement plan
2) Invest in taxable (and effectively borrow against their house to do it)
3) invest in a 529 (and effectively borrow against their house to do it).

Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
bling
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Re: Why max 401k before 529?

Post by bling »

Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:27 pm Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
is the impact dollar for dollar? using your example, let's say you have (a) 500k house owned free and clear, 20k in 529s vs (b) 20k remaining mortgage balance and $0 in 529s. what doors will this shut if you opted for (b) instead of (a)?
Soon2BXProgrammer
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

bling wrote: Tue Jan 05, 2021 8:22 am
Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:27 pm Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
is the impact dollar for dollar? using your example, let's say you have (a) 500k house owned free and clear, 20k in 529s vs (b) 20k remaining mortgage balance and $0 in 529s. what doors will this shut if you opted for (b) instead of (a)?
well. i think you mean
1) 500k house free and clear with 0 dollars in 529
2) 20k mortgage with 20k in 529s.

in this example, setting aside the rest of the "asset protection allowance rules" (assuming you have a little bit of other unsheltered assets in your checking account, etc),

1) The house is an exempt asset and since nothing is in the 529, it is assessed at 0
2) The fafsa ignores your debts, so the fact you owe 20k on your morgage (or car, boat, etc), is just flat out ignored... and the 20k on the 529 is assessed at an additional 6% towards your EFC. (yes i know this number is small) but that is $1,200 increase to EFC.

The real numbers would be 10x in the Ops scenario.. we would be talking about 200k in 529's which is a 12k increase per year in the EFC. which (by itself but especially) with any income starts to get you in the territory, that almost any state school would never provide any need based aid. (private schools might provide aid, but they commonly provide aid to compete with state schools, and make their price comparable for the students they want to attract)

if you follow the rules in the FAFSA, a higher accumulator of wealth does NOT have to have a higher EFC then someone in debt up to their eyeballs, assuming if they have the same income, this is why i asked 10 times what his income was. (There is no point to play this game if you make 200k/yr, your income will be assessed to the point where what you have done with your assets don't matter)

(Extreme example: if someone has $10M in retirement assets, a paid off house, and is unemployed they will get the pell grant and other need based aid)
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N1CKV
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Re: Why max 401k before 529?

Post by N1CKV »

My opinion isn't popular and some consider it harsh, but why is your children's college education your responsibility?
I have no children, so my opinion may be skewed, but:
One of the best things my parents did was make me work and pay for my own college education.
I took no loans. It did take me 5 years (and one summer class) to complete a "4 year program", but I did it while living in my own apartment. Quite a few of my fellow students failed to complete their degree program and a major factor was their lack of respect for the cost of school. When you earned it, you are a bit more careful with it.

If you feel compelled to pay for their education the best thing you can do for them is to reimburse them after graduation (I wish my parents did this, but I still somehow managed to be just fine). This would at least make them put some "skin in the game".
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Re: Why max 401k before 529?

Post by stoptothink »

H-Town wrote: Mon Jan 04, 2021 10:57 pm
Soon2BXProgrammer wrote: Mon Jan 04, 2021 9:45 pm This is contrary to all the normal thinking because everyone says your a bad parent if you don't ear mark the dollars for your children.
This is not always true. I worked 3 jobs and paid my way through college and grad school. Never have I thought that my parents are bad because they didn't pay for my college. Instead of paying for my tuition, they taught me disciplines and perseverance. Living below my means is my second nature because I lived it growing it. There is so much more intangibles that parents could pass down to their kids in lieu of money.

I'll take a present parent over a rich parent any day.
Wife and I and our 9 siblings completely agree with this. Both our parents contributed a grand total of $0 to the college education of their offspring, yet there are 8 college graduates among us. I've never heard any discussion about how our parents were "bad" because they were not in a financial position to help.

My mom didn't graduate high school, yet she's raised 5 people who put themselves completely through college on their own (plus 3 masters degrees and a PhD). She's amazing.
Soon2BXProgrammer
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

stoptothink wrote: Tue Jan 05, 2021 10:27 am
H-Town wrote: Mon Jan 04, 2021 10:57 pm
Soon2BXProgrammer wrote: Mon Jan 04, 2021 9:45 pm This is contrary to all the normal thinking because everyone says your a bad parent if you don't ear mark the dollars for your children.
This is not always true. I worked 3 jobs and paid my way through college and grad school. Never have I thought that my parents are bad because they didn't pay for my college. Instead of paying for my tuition, they taught me disciplines and perseverance. Living below my means is my second nature because I lived it growing it. There is so much more intangibles that parents could pass down to their kids in lieu of money.

I'll take a present parent over a rich parent any day.
Wife and I and our 9 siblings completely agree with this. Both our parents contributed a grand total of $0 to the college education of their offspring, yet there are 8 college graduates among us. I've never heard any discussion about how our parents were "bad" because they were not in a financial position to help.

My mom didn't graduate high school, yet she's raised 5 people who put themselves completely through college on their own (plus 3 masters degrees and a PhD). She's amazing.
I'm not saying your a bad parent. All my posts above are about you should save your retirement first and foremost. I was inferring the parental peer pressure that now exists in schools.
stoptothink
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Re: Why max 401k before 529?

Post by stoptothink »

Soon2BXProgrammer wrote: Tue Jan 05, 2021 10:42 am
stoptothink wrote: Tue Jan 05, 2021 10:27 am
H-Town wrote: Mon Jan 04, 2021 10:57 pm
Soon2BXProgrammer wrote: Mon Jan 04, 2021 9:45 pm This is contrary to all the normal thinking because everyone says your a bad parent if you don't ear mark the dollars for your children.
This is not always true. I worked 3 jobs and paid my way through college and grad school. Never have I thought that my parents are bad because they didn't pay for my college. Instead of paying for my tuition, they taught me disciplines and perseverance. Living below my means is my second nature because I lived it growing it. There is so much more intangibles that parents could pass down to their kids in lieu of money.

I'll take a present parent over a rich parent any day.
Wife and I and our 9 siblings completely agree with this. Both our parents contributed a grand total of $0 to the college education of their offspring, yet there are 8 college graduates among us. I've never heard any discussion about how our parents were "bad" because they were not in a financial position to help.

My mom didn't graduate high school, yet she's raised 5 people who put themselves completely through college on their own (plus 3 masters degrees and a PhD). She's amazing.
I'm not saying your a bad parent. All my posts above are about you should save your retirement first and foremost. I was inferring the parental peer pressure that now exists in schools.
I'm not in the "bad parent" category, my kids have fully-funded 529s a decade before they'll start college (but we easily max all tax-advantaged space). We live in an area where there are reasonable cost options and many young adults pay their own way be working; there is zero peer pressure here to save for kids' future education that we have ever experienced. I would be surprised if a single person/couple in our social circle has 529s for their kids, I know none of our family members do.
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willthrill81
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Re: Why max 401k before 529?

Post by willthrill81 »

Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:02 pm so they signed up for the maximum amount of WA prepaid credits and financed it through WA state at the outrageous interest rate to lock in the current credit value.
I don't understand why anyone is interested in WA state's prepaid plan unless they've been buying into the idea that 'tuition always goes up faster than inflation'. The inflation-adjusted tuition at both WSU and WWU, for instance, is significantly lower now than it was ten years ago.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Soon2BXProgrammer
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

willthrill81 wrote: Tue Jan 05, 2021 11:01 am
Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:02 pm so they signed up for the maximum amount of WA prepaid credits and financed it through WA state at the outrageous interest rate to lock in the current credit value.
I don't understand why anyone is interested in WA state's prepaid plan unless they've been buying into the idea that 'tuition always goes up faster than inflation'. The inflation-adjusted tuition at both WSU and WWU, for instance, is significantly lower now than it was ten years ago.
I tried to talk them out of it. they said, "this is a fixed quantity we can pay for verse the investment account, we won't know when we are done, or we might think we are done and then the market crashes and we are not"

effectively its an emotional decision.
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willthrill81
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Re: Why max 401k before 529?

Post by willthrill81 »

Soon2BXProgrammer wrote: Tue Jan 05, 2021 11:03 am
willthrill81 wrote: Tue Jan 05, 2021 11:01 am
Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:02 pm so they signed up for the maximum amount of WA prepaid credits and financed it through WA state at the outrageous interest rate to lock in the current credit value.
I don't understand why anyone is interested in WA state's prepaid plan unless they've been buying into the idea that 'tuition always goes up faster than inflation'. The inflation-adjusted tuition at both WSU and WWU, for instance, is significantly lower now than it was ten years ago.
I tried to talk them out of it. they said, "this is a fixed quantity we can pay for verse the investment account, we won't know when we are done, or we might think we are done and then the market crashes and we are not"
Using that logic, they should be 100% TIPS in their retirement portfolios.

The price to pay for 'certainty' is very high right now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Why max 401k before 529?

Post by neurosphere »

solarcub wrote: Mon Jan 04, 2021 9:40 pm I was imagining someone who ended up with, say, $2M in 401k and nothing in the bank to pay for college, then has to use the 401k for college, and pay penalties, which negates the whole point of the 401k.
The person who gets $2M in a 401k has likely been maxing out a 401k each year. So, do that. Then, when kids GET to college, you can stop contributing to the 401ks and Roth and use that money to pay for tuition.
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Re: Why max 401k before 529?

Post by willthrill81 »

N1CKV wrote: Tue Jan 05, 2021 10:23 am My opinion isn't popular and some consider it harsh, but why is your children's college education your responsibility?
I have no children, so my opinion may be skewed, but:
One of the best things my parents did was make me work and pay for my own college education.
I took no loans. It did take me 5 years (and one summer class) to complete a "4 year program", but I did it while living in my own apartment. Quite a few of my fellow students failed to complete their degree program and a major factor was their lack of respect for the cost of school. When you earned it, you are a bit more careful with it.

If you feel compelled to pay for their education the best thing you can do for them is to reimburse them after graduation (I wish my parents did this, but I still somehow managed to be just fine). This would at least make them put some "skin in the game".
As a parent myself who has observed the long-term effects of various parenting styles, I see both sides of the coin. Most parents really do mean well and want the best for their children. Unfortunately, it's pretty common knowledge that it's only through experiencing difficulties and hardships that human beings become resilient and appreciative for what they have. As such, I believe that parents should not shield their kids too much from life's challenges while also not letting them drown either.

And as a professor myself, the students of mine who generally do the best are usually those that are both working (gives them good life experience and motivation to do well in their courses so they aren't stuck in such a job forever) and, in particular, highly motivated. It's certainly possible that the student whose college expenses are being completely covered by someone else will be motivated, but it seems less likely.

Which one will appreciate their car more: the one who worked hard for hundreds of hours to pay for it or the one who was given it?

While it's not entirely the same idea as paying for your kids' college expenses, Thomas Stanley's research made it abundantly clear that 'economic outpatient care' was usually to the long-term detriment of those being helped, completely counter to the intentions of the one who provided it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
AnEngineer
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Re: Why max 401k before 529?

Post by AnEngineer »

Soon2BXProgrammer wrote: Tue Jan 05, 2021 9:46 am The real numbers would be 10x in the Ops scenario.. we would be talking about 200k in 529's which is a 12k increase per year in the EFC. which (by itself but especially) with any income starts to get you in the territory, that almost any state school would never provide any need based aid. (private schools might provide aid, but they commonly provide aid to compete with state schools, and make their price comparable for the students they want to attract)
(emphasis added)
For 4 years in college with only one kid you need to multiply by at least 4, so 48k. For many families you're going to multiply this by 6-9 instead (2-3 kids each 2-3 years apart).
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Re: Why max 401k before 529?

Post by SchruteB&B »

N1CKV wrote: Tue Jan 05, 2021 10:23 am My opinion isn't popular and some consider it harsh, but why is your children's college education your responsibility?
I have no children, so my opinion may be skewed, but:
One of the best things my parents did was make me work and pay for my own college education.
I took no loans. It did take me 5 years (and one summer class) to complete a "4 year program", but I did it while living in my own apartment. Quite a few of my fellow students failed to complete their degree program and a major factor was their lack of respect for the cost of school. When you earned it, you are a bit more careful with it.

If you feel compelled to pay for their education the best thing you can do for them is to reimburse them after graduation (I wish my parents did this, but I still somehow managed to be just fine). This would at least make them put some "skin in the game".
Curious if you would be able to do this today? I paid for in state grad school via full time summer jobs because in state tuition was supported by the state much better 30 years ago; it was approximately $2k per year. That same school and program now cost $40k per year. I don’t think there’s a summer job that would support that.
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Re: Why max 401k before 529?

Post by willthrill81 »

SchruteB&B wrote: Tue Jan 05, 2021 12:40 pm
N1CKV wrote: Tue Jan 05, 2021 10:23 am My opinion isn't popular and some consider it harsh, but why is your children's college education your responsibility?
I have no children, so my opinion may be skewed, but:
One of the best things my parents did was make me work and pay for my own college education.
I took no loans. It did take me 5 years (and one summer class) to complete a "4 year program", but I did it while living in my own apartment. Quite a few of my fellow students failed to complete their degree program and a major factor was their lack of respect for the cost of school. When you earned it, you are a bit more careful with it.

If you feel compelled to pay for their education the best thing you can do for them is to reimburse them after graduation (I wish my parents did this, but I still somehow managed to be just fine). This would at least make them put some "skin in the game".
Curious if you would be able to do this today? I paid for in state grad school via full time summer jobs because in state tuition was supported by the state much better 30 years ago; it was approximately $2k per year. That same school and program now cost $40k per year. I don’t think there’s a summer job that would support that.
You're right: a summer job won't cut it for a school that's $40k/year. But there many public universities that are far less costly than that. It's not necessary to spend $160k for a bachelor's degree.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Why max 401k before 529?

Post by stoptothink »

willthrill81 wrote: Tue Jan 05, 2021 12:45 pm
SchruteB&B wrote: Tue Jan 05, 2021 12:40 pm
N1CKV wrote: Tue Jan 05, 2021 10:23 am My opinion isn't popular and some consider it harsh, but why is your children's college education your responsibility?
I have no children, so my opinion may be skewed, but:
One of the best things my parents did was make me work and pay for my own college education.
I took no loans. It did take me 5 years (and one summer class) to complete a "4 year program", but I did it while living in my own apartment. Quite a few of my fellow students failed to complete their degree program and a major factor was their lack of respect for the cost of school. When you earned it, you are a bit more careful with it.

If you feel compelled to pay for their education the best thing you can do for them is to reimburse them after graduation (I wish my parents did this, but I still somehow managed to be just fine). This would at least make them put some "skin in the game".
Curious if you would be able to do this today? I paid for in state grad school via full time summer jobs because in state tuition was supported by the state much better 30 years ago; it was approximately $2k per year. That same school and program now cost $40k per year. I don’t think there’s a summer job that would support that.
You're right: a summer job won't cut it for a school that's $40k/year. But there many public universities that are far less costly than that. It's not necessary to spend $160k for a bachelor's degree.
There are a handful of colleges within driving distance of my home (two within ~6 miles) that are <$7/yr for tuition+fees. This always becomes a regional discussion; it is very common in my area to just work and pay your own way through school.
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

AnEngineer wrote: Tue Jan 05, 2021 12:21 pm
Soon2BXProgrammer wrote: Tue Jan 05, 2021 9:46 am The real numbers would be 10x in the Ops scenario.. we would be talking about 200k in 529's which is a 12k increase per year in the EFC. which (by itself but especially) with any income starts to get you in the territory, that almost any state school would never provide any need based aid. (private schools might provide aid, but they commonly provide aid to compete with state schools, and make their price comparable for the students they want to attract)
(emphasis added)
For 4 years in college with only one kid you need to multiply by at least 4, so 48k. For many families you're going to multiply this by 6-9 instead (2-3 kids each 2-3 years apart).
Thanks. Hopefully readers didn't miss that its "per year". of course over time the 529 would probably be burned down, so each year the add to the EFC would be declining as a family goes from year 1 to year 9.
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Re: Why max 401k before 529?

Post by centrifuge41 »

solarcub wrote: Sun Jan 03, 2021 11:44 pm 1) Spending 401k money on college would be bad, because of the penalty.
2) Spending Roth contributions on college is ok, but not the earnings.

Based on this, I think we will max out our Roth IRAs every year. We will do this by moving some money from the Wellington, (wow, you guys really did your homework on that one), to reduce taxes.
Hey solarcub,
Are your children likely to get financial aid? If so this strategy makes sense, e.g. to put more into a Roth IRA to use as a college vehicle (due to ability withdraw principal (not earnings) tax free). Roth IRA money will be immune to lowering financial aid (not subject to 5.64% expected family contribution).

Once children are in college, you can use the CO 529 as a pass-through churn vehicle. Example: you need to pay $6k tuition in some future year. You withdraw the $6k from Roth IRA. You fund the CO 529. You immediately withdraw the 6k from the CO 529. Then you deduct it from your CO income tax.

If you are unlikely to get financial aid, then it could make sense to use the 529 more now, even when the Roth IRA isn't maxed out each year, if you plan to use the 529 and/or Roth IRA to hold bonds instead of stocks. I say this mainly because CO has a stable value fund in the 529 that pays 2.09%, which is much higher than what a bond fund in the Roth IRA would pay (e.g. Vanguard Total Bond in Roth IRA yields just 1.11% nowadays).
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Re: Why max 401k before 529?

Post by SchruteB&B »

willthrill81 wrote: Tue Jan 05, 2021 12:45 pm
SchruteB&B wrote: Tue Jan 05, 2021 12:40 pm
N1CKV wrote: Tue Jan 05, 2021 10:23 am My opinion isn't popular and some consider it harsh, but why is your children's college education your responsibility?
I have no children, so my opinion may be skewed, but:
One of the best things my parents did was make me work and pay for my own college education.
I took no loans. It did take me 5 years (and one summer class) to complete a "4 year program", but I did it while living in my own apartment. Quite a few of my fellow students failed to complete their degree program and a major factor was their lack of respect for the cost of school. When you earned it, you are a bit more careful with it.

If you feel compelled to pay for their education the best thing you can do for them is to reimburse them after graduation (I wish my parents did this, but I still somehow managed to be just fine). This would at least make them put some "skin in the game".
Curious if you would be able to do this today? I paid for in state grad school via full time summer jobs because in state tuition was supported by the state much better 30 years ago; it was approximately $2k per year. That same school and program now cost $40k per year. I don’t think there’s a summer job that would support that.
You're right: a summer job won't cut it for a school that's $40k/year. But there many public universities that are far less costly than that. It's not necessary to spend $160k for a bachelor's degree.
Oh certainly, I was not trying to imply that a college degree couldn’t be had for less. Just one data point that what worked for me 30 years ago would not work for a resident of my state nowadays. The fact that other states have cheaper in state tuition is rather cold comfort to them.
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Re: Why max 401k before 529?

Post by FelixTheCat »

You can't get a grant or loan for retirement.
Felix is a wonderful, wonderful cat.
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Re: Why max 401k before 529?

Post by Scott S »

solarcub wrote: Mon Jan 04, 2021 9:40 pmIn my particular situation, it looks like I should max out my 401k by drawing down the Wellington.
You keep pondering whether you should move large amounts of money from one type of account to another... before you do any of that, make sure you wouldn't incur tax penalties that would negate the benefit of having the money in the "right" place.
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

Scott S wrote: Tue Jan 05, 2021 5:53 pm
solarcub wrote: Mon Jan 04, 2021 9:40 pmIn my particular situation, it looks like I should max out my 401k by drawing down the Wellington.
You keep pondering whether you should move large amounts of money from one type of account to another... before you do any of that, make sure you wouldn't incur tax penalties that would negate the benefit of having the money in the "right" place.
just pontificating from the outside. if he sells something that he has to recognize capital gains on, but at the same time her defers more to a pretax 401k, he should come out ahead.

Its good to run the numbers though to understand what is going to happen at tax time.
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Re: Why max 401k before 529?

Post by teen persuasion »

centrifuge41 wrote: Tue Jan 05, 2021 1:26 pm
solarcub wrote: Sun Jan 03, 2021 11:44 pm 1) Spending 401k money on college would be bad, because of the penalty.
2) Spending Roth contributions on college is ok, but not the earnings.

Based on this, I think we will max out our Roth IRAs every year. We will do this by moving some money from the Wellington, (wow, you guys really did your homework on that one), to reduce taxes.
Hey solarcub,
Are your children likely to get financial aid? If so this strategy makes sense, e.g. to put more into a Roth IRA to use as a college vehicle (due to ability withdraw principal (not earnings) tax free). Roth IRA money will be immune to lowering financial aid (not subject to 5.64% expected family contribution).

Once children are in college, you can use the CO 529 as a pass-through churn vehicle. Example: you need to pay $6k tuition in some future year. You withdraw the $6k from Roth IRA. You fund the CO 529. You immediately withdraw the 6k from the CO 529. Then you deduct it from your CO income tax.

If you are unlikely to get financial aid, then it could make sense to use the 529 more now, even when the Roth IRA isn't maxed out each year, if you plan to use the 529 and/or Roth IRA to hold bonds instead of stocks. I say this mainly because CO has a stable value fund in the 529 that pays 2.09%, which is much higher than what a bond fund in the Roth IRA would pay (e.g. Vanguard Total Bond in Roth IRA yields just 1.11% nowadays).
Umm, FAFSA has a way to penalize withdrawals from Roth IRAs, too.

Funds inside the Roth IRA are invisible as assets, but any withdrawals from Roth IRAs are reported as non-taxable income, and income sources can increase EFC (or its new name, SAI, student aid index) more rapidly than assets (only 12% of assets are included).

To have Roth withdrawals not affect FAFSA calculations, you should use Roth withdrawals only after all the prior-prior year tax returns are past (which can be as early as the spring semester of sophomore year, unless you have overlapping college years for multiple children).
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Re: Why max 401k before 529?

Post by Finridge »

centrifuge41 wrote: Tue Jan 05, 2021 1:26 pm
Roth IRA money will be immune to lowering financial aid (not subject to 5.64% expected family contribution).
This is key. And of course this is true of both Roth and trad IRA's and also 401(k)'s.
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Re: Why max 401k before 529?

Post by anon_investor »

Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:27 pm
anon_investor wrote: Mon Jan 04, 2021 11:22 pm I wouldn't go so far as to say you need to have a paid off mortgage for 529 makes sense. But I think a 529 really does only make sense for someone that has maxed out all their tax advantaged accounts (401k, IRA, HSA, etc.), is already investing in a taxable account; because the choice is really taxable vs. 529 plan, and if those funds were going to be earmarked for kids college anyway, might as well get the best tax advantage available.
money is fungible. The decision is actually between:

1) reduce the loan they took secured against their house so that they can buy equities in their retirement plan
2) Invest in taxable (and effectively borrow against their house to do it)
3) invest in a 529 (and effectively borrow against their house to do it).

Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
But now a days, super lower interest mortgages make it less of a no brainer to payoff a mortgage with excess cash flow.
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Re: Why max 401k before 529?

Post by willthrill81 »

anon_investor wrote: Thu Jan 07, 2021 12:11 am
Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:27 pm
anon_investor wrote: Mon Jan 04, 2021 11:22 pm I wouldn't go so far as to say you need to have a paid off mortgage for 529 makes sense. But I think a 529 really does only make sense for someone that has maxed out all their tax advantaged accounts (401k, IRA, HSA, etc.), is already investing in a taxable account; because the choice is really taxable vs. 529 plan, and if those funds were going to be earmarked for kids college anyway, might as well get the best tax advantage available.
money is fungible. The decision is actually between:

1) reduce the loan they took secured against their house so that they can buy equities in their retirement plan
2) Invest in taxable (and effectively borrow against their house to do it)
3) invest in a 529 (and effectively borrow against their house to do it).

Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
But now a days, super lower interest mortgages make it less of a no brainer to payoff a mortgage with excess cash flow.
It matters greatly what one would do with that 'excess cash flow'. If used to buy stocks, then it's very historically likely, though obviously not guaranteed, to beat current mortgage rates over the long-term. But if it would be used to buy bonds, the mortgage offers a much better yield (1-2% higher). Also, unless you are one of the few who still deduct mortgage interest, it's a post-tax return, whereas bond returns are pre-tax.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

anon_investor wrote: Thu Jan 07, 2021 12:11 am
Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:27 pm
anon_investor wrote: Mon Jan 04, 2021 11:22 pm I wouldn't go so far as to say you need to have a paid off mortgage for 529 makes sense. But I think a 529 really does only make sense for someone that has maxed out all their tax advantaged accounts (401k, IRA, HSA, etc.), is already investing in a taxable account; because the choice is really taxable vs. 529 plan, and if those funds were going to be earmarked for kids college anyway, might as well get the best tax advantage available.
money is fungible. The decision is actually between:

1) reduce the loan they took secured against their house so that they can buy equities in their retirement plan
2) Invest in taxable (and effectively borrow against their house to do it)
3) invest in a 529 (and effectively borrow against their house to do it).

Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
But now a days, super lower interest mortgages make it less of a no brainer to payoff a mortgage with excess cash flow.
I disagree unless one is 100% stock. Assuming one is maxing all their accounts and those accounts are sizable, and they have any bond allocation.. Why loan money to the government at .9% (or less) and borrow at 2.5%-3.5%? (Effectively this is an argument to not hold bonds in retirement funds until you pay your mortgage off, note i didn't say that one shouldn't have a sizable emergency fund, that is different, that is for peace of mind in case you end up with a pandemic and a job loss.)
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Re: Why max 401k before 529?

Post by janezoey »

Here are two points to consider:

1. You cannot assume the college will meet your EFC/Student Aid Index. Only wealthy top tier colleges are going to meet your full need. Others like Northeastern are going to look at your home equity and expect you to take out a big loan and still say they met your need. Second tier colleges will entice you with “merit aid” but they still expect you to pay up. The state universities aren’t cheap or free. Maybe the Democrats will do something about it but given the devastation of state budgets, the trend of state universities getting more expensive might continue anyway. I would at least save enough too cover state tuition and leave space for the AOTC.
2. You only can take a limited amount of federal loans per year so they won’t always cover the full tuition. So you might have to take out private loans which can have onerous conditions. All these student loans are difficult to discharge especially if you co-sign. Just sayin, there are dangers with student loans and you have to navigate carefully. Even if you had declared bankruptcy, they won’t disappear and can haunt you into retirement. Even your Social Security can be garnished.

Personally speaking...
My husband has a generous pension so it doesn’t make sense to max out our traditional 401k. Yes, we do fill up all our Roth spaces. Right now, tax rates are historically low. I just don’t want to overfill our retirement account and deal with RMDs later and higher tax rates later. What if one of us survives the other by a long time but now the survivor is taxed as a singleton? The inheritance of traditional 401k doesn’t allow for the inheritor to take it out based on their life expectancy anymore. These are all tax things to consider. Again, we’re unique because we have a pension AND can collect social security.

So no, we are not maxing out retirement. We added at least $80k to the 529 so far for two kids under 4. It’s grown by 30% ($24k). If I had dilly dallied I would have missed out on a lot of growth. I know given our household income and preference for expensive elite colleges, we’re going to be paying near full rides. That’s almost 50k-92k per year per a kid. Even we can’t fully cash flow those amounts. Better to do some planning and research now.
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Re: Why max 401k before 529?

Post by anon_investor »

Soon2BXProgrammer wrote: Thu Jan 07, 2021 12:35 am
anon_investor wrote: Thu Jan 07, 2021 12:11 am
Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:27 pm
anon_investor wrote: Mon Jan 04, 2021 11:22 pm I wouldn't go so far as to say you need to have a paid off mortgage for 529 makes sense. But I think a 529 really does only make sense for someone that has maxed out all their tax advantaged accounts (401k, IRA, HSA, etc.), is already investing in a taxable account; because the choice is really taxable vs. 529 plan, and if those funds were going to be earmarked for kids college anyway, might as well get the best tax advantage available.
money is fungible. The decision is actually between:

1) reduce the loan they took secured against their house so that they can buy equities in their retirement plan
2) Invest in taxable (and effectively borrow against their house to do it)
3) invest in a 529 (and effectively borrow against their house to do it).

Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
But now a days, super lower interest mortgages make it less of a no brainer to payoff a mortgage with excess cash flow.
I disagree unless one is 100% stock. Assuming one is maxing all their accounts and those accounts are sizable, and they have any bond allocation.. Why loan money to the government at .9% (or less) and borrow at 2.5%-3.5%? (Effectively this is an argument to not hold bonds in retirement funds until you pay your mortgage off, note i didn't say that one shouldn't have a sizable emergency fund, that is different, that is for peace of mind in case you end up with a pandemic and a job loss.)
So if I am 100% stock with an emergency fund, it is okay to do a 529 plan and not prepay my mortgage?
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

anon_investor wrote: Thu Jan 07, 2021 1:09 am
Soon2BXProgrammer wrote: Thu Jan 07, 2021 12:35 am
anon_investor wrote: Thu Jan 07, 2021 12:11 am
Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:27 pm
anon_investor wrote: Mon Jan 04, 2021 11:22 pm I wouldn't go so far as to say you need to have a paid off mortgage for 529 makes sense. But I think a 529 really does only make sense for someone that has maxed out all their tax advantaged accounts (401k, IRA, HSA, etc.), is already investing in a taxable account; because the choice is really taxable vs. 529 plan, and if those funds were going to be earmarked for kids college anyway, might as well get the best tax advantage available.
money is fungible. The decision is actually between:

1) reduce the loan they took secured against their house so that they can buy equities in their retirement plan
2) Invest in taxable (and effectively borrow against their house to do it)
3) invest in a 529 (and effectively borrow against their house to do it).

Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
But now a days, super lower interest mortgages make it less of a no brainer to payoff a mortgage with excess cash flow.
I disagree unless one is 100% stock. Assuming one is maxing all their accounts and those accounts are sizable, and they have any bond allocation.. Why loan money to the government at .9% (or less) and borrow at 2.5%-3.5%? (Effectively this is an argument to not hold bonds in retirement funds until you pay your mortgage off, note i didn't say that one shouldn't have a sizable emergency fund, that is different, that is for peace of mind in case you end up with a pandemic and a job loss.)
So if I am 100% stock with an emergency fund, it is okay to do a 529 plan and not prepay my mortgage?
It comes down to: if you project into the future, including if things go bad, (you lose your job), is there any way you could qualify for need based aid.

Its okay to do anything you want to do. My point is, if there is any chance of Aid, if you put money into a 529, it is "taxed" by the FAFSA process.. mortgage equity is not. if your putting money into a 529, you probably aren't 100% stock, but depending on timeline, could be quite conservative, this means the difference between the expected return in the 529 and your mortgage are not that big.

if you said, you make 200k a year, you have enough income based on the current FAFSA rules to not get need based aid. if you said you make 65k a year. it is really worth thinking about how to play this out, because every "dollar" counts from a aid perspective.
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Re: Why max 401k before 529?

Post by anon_investor »

Soon2BXProgrammer wrote: Thu Jan 07, 2021 10:27 am
anon_investor wrote: Thu Jan 07, 2021 1:09 am
Soon2BXProgrammer wrote: Thu Jan 07, 2021 12:35 am
anon_investor wrote: Thu Jan 07, 2021 12:11 am
Soon2BXProgrammer wrote: Mon Jan 04, 2021 11:27 pm

money is fungible. The decision is actually between:

1) reduce the loan they took secured against their house so that they can buy equities in their retirement plan
2) Invest in taxable (and effectively borrow against their house to do it)
3) invest in a 529 (and effectively borrow against their house to do it).

Again. if one is fully funding retirement and has excess cash flow, if they reduce their debt loan on their house. These assets disappear from any potential needs testing. If things go bad, they have secured themselves. and if things go well, they can cash flow college. (if they need to, they could re-amortize their remaining loan balance and stretch it out to provide more free cash flow) but effectively, they are putting "college" on the "house loan".

Note: i failed to take my own advice. I hadn't thought about this enough at the time and I had 20k in 529s when we paid off our house.
But now a days, super lower interest mortgages make it less of a no brainer to payoff a mortgage with excess cash flow.
I disagree unless one is 100% stock. Assuming one is maxing all their accounts and those accounts are sizable, and they have any bond allocation.. Why loan money to the government at .9% (or less) and borrow at 2.5%-3.5%? (Effectively this is an argument to not hold bonds in retirement funds until you pay your mortgage off, note i didn't say that one shouldn't have a sizable emergency fund, that is different, that is for peace of mind in case you end up with a pandemic and a job loss.)
So if I am 100% stock with an emergency fund, it is okay to do a 529 plan and not prepay my mortgage?
It comes down to: if you project into the future, including if things go bad, (you lose your job), is there any way you could qualify for need based aid.

Its okay to do anything you want to do. My point is, if there is any chance of Aid, if you put money into a 529, it is "taxed" by the FAFSA process.. mortgage equity is not. if your putting money into a 529, you probably aren't 100% stock, but depending on timeline, could be quite conservative, this means the difference between the expected return in the 529 and your mortgage are not that big.

if you said, you make 200k a year, you have enough income based on the current FAFSA rules to not get need based aid. if you said you make 65k a year. it is really worth thinking about how to play this out, because every "dollar" counts from a aid perspective.
I think a lot of folks here make in excess of $200k and a 529 plan just makes sense. It does at least me. But I agree anyone that might get aid, should shelter as much of their wealth as legally possible to get the best aid package.
Soon2BXProgrammer
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

anon_investor wrote: Thu Jan 07, 2021 8:22 pm
Soon2BXProgrammer wrote: Thu Jan 07, 2021 10:27 am
anon_investor wrote: Thu Jan 07, 2021 1:09 am
Soon2BXProgrammer wrote: Thu Jan 07, 2021 12:35 am
anon_investor wrote: Thu Jan 07, 2021 12:11 am

But now a days, super lower interest mortgages make it less of a no brainer to payoff a mortgage with excess cash flow.
I disagree unless one is 100% stock. Assuming one is maxing all their accounts and those accounts are sizable, and they have any bond allocation.. Why loan money to the government at .9% (or less) and borrow at 2.5%-3.5%? (Effectively this is an argument to not hold bonds in retirement funds until you pay your mortgage off, note i didn't say that one shouldn't have a sizable emergency fund, that is different, that is for peace of mind in case you end up with a pandemic and a job loss.)
So if I am 100% stock with an emergency fund, it is okay to do a 529 plan and not prepay my mortgage?
It comes down to: if you project into the future, including if things go bad, (you lose your job), is there any way you could qualify for need based aid.

Its okay to do anything you want to do. My point is, if there is any chance of Aid, if you put money into a 529, it is "taxed" by the FAFSA process.. mortgage equity is not. if your putting money into a 529, you probably aren't 100% stock, but depending on timeline, could be quite conservative, this means the difference between the expected return in the 529 and your mortgage are not that big.

if you said, you make 200k a year, you have enough income based on the current FAFSA rules to not get need based aid. if you said you make 65k a year. it is really worth thinking about how to play this out, because every "dollar" counts from a aid perspective.
I think a lot of folks here make in excess of $200k and a 529 plan just makes sense. It does at least me. But I agree anyone that might get aid, should shelter as much of their wealth as legally possible to get the best aid package.
I believe the OP of this thread implied they are doing well to save 12 grand a year. I would expect this op isnt over 75-100k. There are a a significant number of middle class incomes on the board. They mostly read though.
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anon_investor
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Re: Why max 401k before 529?

Post by anon_investor »

Soon2BXProgrammer wrote: Thu Jan 07, 2021 8:28 pm
anon_investor wrote: Thu Jan 07, 2021 8:22 pm
Soon2BXProgrammer wrote: Thu Jan 07, 2021 10:27 am
anon_investor wrote: Thu Jan 07, 2021 1:09 am
Soon2BXProgrammer wrote: Thu Jan 07, 2021 12:35 am

I disagree unless one is 100% stock. Assuming one is maxing all their accounts and those accounts are sizable, and they have any bond allocation.. Why loan money to the government at .9% (or less) and borrow at 2.5%-3.5%? (Effectively this is an argument to not hold bonds in retirement funds until you pay your mortgage off, note i didn't say that one shouldn't have a sizable emergency fund, that is different, that is for peace of mind in case you end up with a pandemic and a job loss.)
So if I am 100% stock with an emergency fund, it is okay to do a 529 plan and not prepay my mortgage?
It comes down to: if you project into the future, including if things go bad, (you lose your job), is there any way you could qualify for need based aid.

Its okay to do anything you want to do. My point is, if there is any chance of Aid, if you put money into a 529, it is "taxed" by the FAFSA process.. mortgage equity is not. if your putting money into a 529, you probably aren't 100% stock, but depending on timeline, could be quite conservative, this means the difference between the expected return in the 529 and your mortgage are not that big.

if you said, you make 200k a year, you have enough income based on the current FAFSA rules to not get need based aid. if you said you make 65k a year. it is really worth thinking about how to play this out, because every "dollar" counts from a aid perspective.
I think a lot of folks here make in excess of $200k and a 529 plan just makes sense. It does at least me. But I agree anyone that might get aid, should shelter as much of their wealth as legally possible to get the best aid package.
I believe the OP of this thread implied they are doing well to save 12 grand a year. I would expect this op isnt over 75-100k. There are a a significant number of middle class incomes on the board. They mostly read though.
I absolutely agree the OP should max out 401k and pay any mortgage before contributing to a 529 plan. Many other posters seems to say 529 plans are always bad, which just is not true. As always with personal finance, YMMV.
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vineviz
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Re: Why max 401k before 529?

Post by vineviz »

bling wrote: Mon Jan 04, 2021 8:59 am
solarcub wrote: Sun Jan 03, 2021 11:44 pm Maybe this is not optimal, but with so many unknowns, it's a compromise that works for me.
do the math. even in the best case scenario where your kids go to college and every dime is used for educational expenses you will have less money overall after taxes by not maxing out your 401k.
This is certainly not true.

There are many scenarios in which the use of 529 plans can result in more after-tax wealth .
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
fcf18
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Re: Why max 401k before 529?

Post by fcf18 »

solarcub wrote: Sun Jan 03, 2021 9:49 pm
bling wrote: Sun Jan 03, 2021 5:27 pm
every dollar you contribute to a 529 (which requires after tax money) while you still have deductible space left over (per your example above you have another $4k on the 401k + $6k on an IRA = $10k) is literally lighting your own money on fire.
This is the part I don't get. Can I make this hypothetical? Let's assume 25% total tax bracket, and I have $10,000 to invest. If I put it in my 401k and then discover later that I need to use it to pay for college, don't I lose the 25% tax savings, plus a 10% penalty, and end up with only $6500? If I had just put that in a 529 I would have $7500 after taxes, and no penalty.
if you are in a position that you have to pay college by cashing out your retirement account, something seems to be wrong. College typically have financial aids if you are not super high income (especially if you have 2 kids in college at the same time) or high assets. And retirement account is not part of the asset calculation. So chances are your kids would have received some federal grands and loans if you have put money into your 401k first. On the other hand, if you lower your 401k contribution and instead invested heavily in 529. Those money are now part of the parent assets in financial aid calculation, and might eliminate the eligibility of financial aid.

ps. I do use 529 and is happy with them, but I did prioritize funding other tax advantaged accounts before 529.
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Re: Why max 401k before 529?

Post by bling »

vineviz wrote: Thu Jan 07, 2021 8:42 pm
bling wrote: Mon Jan 04, 2021 8:59 am
solarcub wrote: Sun Jan 03, 2021 11:44 pm Maybe this is not optimal, but with so many unknowns, it's a compromise that works for me.
do the math. even in the best case scenario where your kids go to college and every dime is used for educational expenses you will have less money overall after taxes by not maxing out your 401k.
This is certainly not true.

There are many scenarios in which the use of 529 plans can result in more after-tax wealth .
can you please provide an example?
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willthrill81
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Re: Why max 401k before 529?

Post by willthrill81 »

bling wrote: Thu Jan 07, 2021 11:36 pm
vineviz wrote: Thu Jan 07, 2021 8:42 pm
bling wrote: Mon Jan 04, 2021 8:59 am
solarcub wrote: Sun Jan 03, 2021 11:44 pm Maybe this is not optimal, but with so many unknowns, it's a compromise that works for me.
do the math. even in the best case scenario where your kids go to college and every dime is used for educational expenses you will have less money overall after taxes by not maxing out your 401k.
This is certainly not true.

There are many scenarios in which the use of 529 plans can result in more after-tax wealth .
can you please provide an example?
If you get a state tax deduction for 529 contributions, it's usually the case that paying for college with 529 funds will beat all other options. Unless you're able to take advantage of tax arbitrage between the time you contribute to a 401(k) and later on withdraw it to pay for your kids' college expenses, a 401(k) will, at best, only get tax-deferred growth (e.g., if you contribute in the 22% bracket and withdraw in that same bracket, there's no tax arbitrage), which the 529 gets in addition to a state tax deduction for contributions in 36 states.

Now if you're able to contribute to a 401(k) in a higher tax bracket than which you withdraw the funds to cover the college expenses, that may come out ahead of using a 529 if the tax arbitrage is greater than your state tax deduction, if any.

If yours is a state without income tax or one for which 529 contributions are not deductible, a 529 doesn't work nearly as well and can even lag behind a properly managed taxable account, which can make use of tax-loss harvesting to at least overcome the minimal tax drag and whose gains may be taxed at 0%.
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