Roth IRA instead of 529 plan

crockpotinvesting · Post by **crockpotinvesting** » Mon Sep 30, 2019 11:12 am

Hi all,

I was reading that Roth IRAs could be a better alternative to 529 plans. The reasoning was that you have more flexibility with a Roth and it offers that same tax advantages as a 529 plan. I was thinking I could fund a traditional then do a Roth conversion. In 18 years if I can financially afford to fund college I’ll withdraw from my Roth. If not, I will have a nice retirement nestegg

Current stats: Early 30s, about $225k income. Contribute about $30k to retirement accounts each year.

What are your thoughts?

Thanks!

KlangFool · Post by **KlangFool** » Mon Sep 30, 2019 11:14 am

crockpotinvesting wrote: ↑Mon Sep 30, 2019 11:12 am Hi all,

I was reading that Roth IRAs could be a better alternative to 529 plans. The reasoning was that you have more flexibility with a Roth and it offers that same tax advantages as a 529 plan. I was thinking I could fund a traditional then do a Roth conversion. In 18 years if I can financially afford to fund college I’ll withdraw from my Roth. If not, I will have a nice retirement nestegg

Current stats: Early 30s, about $225k income. Contribute about $30k to retirement accounts each year.

What are your thoughts?

Thanks!

crockpotinvesting,

<<Current stats: Early 30s, about $225k income. Contribute about $30k to retirement accounts each year. >>

<< I was thinking I could fund a traditional then do a Roth conversion.>>

Why do you need to do that when you can contribute to Roth IRAs directly?

KlangFool

miamivice · Post by **miamivice** » Mon Sep 30, 2019 11:19 am

If you fund traditional and then do a Roth conversion, you'll pay ordinary income tax on the conversion at the time you do the conversion.

If you fund directly, you can pull out contributions but not earnings for college. It will be hard to save up enough since you are limited to $11,000 in contributions per year.

While a Roth IRA can work, it is generally less desireable than a 529 for college. Mainly a Roth IRA is used by parents who haven't saved enough for their own retirement first and want the freedom to use college money for retirement.

miamivice · Post by **miamivice** » Mon Sep 30, 2019 11:26 am

KlangFool wrote: ↑Mon Sep 30, 2019 11:14 amWhy do you need to do that when you can contribute to Roth IRAs directly?

KlangFool

He can't contribute directly as his income is too high.

Ddd7651 · Post by **Ddd7651** » Mon Sep 30, 2019 11:30 am

miamivice wrote: ↑Mon Sep 30, 2019 11:19 am If you fund traditional and then do a Roth conversion, you'll pay ordinary income tax on the conversion at the time you do the conversion.

If you fund directly, you can pull out contributions but not earnings for college. It will be hard to save up enough since you are limited to $11,000 in contributions per year.

I'd like to add that whatever you convert (contributions plus earnings) from your traditional IRA now counts as a contribution with a stipulation that you can't touch it for 5 years. Call it a penalty free way to access 401k or traditional IRA funds (including earnings) early. Just a 5 year wait. 401k has its rules (separate from company, etc. or megabackdoor roth from after-tax) and traditional IRA has rules. But, whatever you convert is now a contribution (you paid taxes on it).

We fund a mega-backdoor roth and intend to use it for college. We put minimal into a 529 as we don't want to over fund it or lose out if they get a scholarship or don't go to college. This is ONLY for money ABOVE regular retirement. You are limited to Backdoor Roth contributions to pull out, yes. You can't pull out any Roth earnings without penalty. We do a megabackdoor Roth on top of Backdoor Roth each year so we have more than enough in contributions to pull out to pay for college while using it essentially as a tax free earnings account as long as we don't touch the earnings prior to 59 1/2. Being able to use the converted monies and direct contributions is great.

KlangFool · Post by **KlangFool** » Mon Sep 30, 2019 11:33 am

miamivice wrote: ↑Mon Sep 30, 2019 11:26 am
KlangFool wrote: ↑Mon Sep 30, 2019 11:14 amWhy do you need to do that when you can contribute to Roth IRAs directly?

KlangFool
He can't contribute directly as his income is too high.

miamivice,

Who say so? Not according to IRS. The limit is based on MAGI. It is not based on income.

https://www.irs.gov/retirement-plans/am ... e-for-2019

And, even if that is true, he could do a backdoor Roth IRAs.

https://www.bogleheads.org/wiki/Backdoor_Roth

KlangFool

cshell2 · Post by **cshell2** » Mon Sep 30, 2019 11:34 am

My opinion is you shouldn't fund a 529 until the Roth is maxed anyhow whether or not you're going to use it for college.

KlangFool · Post by **KlangFool** » Mon Sep 30, 2019 11:36 am

miamivice wrote: ↑Mon Sep 30, 2019 11:19 am
If you fund directly, you can pull out contributions but not earnings for college. It will be hard to save up enough since you are limited to $11,000 in contributions per year.

miamivice,

That is not a problem if OP is only planning to pay 12K X 18 = 216K for a college education. Not all of us is willing to write a blank check for a college education.

KlangFool

miamivice · Post by **miamivice** » Mon Sep 30, 2019 11:41 am

cshell2 wrote: ↑Mon Sep 30, 2019 11:34 am My opinion is you shouldn't fund a 529 until the Roth is maxed anyhow whether or not you're going to use it for college.

While I don't subscribe to the "max all retirement space" mantra, I agree that it is better to max a Roth and save in a 529 than it is to only save in a Roth hoping to use Roth money for college.

miamivice · Post by **miamivice** » Mon Sep 30, 2019 11:43 am

KlangFool wrote: ↑Mon Sep 30, 2019 11:36 am
miamivice wrote: ↑Mon Sep 30, 2019 11:19 am
If you fund directly, you can pull out contributions but not earnings for college. It will be hard to save up enough since you are limited to $11,000 in contributions per year.

miamivice,

That is not a problem if OP is only planning to pay 12K X 18 = 216K for a college education. Not all of us is willing to write a blank check for a college education.

KlangFool

If you only have 1 kid, then Roth contributions will pay for most or all of college. But if you have more than 1 kid, you won't be able to contribute 100% to each kid. At 3 and 4 kids, Roth contributions will only pay a small portion of college.

Also, the 12k in contributions annually assumes both spouses are working. If only one works, then one can only save 108k.

cshell2 · Post by **cshell2** » Mon Sep 30, 2019 11:45 am

KlangFool wrote: ↑Mon Sep 30, 2019 11:36 am
miamivice wrote: ↑Mon Sep 30, 2019 11:19 am
If you fund directly, you can pull out contributions but not earnings for college. It will be hard to save up enough since you are limited to $11,000 in contributions per year.

miamivice,

That is not a problem if OP is only planning to pay 12K X 18 = 216K for a college education. Not all of us is willing to write a blank check for a college education.

KlangFool

It's plenty for one kid or probably two, but what if you're like my boss that was lucky enough to have two pregnancies result in 5 kids!

KlangFool · Post by **KlangFool** » Mon Sep 30, 2019 12:01 pm

cshell2 wrote: ↑Mon Sep 30, 2019 11:45 am
KlangFool wrote: ↑Mon Sep 30, 2019 11:36 am
miamivice wrote: ↑Mon Sep 30, 2019 11:19 am
If you fund directly, you can pull out contributions but not earnings for college. It will be hard to save up enough since you are limited to $11,000 in contributions per year.

miamivice,

That is not a problem if OP is only planning to pay 12K X 18 = 216K for a college education. Not all of us is willing to write a blank check for a college education.

KlangFool
It's plenty for one kid or probably two, but what if you're like my boss that was lucky enough to have two pregnancies result in 5 kids!

cshell2,

There is no problem.

A) You have the money to pay for it all. Hence, it is not a problem.

B) You have limited money. Hence, you have to spread the money across 5 kids.

I am rational. I am only willing to pay 240K for 2 kids' college education when my net worth excluding the house is 1 million or more. The limit of college education funding is based on the parent's net worth.

KlangFool

KlangFool · Post by **KlangFool** » Mon Sep 30, 2019 12:08 pm

miamivice wrote: ↑Mon Sep 30, 2019 11:43 am
KlangFool wrote: ↑Mon Sep 30, 2019 11:36 am
miamivice wrote: ↑Mon Sep 30, 2019 11:19 am
If you fund directly, you can pull out contributions but not earnings for college. It will be hard to save up enough since you are limited to $11,000 in contributions per year.

miamivice,

That is not a problem if OP is only planning to pay 12K X 18 = 216K for a college education. Not all of us is willing to write a blank check for a college education.

KlangFool
If you only have 1 kid, then Roth contributions will pay for most or all of college. But if you have more than 1 kid, you won't be able to contribute 100% to each kid. At 3 and 4 kids, Roth contributions will only pay a small portion of college.

Also, the 12k in contributions annually assumes both spouses are working. If only one works, then one can only save 108k.

miamivice,

<<If you only have 1 kid, then Roth contributions will pay for most or all of college. But if you have more than 1 kid, you won't be able to contribute 100% to each kid. At 3 and 4 kids, Roth contributions will only pay a small portion of college.>>

Where is the problem?

A) If my annual saving is high enough, I could fund ("Cash flow") the college education via the taxable account, Roth IRA contribution, and my annual saving.

B) If my annual saving is not high enough, I do not have the money at all. So, I cannot fund 100% anyhow. It is not a problem.

Most of my peers spent their money on their houses. They pay nothing towards their kids' college education even though their median household income is 150K.

<<Also, the 12k in contributions annually assumes both spouses are working. If only one works, then one can only save 108k.>>

This is wrong. You could contribute to non-working spouse's Roth IRA as long as you filed jointly.

https://www.irs.gov/retirement-plans/re ... tributions

<<I want to set up an IRA for my spouse. How much can I contribute?
If you file a joint return and have taxable compensation, you and your spouse can both contribute to your own separate IRAs.

Your total contributions to both your IRA and your spouse’s IRA may not exceed your joint taxable income or the annual contribution limit on IRAs times two, whichever is less. It doesn't matter which spouse earned the income.

Roth IRAs and IRA deductions have other income limits. See IRA Contribution Limits and IRA deduction limits.>>

KlangFool

Spirit Rider · Post by **Spirit Rider** » Mon Sep 30, 2019 12:13 pm

The determination of college savings location should only occur after you have prioritized your retirement savings rate to tax-advantaged accounts.

A Roth IRA for some or all of college savings instead of a 529 can make sense. If and only if you would not be contributing to the Roth IRA for retirement savings anyway. Otherwise, it is effectively a choice of Roth IRA for college savings and taxable for retirement savings vs. 529 for college savings and Roth IRA for retirement savings. The latter is likely a better tax strategy. Notwithstanding concerns of excess 529 funds.

miamivice · Post by **miamivice** » Mon Sep 30, 2019 12:32 pm

We have $175,000 in 529s for our children. Approximately $100,000 is tax-free growth and $75,000 is contributions. Our kids have about 10 - 15 years to go before college so they should continue to appreciate well.

I don't see how we would have done better with respect to college savings by putting into Roth IRA. (We maxed out Roth IRA until we became ineligible and then switched to 401ks and HSA.)

Now, I just have to make sure those darn kids go to college.

Ddd7651 · Post by **Ddd7651** » Mon Sep 30, 2019 2:15 pm

miamivice wrote: ↑Mon Sep 30, 2019 12:32 pm We have $175,000 in 529s for our children. Approximately $100,000 is tax-free growth and $75,000 is contributions. Our kids have about 10 - 15 years to go before college so they should continue to appreciate well.

I don't see how we would have done better with respect to college savings by putting into Roth IRA. (We maxed out Roth IRA until we became ineligible and then switched to 401ks and HSA.)

Now, I just have to make sure those darn kids go to college.

What will you do if your children do not go to college or get a scholarship? All of that money is now penalized and earnings taxed (minus scholarship allowance). Honest question, do you think that will lessen your drive to seek out scholarships or support your kids should they choose another non college route (military, apprenticeship, etc.)? You are very fortunate and have done well in your 529. I am hedging my bets with Roth contributions because should anything happen and they don't need it, it is money straight back into our pockets. Also, being in Roth does not affect FASFA calculations, which might matter for some.

miamivice · Post by **miamivice** » Mon Sep 30, 2019 2:25 pm

Ddd7651 wrote: ↑Mon Sep 30, 2019 2:15 pm
miamivice wrote: ↑Mon Sep 30, 2019 12:32 pm We have $175,000 in 529s for our children. Approximately $100,000 is tax-free growth and $75,000 is contributions. Our kids have about 10 - 15 years to go before college so they should continue to appreciate well.

I don't see how we would have done better with respect to college savings by putting into Roth IRA. (We maxed out Roth IRA until we became ineligible and then switched to 401ks and HSA.)

Now, I just have to make sure those darn kids go to college.
What will you do if your children do not go to college or get a scholarship? All of that money is now penalized and earnings taxed (minus scholarship allowance). Honest question, do you think that will lessen your drive to seek out scholarships or support your kids should they choose another non college route (military, apprenticeship, etc.)? You are very fortunate and have done well in your 529. I am hedging my bets with Roth contributions because should anything happen and they don't need it, it is money straight back into our pockets. Also, being in Roth does not affect FASFA calculations, which might matter for some.

If both of my kids decide not to go to college, I will be very sad about their decision to not go to college. I will be far less concerned about taxes/penalties that we pay than I am with their poor decision my children made to not attend college. I think at a minimum they'll each do at least a year or two of college though. I would be very surprised if they don't do a single course.

Regarding drive for scholarships, I didn't have much success with scholarships when I was in college. I received maybe $10,000 total over a 4 year period. It seemed to me that all of the scholarships in high school went to the same 5 kids over and over again, and since I was number 6 or 7 in line, I didn't receive much. I hope my kids will want to try to scholarships, not because the money is that important, but because I hope they have that competitive drive.

Ddd7651 · Post by **Ddd7651** » Mon Sep 30, 2019 2:46 pm

miamivice wrote: ↑Mon Sep 30, 2019 2:25 pm
Ddd7651 wrote: ↑Mon Sep 30, 2019 2:15 pm
miamivice wrote: ↑Mon Sep 30, 2019 12:32 pm We have $175,000 in 529s for our children. Approximately $100,000 is tax-free growth and $75,000 is contributions. Our kids have about 10 - 15 years to go before college so they should continue to appreciate well.

I don't see how we would have done better with respect to college savings by putting into Roth IRA. (We maxed out Roth IRA until we became ineligible and then switched to 401ks and HSA.)

Now, I just have to make sure those darn kids go to college.
What will you do if your children do not go to college or get a scholarship? All of that money is now penalized and earnings taxed (minus scholarship allowance). Honest question, do you think that will lessen your drive to seek out scholarships or support your kids should they choose another non college route (military, apprenticeship, etc.)? You are very fortunate and have done well in your 529. I am hedging my bets with Roth contributions because should anything happen and they don't need it, it is money straight back into our pockets. Also, being in Roth does not affect FASFA calculations, which might matter for some.
If both of my kids decide not to go to college, I will be very sad about their decision to not go to college. I will be far less concerned about taxes/penalties that we pay than I am with their poor decision my children made to not attend college. I think at a minimum they'll each do at least a year or two of college though. I would be very surprised if they don't do a single course.

Regarding drive for scholarships, I didn't have much success with scholarships when I was in college. I received maybe $10,000 total over a 4 year period. It seemed to me that all of the scholarships in high school went to the same 5 kids over and over again, and since I was number 6 or 7 in line, I didn't receive much. I hope my kids will want to try to scholarships, not because the money is that important, but because I hope they have that competitive drive.

Those are very fair statements based your experiences. I didn't have enough money for college completely. By not having money, which is sorta the opposite of your situation, money was important and caused me to apply for many scholarships and become a resident assistant also to pay for housing. It created my drive because I really wanted to go. If we had money and were told money isn't important I am sure I would not waste time with scholarships as there is a lot of work there. I would be disappointed if my children didn't go to college to an extent also, but by hedging my bets, I can be disappointed but also not take a huge penalty or tax hit at the same time. I think it is possible to have both in some circumstances as far as solutions in a financial forum.

miamivice · Post by **miamivice** » Mon Sep 30, 2019 2:59 pm

Ddd7651 wrote: ↑Mon Sep 30, 2019 2:46 pm
miamivice wrote: ↑Mon Sep 30, 2019 2:25 pm
Ddd7651 wrote: ↑Mon Sep 30, 2019 2:15 pm
miamivice wrote: ↑Mon Sep 30, 2019 12:32 pm We have $175,000 in 529s for our children. Approximately $100,000 is tax-free growth and $75,000 is contributions. Our kids have about 10 - 15 years to go before college so they should continue to appreciate well.

I don't see how we would have done better with respect to college savings by putting into Roth IRA. (We maxed out Roth IRA until we became ineligible and then switched to 401ks and HSA.)

Now, I just have to make sure those darn kids go to college.
What will you do if your children do not go to college or get a scholarship? All of that money is now penalized and earnings taxed (minus scholarship allowance). Honest question, do you think that will lessen your drive to seek out scholarships or support your kids should they choose another non college route (military, apprenticeship, etc.)? You are very fortunate and have done well in your 529. I am hedging my bets with Roth contributions because should anything happen and they don't need it, it is money straight back into our pockets. Also, being in Roth does not affect FASFA calculations, which might matter for some.
If both of my kids decide not to go to college, I will be very sad about their decision to not go to college. I will be far less concerned about taxes/penalties that we pay than I am with their poor decision my children made to not attend college. I think at a minimum they'll each do at least a year or two of college though. I would be very surprised if they don't do a single course.

Regarding drive for scholarships, I didn't have much success with scholarships when I was in college. I received maybe $10,000 total over a 4 year period. It seemed to me that all of the scholarships in high school went to the same 5 kids over and over again, and since I was number 6 or 7 in line, I didn't receive much. I hope my kids will want to try to scholarships, not because the money is that important, but because I hope they have that competitive drive.
Those are very fair statements based your experiences. I didn't have enough money for college completely. By not having money, which is sorta the opposite of your situation, money was important and caused me to apply for many scholarships and become a resident assistant also to pay for housing. It created my drive because I really wanted to go. If we had money and were told money isn't important I am sure I would not waste time with scholarships as there is a lot of work there. I would be disappointed if my children didn't go to college to an extent also, but by hedging my bets, I can be disappointed but also not take a huge penalty or tax hit at the same time. I think it is possible to have both in some circumstances as far as solutions in a financial forum.

I think the most honest thing I can say is that I superfunded my kids 529s (fully invested while my wife was pregnant). Back then, I was 100% confident that my children would go to college, it was other people's children who wouldn't go. Now that my kids are older, I am no longer 100% sure. If for some reason the money goes unused, I'll have to figure out later in life what to do about the taxes.

As far as scholarships, my dad didn't save a lot for my college assuming that I was a smart kid that would get a lot of scholarships, because everyone else's kid was getting them. When the scholarship money didn't materialize and the Bank of Dad had no more money, the stress to pay for college fell onto my shoulders. It was one of the most stressful financial times of my life, and yet, I was investing in my human capital. I was making the best investment of my life but that investment wasn't just wasn't financial.

I want to support my children enough for college that they don't have to stress about the finances, while also encourging them to be thrifty and learn how to manage money. That is later.

That reminds me of how I am planning on incentiving applying for scholarships. If they win any scholarships, they get that money deposited in their bank account for them to use as they want (either pay for their share of college/books/etc, or save it for the future, or use for current expenses). Most kids will find that highly motivating, but my kids aren't "most kids" so we will see how that works.

That's all thought for later though.

Post by **LadyGeek** » Mon Sep 30, 2019 6:36 pm

The discussion is getting derailed with conjecture on college vs. scholarship and whether parents should / should not pay for a college education.

Please stay on-topic, which is:

crockpotinvesting wrote: ↑Mon Sep 30, 2019 11:12 am Hi all,

I was reading that Roth IRAs could be a better alternative to 529 plans. The reasoning was that you have more flexibility with a Roth and it offers that same tax advantages as a 529 plan. I was thinking I could fund a traditional then do a Roth conversion. In 18 years if I can financially afford to fund college I’ll withdraw from my Roth. If not, I will have a nice retirement nestegg

Current stats: Early 30s, about $225k income. Contribute about $30k to retirement accounts each year.

What are your thoughts?

Thanks!

jabroni · Post by **jabroni** » Tue Oct 01, 2019 9:06 am

I'm firmly in the "put on your own oxygen mask first" camp. Take advantage of every tax-favored investment vehicle you can for your own nest egg.

Are you married?
If so, does your spouse also work?
If so, does he/she have access to a 401(k)?
If so, that makes your retirement contribution limit $50k (2 maxed 401(k)s and 2 maxed IRAs).
If not, your total limit is $31k (1 maxed 401(k) and 2 maxed IRAs).
It could be even higher if you work for the government and also have access to a 457(b), but we'll assume not.

I wouldn't even consider a 529 until you are investing in those vehicles. Personally, I'm not at that point either, so if I pay for my child's college, it will likely be out of my Roth IRA contributions. I too value the flexibility it provides. If my child can fund his own education (or doesn't go to college), that money can still be used for my retirement without having to incur penalties.

dsmil · Post by **dsmil** » Tue Oct 01, 2019 9:23 am

I agree with filling the Roth before using the 529. The 529 is easier but I like the flexibility of the Roth. You'll just need some other funding sources once it's time to pay up, since the Roth contributions towards college wouldn't be enough. My long term plan is for the Roth contributions to make up 50% of the college bills, with the other 50% coming from deferring retirement contributions (offset by the earnings staying in the Roth) and cash flow. Even tapping into home equity could be an option at that point.

anhonymous · Post by **anhonymous** » Tue Oct 01, 2019 9:29 am

This may have been mentioned before but some states offer tax exemption at least to a certain amount to 529 contribution.

Buccaneer82 · Post by **Buccaneer82** » Tue Oct 01, 2019 9:33 am

Personally going to choose to superfund Vanguard 529's for each of our kids. We already max our roths each year and I'm the sole working spouse with no access to any other retirement accounts. May get access to 401K in the near future which I'll then max as well.

KlangFool · Post by **KlangFool** » Tue Oct 01, 2019 10:42 am

Buccaneer82 wrote: ↑Tue Oct 01, 2019 9:33 am Personally going to choose to superfund Vanguard 529's for each of our kids. We already max our roths each year and I'm the sole working spouse with no access to any other retirement accounts. May get access to 401K in the near future which I'll then max as well.

Buccaneer82,

I do not see why that is a good idea. Funding a taxable account is probably a better idea. With that, you could move the money from the taxable account into the 401K later. You lose that flexibility with the 529.

I have no 529. I am moving my money from the taxable account into the Roth IRAs, 401K, and 457 accounts.

KlangFool

Spirit Rider · Post by **Spirit Rider** » Tue Oct 01, 2019 11:13 am

KlangFool wrote: ↑Tue Oct 01, 2019 10:42 am
Buccaneer82 wrote: ↑Tue Oct 01, 2019 9:33 am Personally going to choose to superfund Vanguard 529's for each of our kids. We already max our roths each year and I'm the sole working spouse with no access to any other retirement accounts. May get access to 401K in the near future which I'll then max as well.
I do not see why that is a good idea. Funding a taxable account is probably a better idea. With that, you could move the money from the taxable account into the 401K later. You lose that flexibility with the 529.

You are making the assumption that @Buccaneer82 doesn't have the disposable income to do both.

I have no 529. I am moving my money from the taxable account into the Roth IRAs, 401K, and 457 accounts.

Yes, yes, we are well aware of your anti-529 screeds.

miamivice · Post by **miamivice** » Tue Oct 01, 2019 11:21 am

I really don't understand KlangFool's opposition to a 529. In particular, I don't see why one would fund a taxable account in lieu of a 529 for college savings, unless they really had little confidence their children would attend college. And if that was the case, I assume that they wouldn't save for college in the first place.

I also don't get cash flowing college by withdrawing from retirement accounts and withdrawing from taxable. That's not cash flowing in my mind but rather pulling from various savings vehicles, none which are tax efficient for college.

KlangFool · Post by **KlangFool** » Tue Oct 01, 2019 11:32 am

Spirit Rider wrote: ↑Tue Oct 01, 2019 11:13 am
KlangFool wrote: ↑Tue Oct 01, 2019 10:42 am
Buccaneer82 wrote: ↑Tue Oct 01, 2019 9:33 am Personally going to choose to superfund Vanguard 529's for each of our kids. We already max our roths each year and I'm the sole working spouse with no access to any other retirement accounts. May get access to 401K in the near future which I'll then max as well.
I do not see why that is a good idea. Funding a taxable account is probably a better idea. With that, you could move the money from the taxable account into the 401K later. You lose that flexibility with the 529.
You are making the assumption that @Buccaneer82 doesn't have the disposable income to do both.

I have no 529. I am moving my money from the taxable account into the Roth IRAs, 401K, and 457 accounts.
Yes, yes, we are well aware of your anti-529 screeds.

Spirit Rider,

You are assuming that he does. So, unless we have further information, we could be equally right or wrong.

KlangFool

KlangFool · Post by **KlangFool** » Tue Oct 01, 2019 11:39 am

miamivice wrote: ↑Tue Oct 01, 2019 11:21 am
I also don't get cash flowing college by withdrawing from retirement accounts and withdrawing from taxable. That's not cash flowing in my mind but rather pulling from various savings vehicles, none which are tax efficient for college.

miamivice,

1) My annual saving is 50K to 60K per year. My taxable account is around 500K.

2) The college education cost for 2 kids is around 50K to 60K per year.

3) I contribute the 50K to 60K of annual savings to my 401K, 457, and Roth IRAs.

4) I sell my taxable account's investment with a long-term capital gain of 0% and 15%. I did some TLH too.

5) My effective tax rate is less than 5%.

KlangFool

StealthRabbit · Post by **StealthRabbit** » Tue Oct 01, 2019 12:43 pm

Roth for the Student was a good idea for us.

We started when they were age 12, should have started at age 8 (matched 100% of kid's earned income into their Roth until age 18).
They made more than enough earned income for annual max Roth contributions. (chickens, eggs, 4-H steers, helping on family businesses, 'neighbor labor' (The BEST kind... teach them to work for others, and they usually work HARDER for others...' swap kids' for more efficient labor and more value for labor $$ spent!)

If paying for college... consider the 'reimbursement plan'.
They go
They pay
...
When (if) they graduate you reimburse with dollars you have had invested for 16 yrs.

JMHO

UpsetRaptor · Post by **UpsetRaptor** » Tue Oct 01, 2019 12:49 pm

OP, what state do you live in? Many states have a state tax deduction or credit for 529 contributions, on top of the tax-free Roth-like benefits for QEE. So if you're in a state where that applies, that's another benefit for a 529 which a Roth IRA does not have.

lthenderson · Post by **lthenderson** » Tue Oct 01, 2019 1:06 pm

Ddd7651 wrote: ↑Mon Sep 30, 2019 2:15 pm
miamivice wrote: ↑Mon Sep 30, 2019 12:32 pm We have $175,000 in 529s for our children. Approximately $100,000 is tax-free growth and $75,000 is contributions. Our kids have about 10 - 15 years to go before college so they should continue to appreciate well.

I don't see how we would have done better with respect to college savings by putting into Roth IRA. (We maxed out Roth IRA until we became ineligible and then switched to 401ks and HSA.)

Now, I just have to make sure those darn kids go to college.
What will you do if your children do not go to college or get a scholarship? All of that money is now penalized and earnings taxed (minus scholarship allowance).

Just to clarify, there is no penalty for withdrawing unused contributions out of a 529 plan. You only pay a penalty on earnings only if you don't fall into one of these categories:

A beneficiary dies or becomes disabled
A beneficiary receives a tax-free scholarship
A beneficiary receives educational assistance through a qualifying employer program
A beneficiary attends a U.S. Military Academy
The qualified education expenses were used to generate the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLTC)

Buccaneer82 · Post by **Buccaneer82** » Tue Oct 01, 2019 1:32 pm

KlangFool wrote: ↑Tue Oct 01, 2019 11:32 am
Spirit Rider wrote: ↑Tue Oct 01, 2019 11:13 am
KlangFool wrote: ↑Tue Oct 01, 2019 10:42 am
Buccaneer82 wrote: ↑Tue Oct 01, 2019 9:33 am Personally going to choose to superfund Vanguard 529's for each of our kids. We already max our roths each year and I'm the sole working spouse with no access to any other retirement accounts. May get access to 401K in the near future which I'll then max as well.
I do not see why that is a good idea. Funding a taxable account is probably a better idea. With that, you could move the money from the taxable account into the 401K later. You lose that flexibility with the 529.
You are making the assumption that @Buccaneer82 doesn't have the disposable income to do both.

I have no 529. I am moving my money from the taxable account into the Roth IRAs, 401K, and 457 accounts.
Yes, yes, we are well aware of your anti-529 screeds.
Spirit Rider,

You are assuming that he does. So, unless we have further information, we could be equally right or wrong.

KlangFool

Luckily I have the ability to superfund and max our our Roths while also putting some in taxable. When/if a 401k option opens I'll make sure that's maxed also.

KlangFool · Post by **KlangFool** » Tue Oct 01, 2019 1:37 pm

Buccaneer82 wrote: ↑Tue Oct 01, 2019 1:32 pm
KlangFool wrote: ↑Tue Oct 01, 2019 11:32 am
Spirit Rider wrote: ↑Tue Oct 01, 2019 11:13 am
KlangFool wrote: ↑Tue Oct 01, 2019 10:42 am
Buccaneer82 wrote: ↑Tue Oct 01, 2019 9:33 am Personally going to choose to superfund Vanguard 529's for each of our kids. We already max our roths each year and I'm the sole working spouse with no access to any other retirement accounts. May get access to 401K in the near future which I'll then max as well.
I do not see why that is a good idea. Funding a taxable account is probably a better idea. With that, you could move the money from the taxable account into the 401K later. You lose that flexibility with the 529.
You are making the assumption that @Buccaneer82 doesn't have the disposable income to do both.

I have no 529. I am moving my money from the taxable account into the Roth IRAs, 401K, and 457 accounts.
Yes, yes, we are well aware of your anti-529 screeds.
Spirit Rider,

You are assuming that he does. So, unless we have further information, we could be equally right or wrong.

KlangFool
Luckily I have the ability to superfund and max our our Roths while also putting some in taxable. When/if a 401k option opens I'll make sure that's maxed also.

The question is can you max up your 401K plus your Roth IRAs. If you cannot, you had lost that capability by superfunding your 529.

KlangFool

Ddd7651 · Post by **Ddd7651** » Tue Oct 01, 2019 1:48 pm

lthenderson wrote: ↑Tue Oct 01, 2019 1:06 pm
Ddd7651 wrote: ↑Mon Sep 30, 2019 2:15 pm
miamivice wrote: ↑Mon Sep 30, 2019 12:32 pm We have $175,000 in 529s for our children. Approximately $100,000 is tax-free growth and $75,000 is contributions. Our kids have about 10 - 15 years to go before college so they should continue to appreciate well.

I don't see how we would have done better with respect to college savings by putting into Roth IRA. (We maxed out Roth IRA until we became ineligible and then switched to 401ks and HSA.)

Now, I just have to make sure those darn kids go to college.
What will you do if your children do not go to college or get a scholarship? All of that money is now penalized and earnings taxed (minus scholarship allowance).
Just to clarify, there is no penalty for withdrawing unused contributions out of a 529 plan. You only pay a penalty on earnings only if you don't fall into one of these categories:

A beneficiary dies or becomes disabled
A beneficiary receives a tax-free scholarship
A beneficiary receives educational assistance through a qualifying employer program
A beneficiary attends a U.S. Military Academy
The qualified education expenses were used to generate the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLTC)

It is also important to note that scholarship and excess withdrawals are pro-rata which means you can't take out just contributions or just earnings. Any type of scholarship or penalty-free withdrawal is still taxed on earnings, as a proportion of contributions + earnings. I think the main thing we focused on is to not over-fund a 529 if we can put some in whatever method into a Roth IRA. We can do a mega-backdoor Roth so we have plenty of room to only touch contributions. We hedge with a Roth IRA so we would pay no penalty on contribution withdrawals and can touch just the contributions specifically. That leaves the earnings to mature to a tax free status at 59 1/2. One step away from a tax free account altogether.

Spirit Rider · Post by **Spirit Rider** » Tue Oct 01, 2019 2:54 pm

StealthRabbit wrote: ↑Tue Oct 01, 2019 12:43 pm Roth for the Student was a good idea for us.

It may not matter if the parents/student are never going to be eligible for financial aid. While student owned Roth IRA assets are not included as FAFSA and CSS Profile assets. Distributions from student owned Roth IRA accounts are treated as untaxed income to the student and assessed at a maximum 50% rate.

Bacchus01 · Post by **Bacchus01** » Tue Oct 01, 2019 3:13 pm

If it's either/or, then fund the Roth.

If you get a state tax deduction, and you have filled your Roth already, as well as all other retirement vehicles, THEN do a 529.

miamivice · Post by **miamivice** » Tue Oct 01, 2019 3:18 pm

Bacchus01 wrote: ↑Tue Oct 01, 2019 3:13 pm If it's either/or, then fund the Roth.

If you get a state tax deduction, and you have filled your Roth already, as well as all other retirement vehicles, THEN do a 529.

That's a bit simplistic.

With a Roth, you cannot use growth without penalty. Only contributions. That means a parent wanting to save for their kids college would have to stuff a lot of contributions in a Roth in order to pay for college.

With a 529, you can use both growth and earnings. You can pay for your kids college and set aside a lot less money and still pay for college. You also can superfund the 529 during the good years rather than having to invest it in $11,000 allotments.

Bacchus01 · Post by **Bacchus01** » Tue Oct 01, 2019 3:23 pm

miamivice wrote: ↑Tue Oct 01, 2019 3:18 pm
Bacchus01 wrote: ↑Tue Oct 01, 2019 3:13 pm If it's either/or, then fund the Roth.

If you get a state tax deduction, and you have filled your Roth already, as well as all other retirement vehicles, THEN do a 529.
That's a bit simplistic.

With a Roth, you cannot use growth without penalty. Only contributions. That means a parent wanting to save for their kids college would have to stuff a lot of contributions in a Roth in order to pay for college.

With a 529, you can use both growth and earnings. You can pay for your kids college and set aside a lot less money and still pay for college. You also can superfund the 529 during the good years rather than having to invest it in $11,000 allotments.

You are assuming that the growth for 529s is a lot. With a short timeframe for most, and very conservative investments for most, the growth is not that meaningful.

I stick by my original post.

cshell2 · Post by **cshell2** » Tue Oct 01, 2019 3:25 pm

miamivice wrote: ↑Tue Oct 01, 2019 3:18 pm
Bacchus01 wrote: ↑Tue Oct 01, 2019 3:13 pm If it's either/or, then fund the Roth.

If you get a state tax deduction, and you have filled your Roth already, as well as all other retirement vehicles, THEN do a 529.
That's a bit simplistic.

With a Roth, you cannot use growth without penalty. Only contributions. That means a parent wanting to save for their kids college would have to stuff a lot of contributions in a Roth in order to pay for college.

With a 529, you can use both growth and earnings. You can pay for your kids college and set aside a lot less money and still pay for college. You also can superfund the 529 during the good years rather than having to invest it in $11,000 allotments.

He's just saying to fill the Roth space first. After that go at the 529 with whatever you want. Plus, not everyone wants or needs to put away hundreds of thousands for college anyhow.

EddyB · Post by **EddyB** » Tue Oct 01, 2019 5:14 pm

KlangFool wrote: ↑Tue Oct 01, 2019 1:37 pm
Buccaneer82 wrote: ↑Tue Oct 01, 2019 1:32 pm
KlangFool wrote: ↑Tue Oct 01, 2019 11:32 am
Spirit Rider wrote: ↑Tue Oct 01, 2019 11:13 am
KlangFool wrote: ↑Tue Oct 01, 2019 10:42 am
I do not see why that is a good idea. Funding a taxable account is probably a better idea. With that, you could move the money from the taxable account into the 401K later. You lose that flexibility with the 529.
You are making the assumption that @Buccaneer82 doesn't have the disposable income to do both.

I have no 529. I am moving my money from the taxable account into the Roth IRAs, 401K, and 457 accounts.
Yes, yes, we are well aware of your anti-529 screeds.
Spirit Rider,

You are assuming that he does. So, unless we have further information, we could be equally right or wrong.

KlangFool
Luckily I have the ability to superfund and max our our Roths while also putting some in taxable. When/if a 401k option opens I'll make sure that's maxed also.
The question is can you max up your 401K plus your Roth IRAs. If you cannot, you had lost that capability by superfunding your 529.

KlangFool

He said he doesn't have a 401(k) available, but that if he got one in the future, he'd max it.

KlangFool · Post by **KlangFool** » Tue Oct 01, 2019 5:19 pm

EddyB wrote: ↑Tue Oct 01, 2019 5:14 pm
KlangFool wrote: ↑Tue Oct 01, 2019 1:37 pm
Buccaneer82 wrote: ↑Tue Oct 01, 2019 1:32 pm
KlangFool wrote: ↑Tue Oct 01, 2019 11:32 am
Spirit Rider wrote: ↑Tue Oct 01, 2019 11:13 am
You are making the assumption that @Buccaneer82 doesn't have the disposable income to do both.

Yes, yes, we are well aware of your anti-529 screeds.
Spirit Rider,

You are assuming that he does. So, unless we have further information, we could be equally right or wrong.

KlangFool
Luckily I have the ability to superfund and max our our Roths while also putting some in taxable. When/if a 401k option opens I'll make sure that's maxed also.
The question is can you max up your 401K plus your Roth IRAs. If you cannot, you had lost that capability by superfunding your 529.

KlangFool
He said he doesn't have a 401(k) available, but that if he got one in the future, he'd max it.

Correct. He could max the 401K. But, that does not mean he could max the 401K plus contributing to the max of the Roth IRAs (12K).

KlangFool

marcopolo · Post by **marcopolo** » Tue Oct 01, 2019 5:22 pm

KlangFool wrote: ↑Tue Oct 01, 2019 11:32 am
Spirit Rider wrote: ↑Tue Oct 01, 2019 11:13 am
KlangFool wrote: ↑Tue Oct 01, 2019 10:42 am
Buccaneer82 wrote: ↑Tue Oct 01, 2019 9:33 am Personally going to choose to superfund Vanguard 529's for each of our kids. We already max our roths each year and I'm the sole working spouse with no access to any other retirement accounts. May get access to 401K in the near future which I'll then max as well.
I do not see why that is a good idea. Funding a taxable account is probably a better idea. With that, you could move the money from the taxable account into the 401K later. You lose that flexibility with the 529.
You are making the assumption that @Buccaneer82 doesn't have the disposable income to do both.

I have no 529. I am moving my money from the taxable account into the Roth IRAs, 401K, and 457 accounts.
Yes, yes, we are well aware of your anti-529 screeds.
Spirit Rider,

You are assuming that he does. So, unless we have further information, we could be equally right or wrong.

KlangFool

Not sure what difference that would make to you KlangFool. I recall from previous discussions that your irrational dislike for 529 plans has you recommending people avoid them EVEN in the scenario where they have maxed out all other tax-advantaged space AND plan to pay for college with their 529 dollars. So, I am not sure why you are now quibbling over whether OP has the disposable income to fund 401k and 529, since it seems you would still caution against the 529 plan regardless (quite incorrectly, IMHO).

EddyB · Post by **EddyB** » Tue Oct 01, 2019 6:10 pm

KlangFool wrote: ↑Tue Oct 01, 2019 5:19 pm
EddyB wrote: ↑Tue Oct 01, 2019 5:14 pm
KlangFool wrote: ↑Tue Oct 01, 2019 1:37 pm
Buccaneer82 wrote: ↑Tue Oct 01, 2019 1:32 pm
KlangFool wrote: ↑Tue Oct 01, 2019 11:32 am

Spirit Rider,

You are assuming that he does. So, unless we have further information, we could be equally right or wrong.

KlangFool
Luckily I have the ability to superfund and max our our Roths while also putting some in taxable. When/if a 401k option opens I'll make sure that's maxed also.
The question is can you max up your 401K plus your Roth IRAs. If you cannot, you had lost that capability by superfunding your 529.

KlangFool
He said he doesn't have a 401(k) available, but that if he got one in the future, he'd max it.
Correct. He could max the 401K. But, that does not mean he could max the 401K plus contributing to the max of the Roth IRAs (12K).

KlangFool

He (she?) said he'd max the 401(k) "as well." Let's try to at least respond to what we get, rather than imagining readings that support rhetorical points that aren't relevant to the present question.

cshell2 · Post by **cshell2** » Tue Oct 01, 2019 7:07 pm

Yes, you need to make sure all your ducks are in a row before saving for college, but that doesn't necessarily mean maxing all your retirement options either. I make 45K/year. Putting 26K in 401K/Roth for 18 years at that income would be a bit overkill. There were a lot of years when I only saved 6 or 7K/year or so in retirement accounts while also saving for college separately, but I still have 10X my income in retirement accounts at age 50 and a 6 month emergency fund, so I think I'm fine. DS has scholarships and grants for school and plenty in college savings (529 and UTMA) to cover the rest so if I DID lose my job while he was in school, it wouldn't really effect him.

Post by **LadyGeek** » Tue Oct 01, 2019 7:09 pm

I removed several off-topic posts which were derailing the discussion.

crockpotinvesting has your question been answered?

crockpotinvesting wrote: ↑Mon Sep 30, 2019 11:12 am Hi all,

I was reading that Roth IRAs could be a better alternative to 529 plans. The reasoning was that you have more flexibility with a Roth and it offers that same tax advantages as a 529 plan. I was thinking I could fund a traditional then do a Roth conversion. In 18 years if I can financially afford to fund college I’ll withdraw from my Roth. If not, I will have a nice retirement nestegg

Current stats: Early 30s, about $225k income. Contribute about $30k to retirement accounts each year.

What are your thoughts?

Thanks!

KlangFool · Post by **KlangFool** » Tue Oct 01, 2019 7:16 pm

marcopolo wrote: ↑Tue Oct 01, 2019 5:22 pm
Not sure what difference that would make to you KlangFool. I recall from previous discussions that your rational dislike for 529 plans has you recommending people avoid them EVEN in the scenario where they have maxed out all other tax-advantaged space AND plan to pay for college with their 529 dollars. So, I am not sure why you are now quibbling over whether OP has the disposable income to fund 401k and 529, since it seems you would still caution against the 529 plan regardless (quite incorrectly, IMHO).

marcopolo,

<<your rational dislike for 529 plans>>

I will accept this statement. It is rational to dislike tying up your money into the 529 plan when the person has no job security over the last 10+ years and many of his peers are permanently unemployed or under-employed in their 40s and 50s.

KlangFool

Clarice · Post by **Clarice** » Tue Oct 01, 2019 7:32 pm

I got lost in the back and forth. Trying a pros and cons list. Correct me if I’m wrong.

Roth v. 529

Roth pros:

-Once it’s in then it’s penalty and tax free forever
-I saw something about not counting toward FAFSA
-Not limited to specific expenses for specific individuals
-Seems easier in terms of like estate planning
-Seems like a lot more firms offer and a lot more investment options

Roth cons:
-Smaller annual contribution limit...
-Temptation for raiding for non-education expenses

KlangFool · Post by **KlangFool** » Tue Oct 01, 2019 7:38 pm

Clarice wrote: ↑Tue Oct 01, 2019 7:32 pm I got lost in the back and forth. Trying a pros and cons list. Correct me if I’m wrong.

Roth v. 529

Roth pros:

-Once it’s in then it’s penalty and tax free forever
-I saw something about not counting toward FAFSA
-Not limited to specific expenses for specific individuals
-Seems easier in terms of like estate planning
-Seems like a lot more firms offer and a lot more investment options

Roth cons:
-Smaller annual contribution limit...
-Temptation for raiding for non-education expenses

Clarice,

<<-Temptation for raiding for non-education expenses>>

It is a pro too. When a person is laid off in a recession and needs the money to feed the family, it comes in handy.

<<-Smaller annual contribution limit...>>

It is a non-issue. We cannot afford to contribute any significant more amount to 529 anyhow. Not many of us are willing and capable of spending six figures for our children's college education.

KlangFool

cshell2 · Post by **cshell2** » Tue Oct 01, 2019 7:43 pm

Clarice wrote: ↑Tue Oct 01, 2019 7:32 pm
Roth cons:
-Smaller annual contribution limit...
-Temptation for raiding for non-education expenses

If you use Roth money for college and financial aid is a possibility you should limit the Roth to the last two years of college. Roth is invisible as an asset, but withdrawals are counted as income on the FAFSA in the year they're withdrawn. Income is hit, much harder than assets in the financial aid formula and up to 40% of that withdrawal could end up added to your EFC, but due to the prior prior year lookback of FAFSA the last two years are in the clear.