Author Topic: 529 vs. brokerage  (Read 1200 times)

michaelrecycles

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529 vs. brokerage
« on: June 16, 2013, 02:05:02 PM »
As detailed in another post, I am nearly decided on opening a taxable account. However, recent reading has me curious about 529 plans.

For illustrative purposes, let's just pretend $10k is waiting for a direction to go. My marginal tax rates are 25% federal and 9.3% CA.

Based on the info below, which comes first in your opinion?

529
  • As a CA resident, I get no state income tax deductions for contributing. However, earnings and withdrawals are tax-free from the feds and state (if used on educational expenses).
  • I have no children yet. Does that make a 529 an automatic no to you, even if I am fairly certain I will have children one day? I would like to allow my children to graduate from university free of debt. (While I realize there are differing opinions on this subject, I have decided I want to do this. My parents sacrificed to do this for me, allowing me a fresh start from zero, rather than starting my post-school life in debt. I also do not believe an 18-year-old can fully grasp the magnitude of taking on student loan debt.) The timeline would be 23-33 years out.
  • If I don't have children or they don't want to go do university, I will pay a penalty for withdrawing the funds for non-qualified expenses.
  • BONUS: If you believe this is the direction to go, do you have a state plan recommendation? My research hasn't yielded a clear-cut winner, but Nevada, Ohio and Utah have come up often.

Taxable
  • Taxed as I go.
  • My current asset allocation includes Total Stock, Total Bond, and a REIT Index, contained in 401k and IRA accounts. I currently have no international stock in my asset allocation and recently decided that I should. I will execute my allocation, one way or another, but by adding VTIAX in a taxable account, I can take advantage of tax loss harvesting. I have never done that and don't fully know the potential impact of such a benefit.
  • I can use the money for whatever I want. I hope to be FI 13 years out.

Any thoughts on this decision? To anyone commenting, thanks very much for your time! Let me know if I need to correct or add more information.

Ryan Dagg

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Re: 529 vs. brokerage
« Reply #1 on: June 16, 2013, 02:56:23 PM »
In my personal opinion, neither you nor any other Mustachian should contribute to a 529 plan unless they currently have 100% of all future retirement spending funded. I'm still not sure if they are a good idea even if you do. They can be useful automatic savings plans for spendthrifts, but that is an entirely different topic for some other forum.

Why?
1) You don't have any kids yet! Nothing is certain in this world.
2) You have no idea if your kids will need the money. They could get full scholarships, or more likely in my opinion, higher education will have RADICALLY changed by the time they are college age.

There are tectonic shifts happening in education right now and I agree with a lot of brilliant people in the field that there will be ~free education available 20 years from now that is far superior than what is available for ~$70k/yr at MIT, Yale, etc right now.

You should pay yourself first even if I am wrong about future paradigm shifts in education. I'm not a huge Dave Ramsey fan but he does a decent job explaining here: http://www.daveramsey.com/mobile/article-view/category/investing/storyID/retirement-or-college-funding-which-comes-first-/

To back up my education perspective, here are just a few of the organizations that are disrupting eduction right now:
khanacademy.org
udacity.com
edx.org
ocw.mit.edu

These also happen to be excellent Mustachian sources of education.
I help people get their personal finances and investments under control so that they can start tackling the important things in their lives.

michaelrecycles

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Re: 529 vs. brokerage
« Reply #2 on: June 16, 2013, 03:12:03 PM »
Thank you! You confirmed my suspicions and added some new ideas to the subject. I think I was just guilty of chasing tax advantages...

michaelrecycles

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Re: 529 vs. brokerage
« Reply #3 on: June 16, 2013, 03:13:43 PM »
Thank you! You confirmed my suspicions and added some new ideas to the subject. I think I was just guilty of chasing tax advantages...

Or rather, the 529 "advantages" add a hook to the emotional desire to provide.

grantmeaname

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Re: 529 vs. brokerage
« Reply #4 on: June 17, 2013, 07:06:15 AM »
You've already maxed out your 401(k)/IRA/etc.?

Are you eligible for an HSA?

michaelrecycles

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Re: 529 vs. brokerage
« Reply #5 on: June 17, 2013, 01:39:27 PM »
You've already maxed out your 401(k)/IRA/etc.?

Are you eligible for an HSA?
Roth is maxed, and 401k is on track to be maxed. Once I switch to an HDHP during open enrollment this fall, I will be eligible for an HSA in 2014. The tax man cometh (and taketh away).

Ryan Dagg

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Re: 529 vs. brokerage
« Reply #6 on: June 17, 2013, 06:07:29 PM »
Thank you! You confirmed my suspicions and added some new ideas to the subject. I think I was just guilty of chasing tax advantages...

Or rather, the 529 "advantages" add a hook to the emotional desire to provide.
You nailed it. Most people contribute to their children's college expenses before their own retirement because they find the emotional return superior (without realizing this is the reason why).
I help people get their personal finances and investments under control so that they can start tackling the important things in their lives.