Hi y'all,
I’ve looked at the investment order sticky, and see that maxing out your 401k comes before a 529 plan. I think I see why, I’m just trying to make sure I clearly understand so I can filter through the continual “don’t rob your retirement to fund your children’s education!” I see every time I try to research this.
Let’s assume I am planning on funding at least part of my kids’ educations and because I’m rational, I can plan and can do this without jeopardizing my retirement. In other words, I am saving X much for my FIRE in Y years. The fact that I am also saving Z amount for my kids education has no bearing on X to me, because I have already accepted Y years at work. I feel that society tends to assume that the standard consumer only has one saving fund for everything, hence the raiding your retirement fund mania.
Anyways: Since I am still transitioning to a true mustachian, I do not (yet) have enough savings to fill my tIRA and t401k. I’m in the 15% federal tax bracket and 5% state tax bracket. I am saving $10k a year for my kids’ educations, and already max my tIRA for retirement. My state gives up to a $10k deduction for contributions to its in-state 529 plan. This would save me $500 a year in state taxes. OTOH, if I put that $10k into a t401k, that would save me $1500 in federal taxes as well as $500 in state taxes. Clear winner in the beginning-401k.
I’m on track to FIRE before the kiddos reach college and with FIRE expenses + withdrawing to help pay for college I will probably still be in the same tax bracket (worst case assumption). Regardless of the rIRA pipeline status, I can withdraw from my tIRA for education expenses. The fact that I will be depleting it faster doesn’t matter because that extra depletion amount (that would be coming from the 529) is now circuitously coming from the extra in my 401k.
As far as taxes- I would pay the $2000 in tax when withdrawing, but the extra $1500 I saved up front each year nets me an extra ~$60k over those 18 years over just the $500 from the 529. Clear winner in the end-401k.
I really do apologize for starting a new topic and beating a dead horse here… I just haven’t been able to find a previous post that lays out the math and reasoning that quite lines up with my head :), and before I break with “conventional wisdom” I just want to double check with y’all :). Anything wrong with the logic here?