Author Topic: Investment order: 401k, Roth, or 529?  (Read 628 times)

englishteacheralex

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Investment order: 401k, Roth, or 529?
« on: July 12, 2018, 09:57:46 AM »
I vote for maxing out my husband's 401(k) in the federal TSP system ahead of funding my Vanguard Roth or our kids' 529.

Husband votes for forgoing maxing out his 401(k) in favor of funding my Vanguard Roth because the Roth is more flexible for paying for the kids' college in 15 years (kids are 3 and 1.5 currently). He says the 401(k) money is locked up until he's 55, so extra money should go to the Roth because you can take out the principle whenever you need it.

We are disciplined savers with a fat emergency fund. There is no danger that we'd take money out of the Roth for anything other than a true emergency, a better investment, or kids' college.

Is it true that money in a 401(k) is locked up and can't be tapped for kids' college?

sokoloff

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Re: Investment order: 401k, Roth, or 529?
« Reply #1 on: July 12, 2018, 10:01:23 AM »

englishteacheralex

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Re: Investment order: 401k, Roth, or 529?
« Reply #2 on: July 12, 2018, 10:08:15 AM »
I read it already a couple of times, but I...maybe need to read it again?

sokoloff

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Re: Investment order: 401k, Roth, or 529?
« Reply #3 on: July 12, 2018, 10:13:28 AM »
My bad. I assumed you were starting from scratch. (A random poster asking your question is way less likely to have read that thread vs not.)

On the 401K question specifically, have a look at https://www.madfientist.com/how-to-access-retirement-funds-early/ to get a primer on what options you have. It's not nearly as cut and dried as "nothing before 55".

englishteacheralex

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Re: Investment order: 401k, Roth, or 529?
« Reply #4 on: July 12, 2018, 10:14:57 AM »
Ok, read it again, still not helping me with this particular question. It's probably me just not understanding, but can somebody help me, anyway?

What I think we should do is max out the 401(k) because it's the TSP, which has the lowest fees available anywhere. We are hoping to retire right around the same time the kids go to college--we'll be 53--and my understanding is that we can convert money from the 401(k) into the Roth that I already have in order to pay our living expenses and the kids' college fees. Isn't this how people who retire early do it?

What am I missing? Bad plan?

RWD

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Re: Investment order: 401k, Roth, or 529?
« Reply #5 on: July 12, 2018, 10:17:10 AM »
He says the 401(k) money is locked up until he's 55, so extra money should go to the Roth because you can take out the principle whenever you need it.

Most people worry they can't access funds until age 59.5, why 55 in your case? You should be aware though that this money is not as locked up as most people think:
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
https://www.madfientist.com/retire-even-earlier/

Edit: It seems you're already aware of this. The forum didn't warn me of new posts in this thread before I posted for some reason...
« Last Edit: July 12, 2018, 10:19:29 AM by RWD »

erutio

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Re: Investment order: 401k, Roth, or 529?
« Reply #6 on: July 12, 2018, 10:17:40 AM »
For your situation:

-Contribute to TSP to maximize the match (5%).
-Next, max out the Roth.
-Since you say you are disciplined savers, you will likely reach the Roth contribution limit ($5.5k), so further savings should be socked away in the TSP.
- 529 should probably be one of the lowest priorities, depending on the state.

englishteacheralex

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Re: Investment order: 401k, Roth, or 529?
« Reply #7 on: July 12, 2018, 10:18:33 AM »
He says the 401(k) money is locked up until he's 55, so extra money should go to the Roth because you can take out the principle whenever you need it.

Most people worry they can't access funds until age 59.5, why 55 in your case? You should be aware though that this money is not as locked up as most people think:
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
https://www.madfientist.com/retire-even-earlier/

55 in my case because I didn't take the time to google the correct standard retirement age answer: 59.5. Sorry! I am dumb!

englishteacheralex

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Re: Investment order: 401k, Roth, or 529?
« Reply #8 on: July 12, 2018, 10:20:04 AM »
For your situation:

-Contribute to TSP to maximize the match (5%).
-Next, max out the Roth.
-Since you say you are disciplined savers, you will likely reach the Roth contribution limit ($5.5k), so further savings should be socked away in the TSP.
- 529 should probably be one of the lowest priorities, depending on the state.

Wait...why max out Roth before maxing out TSP? We already get the match on the TSP. 529 offers no tax advantages in Hawaii; we just set it up so that grandparents would have a place to put birthday money. I view it with disdain.

terran

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Re: Investment order: 401k, Roth, or 529?
« Reply #9 on: July 12, 2018, 10:52:45 AM »
I'm with you on the maxing the TSP first. You (or your kids) can take out loans to pay for college. You can't take out loans to pay for retirement. If it  would help appease your husband, I believe you can take loans for your TSP.

Of course even better would be if you can max them both out. Remember that you have longer to max out an IRA (until the tax filing deadline of the year in which you would like the contribution counted).

CorpRaider

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Re: Investment order: 401k, Roth, or 529?
« Reply #10 on: July 12, 2018, 11:20:36 AM »
Sounds like you are right, but it would depend on the marginal tax rates now versus retirement.  Just check out that investment order post sticky a few inches up your screen. 

Seems like you are planning to FIRE so quite likely future marginal rate will be low.  Funding college by using up limited retirement tax advantaged space (for relatively short-term saving) seems less than optimal.  As has been noted, you can borrow for college (for now) but not for retirement.
« Last Edit: July 12, 2018, 11:22:32 AM by CorpRaider »

Much Fishing to Do

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Re: Investment order: 401k, Roth, or 529?
« Reply #11 on: July 17, 2018, 02:56:21 PM »
If your TSP allows for a Roth 401k contribution then you;re really just looking at investment choices/fees.  If the Roth IRA is the only way to get a Roth acct going then does come down to current tax rate versus future, which is obviously mostly a guessing game.  I have a pretty unique income flow (all over the place from year to year with my business) so after a lot of trying to figure it out ended up having a rule of thumb to max out deductible contributions when my top tax bracket is 25%+ and use the roth options if its 15% or less (or whatever that all equates to now). 

It is worth trying to figure out...but in the end don't lose sight that every dollar you don;t spend and instead invest makes a much bigger difference in the end than where you actually put that dollar....

Until you are nearing FI I like the concept of a 529 being just a place for the grandparents to put money for their grandkids.