Author Topic: Pennslyvania 529 or IRA?  (Read 832 times)

jax8

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Pennslyvania 529 or IRA?
« on: March 19, 2018, 11:49:24 AM »
My oldest is will be starting college in 7 years and we have ZERO saved for her.  I'm working on the investment order, and so far I have:

0 - Emergency fund - DONE
1 - 401Ks to employer match - DONE
2 - No debts over 5% - DONE
3 - HSA - INCOMPLETE (still researching if this is offered at husband's job to prep for next enrollment period in November)
4 - Max traditional IRA or Roth - INCOMPLETE (don't have one - still researching)
5 - Max 401k - IN PROGRESS (upped mine by a lot, but it's still way short of $18,000)
6 - Fund a mega back door roth - TOO ADVANCED FOR ME TO EVEN LOOK AT! :)
7 - Pay off any debts around 3% - INCOMPLETE (house = 15 years @ 3.375%, student loan = 10 years @ 2.75%)
8 - Invest in a taxable account and/or 529


Saving for kid's college is way down at the bottom of the investment order, but it's really dear to my heart to pay for the first year at state school.  Even if I can only give her tuition and not room and board, I want to give her something.

I know I can use a traditional Roth and withdraw money for tutition and college expenses without hitting fees.  But the PA Guaranteed Savings Plan has extra benefits:

1. Tution rates are "locked in" from the date of opening, so I'll be paying 2018 tution rates when she attends college in 2024 when we use the funds from this account.
2. No federal or state income tax on earnings or withdrawals.
3. Up to $28,000 state income tax deduction on contributions - BUT STILL ELIGABLE FOR FEDERAL INCOME TAX
4. Money in this 529 account is excluded when state financial aid determined, excluded from PA inheritance tax, protected from creditors
5. Having a PA 529 plan opens up extra private school tuition discounts.

We're not talking about a ton of money going into this account--I mean, I'll be thrilled if I can hit $7,000 before she heads to school!  We have to fund our own retirement and pay off our own student loans.  But I'm leaning toward the PA 529...

Oh--and it's 90% likely she'll attend a PA school.  My husband's professional license is in PA and it's a huge undertaking to transfer that to another state.  We're staying here forever.  Thoughts?

catccc

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Re: Pennslyvania 529 or IRA?
« Reply #1 on: March 19, 2018, 01:23:25 PM »
Is out-of-state not going to be an option for her?  Most parents don't move and follow their children if the happen to attend an out of state school... Just a thought.

Anyway, I live in PA and we have 529s for both of our kids, who are now almost 7 and 9.  So we have 8-11 years before they head off to college, should they decide to do so.  Since PA allows deductions (at the state level) for contributions to the 529, regardless of which state sponsors the plan you elect, we actually went with NY's 529 due to lower fees and vanguard fund choices (our preference).  So this is not the same type of 529 as you are proposing.

Are you certain it is excluded from Financial Aid determinations?  I didn't think that was the case, unless the account is held by a grandparent or some other less close relative.  But I could be wrong, or this could be a difference between the GSP you are looking at and the IP we actually have.

However, given your current situation, I would focus on paying off your own student loans and contributing to retirement funds, not your daughter's educational expenses.  If she happens to receive gifts from family from time to time, I would set that aside and put it into a 529, or in lieu of gifts for birthday or Christmas, put $ aside for her.


jax8

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Re: Pennslyvania 529 or IRA?
« Reply #2 on: March 19, 2018, 01:58:23 PM »
Are you certain it is excluded from Financial Aid determinations?  I didn't think that was the case, unless the account is held by a grandparent or some other less close relative.  But I could be wrong, or this could be a difference between the GSP you are looking at and the IP we actually have.

However, given your current situation, I would focus on paying off your own student loans and contributing to retirement funds, not your daughter's educational expenses.  If she happens to receive gifts from family from time to time, I would set that aside and put it into a 529, or in lieu of gifts for birthday or Christmas, put $ aside for her.

A PA 529 is excluded from PA state financial aid, but not ferderal financial aid.  The PA 529 website claims that 529's from other states WILL be counted towards state financial aid, so I guess it's an incentive to invest in your own state's plan?

csprof

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Re: Pennslyvania 529 or IRA?
« Reply #3 on: March 19, 2018, 07:26:23 PM »

0 - Emergency fund - DONE
1 - 401Ks to employer match - DONE
2 - No debts over 5% - DONE
3 - HSA - INCOMPLETE (still researching if this is offered at husband's job to prep for next enrollment period in November)
4 - Max traditional IRA or Roth - INCOMPLETE (don't have one - still researching)
5 - Max 401k - IN PROGRESS (upped mine by a lot, but it's still way short of $18,000)
6 - Fund a mega back door roth - TOO ADVANCED FOR ME TO EVEN LOOK AT! :)
7 - Pay off any debts around 3% - INCOMPLETE (house = 15 years @ 3.375%, student loan = 10 years @ 2.75%)
8 - Invest in a taxable account and/or 529

Just a note - the usual view on the "paying off debts" is 5% and 3% *above the current 10 year t-note rate", which is currently 2.85%.  (The reason for this should be clear -- it's trying to compare your debt vs. a basically guaranteed, safe return).  So this means that "Pay off any debts over 3%" is really over about 5.x%.  House @ 3.375% is awesome, and student loan at 2.75% is doubly awesome.  Don't accelerate your payoff there unless you're planning on retiring now.

Also - are you sure you want to use the GSP instead of the IP?  In general, the yield on the IP should be higher, and PA's IP gets much higher grades than the GSP.  The math may differ for you - my kids are 5 and 0, and the longer investment horizon makes a higher-risk investment more attractive.

Finally, if you're not on target to max all of the pre-tax vehicles and likely a backdoor roth, don't do the 529.  (Don't sweat the mega-backdoor if it's not available -- many employers don't provide an easy way to do it.).  The 3% savings you'll get on PA state taxes are pretty small stuff compared to getting the federal tax benefits of a traditional IRA or 401k.

(I'm a fan of 529s, but I'm in agreement with the investment order list from a practical perspective.  I also contribute to a PA 529, but only after maxing retirement contributions.)