Author Topic: Step 8 on Investment Order - 529 or taxable or alternative?  (Read 654 times)

nereo

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This is mostly a post to check that I'm not missing anything.

Following the Investment Order we're pretty much at step 8; we've maxed out our HSA and IRAs for this year and contributed as much as we could to our only 403(b) before we lost that option (shifted jobs).
So it seems our options left are 529 for our daughter (age ~1) and/or taxable accounts.  The only debt we carry is a mortgage at 2.49% and I have no interest in paying that down any faster.

In very broad strokes we have
  • $155k in IRAs (combination of traditional and Roth)
  • $105k in taxable accounts (Vanguard 3 fund portfolio)
  • $13k in HSA (with documented expenses we could pull this all out tax free)
  • $8k in an 529 account (one child, age 1).
  • ~$100k expected from home sale (home on market - amount subject to final sale price).
  • 4 months expenses in our checking account (way more than normal, and we'd like to pare that down).
  • No major anticipated expenses on the horizon.

Another wrinkle; it's possible that my spouse will start a new job in August which would provide an additional 401(k) headspace for 2019.

Currently we are splitting the difference - contributing a few hundred each pay period towards the 529 and towards our taxable accounts. Part of me thinks it could be a very good idea to just dump as much as we can into the 529 now to allow for tax-free growth for ~2 decades, as we've got enough in taxable to satisfy the "put on your own emergency mask first". I crunched some numbers and figured if we can put $30k into the 529 by age 5 we can largely let that coast and feel comfortable that the account will allow us to contribute the amount we are comfortable with for higher education.

Thoughts?  Anything I'm overlooking?
« Last Edit: May 24, 2019, 08:15:33 AM by nereo »

the_gastropod

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #1 on: May 24, 2019, 08:38:24 AM »
I don't have any kids myself, but I've looked into starting a 529 for my financially irresponsible cousin's children. I decided it wasn't the best path for me. Here are a few reasons:

- The tax break is nice, but it's not that significant
- I have no idea whether these kids will go to college or not
- I have no idea what college will look like in ~15+ years. Will costs continue to rise as they are?  Will a  college degree be as necessary as it is today? Will public university be free? I'm not confident enough in any of this to lock away money today for future education purposes.

I apologize in advance if you have read this already. But if not, JL Collins has a pretty thorough article about saving for college and the various pros / cons as he sees them. Check it out: https://jlcollinsnh.com/2016/04/12/stocks-part-xxix-how-to-save-money-for-college-or-not/

Nick_Miller

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #2 on: May 24, 2019, 09:01:09 AM »
Dumping college money into a 529 when your child is so young is mathematically a great choice, assuming you pick a 529 with reasonable fees and some decent investment options. Let the next 17 years of (anticipated) gains do the work for you! I can't tell your age, but you all seem to be doing a pretty good job across the board in other financial aspects.

Now of course, the danger is that your child is just 1, and there's no way to know if they are going to be a good match for college. My kiddos are older, and yes they are college material, so I lose absolutely no sleep worrying "what if we can't use the money?" And yeah, with such a long horizon, there is the "will college be free by 2036?" question to consider. I would assume if there were such seismic changes to college tuition costs, that 529 rules would be tweaked to allow for withdraw, but who knows?

nereo

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #3 on: May 24, 2019, 09:05:51 AM »
Appreciate the thoughts - I had read JL Collins post regarding college a while ago, but it was good to review.  Having done so I'm not particularly concerned with his 5 major reasons not to contribute, and we seem to hit all four of his reasons why you might want to.  My state allows deductions for 529 contributions so the tax savings over 2 decades could be upwards of $10k... not earth shattering but not to be ignored, either.  Plus, our alternative seems to be vanilla taxable accounts, so we're just left with 'what's a better place for our money'.

I figure even if the impossible happens and we get free education, the money is no worse off in a 529 than in a traditional, as we'd just pay applicable taxes, and/or find other uses like school supplies or room/board.

Dumping college money into a 529 when your child is so young is mathematically a great choice, assuming you pick a 529 with reasonable fees and some decent investment options.
We actually have good 529 options -- the selection of index funds and target-date funds are decent, fees are comparable to Vanguard and we get a small match (which we're taking advantage of regardless).


doingfine

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #4 on: May 24, 2019, 09:13:52 AM »
I figure even if the impossible happens and we get free education, the money is no worse off in a 529 than in a traditional, as we'd just pay applicable taxes, and/or find other uses like school supplies or room/board.

You will also pay a 10% penalty on the gains for non-qualified withdrawals.

That said, I'm pretty happy contributing to a 529 (which we do in addition to our taxable account). We make sure to contribute at least enough to capture the full state tax break every year. We happen to have 3 kids, so there is less of a chance that nobody will use that money, but even if that were to somehow happen saving this money is not a substantial enough portion of our overall savings that it will impact our retirement goals in any meaningful way, and if we happen to have an excess in 529's I look forward to being able to leave an educational trust for the family, something nobody else in our family has ever had the advantage of.

nereo

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #5 on: May 24, 2019, 09:24:37 AM »
I figure even if the impossible happens and we get free education, the money is no worse off in a 529 than in a traditional, as we'd just pay applicable taxes, and/or find other uses like school supplies or room/board.

You will also pay a 10% penalty on the gains for non-qualified withdrawals.

True.  I just don't see how we could realistically get to that point with the dollar amounts we are talking about.  I suppose it's possible, in which case we'd have to weigh the probability of being forced to take non-qualified withdrawals from a 529 with the greater freedom but higher tax burden on taxable accounts contributions.

Nick_Miller

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #6 on: May 24, 2019, 10:33:40 AM »
I figure even if the impossible happens and we get free education, the money is no worse off in a 529 than in a traditional, as we'd just pay applicable taxes, and/or find other uses like school supplies or room/board.

You will also pay a 10% penalty on the gains for non-qualified withdrawals.

I know you were clear about it (as you specified "gains") but I just wanted to emphasis for anyone reading this that 529 contributions aren't subject to either penalties or tax, even if you can't end up using the funds for qualified expenses (worst case scenario). So it's not like you get "punished" on the money you tossed in.

Buffalo Chip

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #7 on: May 24, 2019, 07:29:06 PM »
The Big advantage for 529s in my view is the STATE tax advantage. If your state offers a nice one, itís like getting a Roth IRA with an instant return. Very nice! A lot of folks obsess worry about whether their kid will go to college. If they donít, you can use it for the grandkids. Generational wealth; gotta love it!

kpd905

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #8 on: May 25, 2019, 08:37:33 PM »
I figure even if the impossible happens and we get free education, the money is no worse off in a 529 than in a traditional, as we'd just pay applicable taxes, and/or find other uses like school supplies or room/board.

You will also pay a 10% penalty on the gains for non-qualified withdrawals.

I know you were clear about it (as you specified "gains") but I just wanted to emphasis for anyone reading this that 529 contributions aren't subject to either penalties or tax, even if you can't end up using the funds for qualified expenses (worst case scenario). So it's not like you get "punished" on the money you tossed in.

So if your child is nearing college and it suddenly seems like you have more than they need in there, you could potentially pull out all contributions, and use the gains for their schooling?  Avoiding the 10% penalty.  Assuming you don't just punt it to a different beneficiary.

Nick_Miller

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #9 on: May 25, 2019, 09:02:48 PM »
Yes you can withdraw contributions at any time for any reason with no taxes due or penalties owed.


secondcor521

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #10 on: May 26, 2019, 12:22:09 AM »
Yes you can withdraw contributions at any time for any reason with no taxes due or penalties owed.

The above is true of Roth IRAs.  However, in the case of 529s, I'm fairly certain that withdrawals are required to be done on a prorata basis.  Thus, if you have contributions of $9,000 and gains of $9,000, then make a $5,000 withdrawal, it would be considered to be $2,500 of contributions and $2,500 of gains.  To the extent that they exceeded qualified education expenses, the $2,500 of gains would be subject to ordinary income tax plus the 10% penalty unless one of the penalty exceptions were met.  See chapter 8 of IRS Pub 970.

nereo

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #11 on: May 26, 2019, 07:07:32 AM »
Yes you can withdraw contributions at any time for any reason with no taxes due or penalties owed.

The above is true of Roth IRAs.  However, in the case of 529s, I'm fairly certain that withdrawals are required to be done on a prorata basis.  Thus, if you have contributions of $9,000 and gains of $9,000, then make a $5,000 withdrawal, it would be considered to be $2,500 of contributions and $2,500 of gains.  To the extent that they exceeded qualified education expenses, the $2,500 of gains would be subject to ordinary income tax plus the 10% penalty unless one of the penalty exceptions were met.  See chapter 8 of IRS Pub 970.

..this is what I love about this forum; so much detailed info on rather technical topics such as this.

Nick_Miller

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Re: Step 8 on Investment Order - 529 or taxable or alternative?
« Reply #12 on: May 26, 2019, 11:54:22 AM »
Everything I have read says no limits on contribution withdraws but I guess I could be wrong. Iíll post some links when I get to my PC.