Where Next?

[WoodStache]

Looking at a few different options for investing moving forward and would love some advice. If this belongs in Ask A Mustachian please let me know. I want to say first that my wife and I know we're very fortunate, and that the "issue" we have is very much a blessing.

Life Situation: Me (late 20s), Wife (mid 20s) and 1 child, a newborn.

Gross Salary/Wages: 250-280k

Individual amounts of each Pre-tax deductions: Both maxing out our 401k, backdoor ROTH (post tax I know) and we have a family HSA that we max as well.

Assets:

• Relevant Cash: ~36k
• Emergency Fund/floating cash: 20k
• Retirement savings: $335k
• HSA: 8.5k
• House: 280k
• 529: 28k

House value is estimated fairly conservatively, all other accounts are within 1-2k.

Liabilities:None

Specific Question(s): We have a chunk of cash (tax return + quarterly profit share), with more money obviously to be made throughout the year. Does it make sense to fully max the 529?

Assumptions/Reasoning: We want to pay for undergrad tuition, room and board at an in state public school when he turns 18. Anything else (out of state, grad school) will be up to him. We also plan on having more than one child (2-3 total), which would mitigate the risk of over funding.

We're in the final stages of purchasing a business right now, which is where we currently work. We are confident in our jobs and the health of the company, but also don't want to over complicate investments as extra time should be spent furthering the office where the larger $$ opportunity is.

To me, I see two main investment vehicles: Index funds (simple and easy) and Real Estate (no expertise, but I have a strong desire to own rental properties). With the money we have we could contribute even more to his 529 and just start him out with 60-70k in there. With 18 years that should be enough to pay for his college.

The way I see it, the choice is only between real estate and maxing the 529, right? Because if the 529 is going to be invested in the same types of funds as a Vanguard account, I may as well get the tax shelter of the 529.  I then worry a bit about putting 70k into the market in such a short period of time. I've never concerned myself with DCA, but this represents about 10% of our net worth. It's even more when you consider the retirement savings throughout the year that are put into the same types of things.

That said, I know there's no real easy ways to make a buck, and real estate would be no different. I'd use a property manager, but I'd still have to find that manager, find the property, etc.

Am I missing anything? Other than being less liquid, are there additional risks to funding the 529?

I've always worked off goals, long and short - max out 401k, save cash for a car replacement, pay off the house. So i guess I'm suffering from a bit of "now what?" as well as wondering if I should fight my natural inclination to just dump money into a 529 until his college is funded as that would check a goal "off the list."

Anything I'm missing?

Thanks in advance for any help.

[MDM]

We're in the final stages of purchasing a business right now, which is where we currently work. We are confident in our jobs and the health of the company, but also don't want to over complicate investments as extra time should be spent furthering the office where the larger $$ opportunity is.
...
The way I see it, the choice is only between real estate and maxing the 529, right? Because if the 529 is going to be invested in the same types of funds as a Vanguard account, I may as well get the tax shelter of the 529.
...
Am I missing anything? Other than being less liquid, are there additional risks to funding the 529?

You do have another choice: invest in a normal (i.e., not tax-advantaged) brokerage account until the combination of your taxable and tax-advantaged accounts allows you to retire.  Whether you choose to retire at that time is a different question.  After you reach that milestone, then contribute as much as you want to the 529.

Why?  Because, unfortunately, "stuff happens" and your future income stream from working is not guaranteed.  The gift of not having to worry about their parents' retirement may be more valuable than decreasing the cost of college for your kids.

It's unlikely that either funding the 529 or the taxable account now will be a "bad" choice. 

[WoodStache]

Thanks MDM. That is a good point - I do think our retirement is a higher priority than our kid(s') college. I guess the hump I'm having trouble getting over is that they'll be essentially the same investment, but one will be tax sheltered. It seems somewhat similar to investing in a Vanguard account when you haven't maxed out a 401k, which I obviously never did.

[Laura33]

If you are purchasing a business now, I would sit tight and keep that money accessible (i.e., regular Vanguard account, not 529).  Even given that you know the business, you don't know it as an owner; I would want accessible money for a "just in case" so I don't lose my entire investment.  If things are solid next year this time, you still have plenty of time to fund a 529.

I also would advise against rentals at this time.  You're in the middle of making -- and learning how to manage -- one huge investment.  Give yourselves time to figure out what that entails before jumping in to learn another.

FWIW, I think you are also looking at the "529 vs post-tax" fund wrong.  It is not the same as investing post-tax while not maxing your 401(k), because you can't use a 529 for your retirement (at least, not without forfeiting the tax advantage and paying penalties).  I think what you are hearing here is to prioritize your own retirement over your kid's education, which means post-tax before 529.

Finally, do you have a state tax deduction for the 529?  If so, that might argue for doing small amounts each year instead of all at once.

[WoodStache]

If you are purchasing a business now, I would sit tight and keep that money accessible (i.e., regular Vanguard account, not 529).  Even given that you know the business, you don't know it as an owner; I would want accessible money for a "just in case" so I don't lose my entire investment.  If things are solid next year this time, you still have plenty of time to fund a 529.

I also would advise against rentals at this time.  You're in the middle of making -- and learning how to manage -- one huge investment.  Give yourselves time to figure out what that entails before jumping in to learn another.

FWIW, I think you are also looking at the "529 vs post-tax" fund wrong.  It is not the same as investing post-tax while not maxing your 401(k), because you can't use a 529 for your retirement (at least, not without forfeiting the tax advantage and paying penalties).  I think what you are hearing here is to prioritize your own retirement over your kid's education, which means post-tax before 529.

Finally, do you have a state tax deduction for the 529?  If so, that might argue for doing small amounts each year instead of all at once.

Thanks. This is the way we'll go, I think. As much as I want to own rental properties, I have to get past a psychological desire and do what makes the most sense. We'll dump it into vanguard. Haven't actually started a non tax sheltered account yet, so seeing more liquid investments grow will be reassuring in its own way.