Author Topic: Doublecheck on why fund 401k before 529  (Read 991 times)

x02947

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Doublecheck on why fund 401k before 529
« on: August 10, 2018, 01:22:47 PM »
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?

Zamboni

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Re: Doublecheck on why fund 401k before 529
« Reply #1 on: August 10, 2018, 03:28:09 PM »
Seems like you understand why 401k is better. Once you are maxing your 401k contributions, then you can put extra savings in the 529's again if that makes sense to you.

AccidentalMiser

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Re: Doublecheck on why fund 401k before 529
« Reply #2 on: August 10, 2018, 04:49:29 PM »
Seems like you understand why 401k is better. Once you are maxing your 401k contributions, then you can put extra savings in the 529's again if that makes sense to you.
Agree.

Your kids can borrow for their education if necessary.  You can't borrow for your retirement.  A hell of a lot can happen in Y years.

This leaves aside the moral hazard from funding your children's education but that's a whole different topic.  I didn't pay for my kids to go to school for several reasons.  They were committed to going and found the money/jobs/minimal loans necessary to make it happen.  They own and value their educations in a real way.  They earned them in every sense of the word and are all very proud of their accomplishments.  None of them screwed around at school because they had skin in the game and understood the cost/benefit analysis.  We helped them with cars or used books or a place to live during school but didn't write any checks to colleges.

It's noble to want to help your kids and you should if you can but there are different ways of helping besides writing out tens of thousands of dollars.

My two cents, I understand that my view is in the minority.

Good on you for thinking clearly about this early in life!

reeshau

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Re: Doublecheck on why fund 401k before 529
« Reply #3 on: August 11, 2018, 01:55:25 AM »
Seems like you understand why 401k is better. Once you are maxing your 401k contributions, then you can put extra savings in the 529's again if that makes sense to you.
Agree.

Your kids can borrow for their education if necessary.  You can't borrow for your retirement.  A hell of a lot can happen in Y years.

This leaves aside the moral hazard from funding your children's education but that's a whole different topic.  I didn't pay for my kids to go to school for several reasons.  They were committed to going and found the money/jobs/minimal loans necessary to make it happen.  They own and value their educations in a real way.  They earned them in every sense of the word and are all very proud of their accomplishments.  None of them screwed around at school because they had skin in the game and understood the cost/benefit analysis.  We helped them with cars or used books or a place to live during school but didn't write any checks to colleges.

It's noble to want to help your kids and you should if you can but there are different ways of helping besides writing out tens of thousands of dollars.

My two cents, I understand that my view is in the minority.

Good on you for thinking clearly about this early in life!

+1 For both points.

The math you lay out expresses, in part, the optionality around college.  There are many paths to paying through college, including the IRA, as you state.  Nobody is going to help you with retirement.  So, make sure you do what you have to do first, (save for retirement) before you commit to the burden that has other possible solutions.

x02947

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Re: Doublecheck on why fund 401k before 529
« Reply #4 on: August 11, 2018, 07:39:40 AM »
Thanks everyone!  Like I said, I'm still trying to break through the "standard" way of thinking that all the news articles toss out, instead of actually doing the analysis for myself.  It's nice ot have a forum like this with people like y'all :)

pressure9pa

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Re: Doublecheck on why fund 401k before 529
« Reply #5 on: August 11, 2018, 08:52:42 AM »
You seem to have it down.  However, for others reading YMMV greatly depending on your state.  Here in Indiana, we get a 20% credit (not deduction) for contributions up to $5000.  Thus every year it's as if for my $5k contribution, the state reimburses me $1000.

appleshampooid

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Re: Doublecheck on why fund 401k before 529
« Reply #6 on: August 13, 2018, 08:39:46 AM »
Seems like you understand why 401k is better. Once you are maxing your 401k contributions, then you can put extra savings in the 529's again if that makes sense to you.
Agree.

Your kids can borrow for their education if necessary.  You can't borrow for your retirement.  A hell of a lot can happen in Y years.

This leaves aside the moral hazard from funding your children's education but that's a whole different topic.  I didn't pay for my kids to go to school for several reasons.  They were committed to going and found the money/jobs/minimal loans necessary to make it happen.  They own and value their educations in a real way.  They earned them in every sense of the word and are all very proud of their accomplishments.  None of them screwed around at school because they had skin in the game and understood the cost/benefit analysis.  We helped them with cars or used books or a place to live during school but didn't write any checks to colleges.

It's noble to want to help your kids and you should if you can but there are different ways of helping besides writing out tens of thousands of dollars.

My two cents, I understand that my view is in the minority.

Good on you for thinking clearly about this early in life!
If you don't mind my asking, when did your kids go to college? The costs have been skyrocketing lately.

I understand your position but we plan on helping our kids out with tuition money. Our current plan is we'll cover tuition at the best in-school university in our current state, and anything over that will be up to them to fund/borrow. Hopefully they will get some scholarships too.

My only child is 16 months right now, so plenty of time to adjust this plan :)