Rollover IRA/College Fund

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Topic Author
Texanbybirth
Posts: 1612
Joined: Tue Apr 14, 2015 12:07 pm

Rollover IRA/College Fund

Post by Texanbybirth »

Good morning all,

I'm looking for advice regarding how to look at an old retirement account vis a vis saving for college.

My wife recently stopped working to take of our child(ren), and she doesn't have any plans to return to full-time work in the future. However, she has a 403(b) Thrift plan at Mutual of America. It's in a MoA TDF (2045), which currently has a 90/10 AA. The fees are pretty cheap (39bps), but I know we could do a bit better elsewhere. The balance is currently ~$13k. At first we planned to just use this as a base to start saving for our daughter's (3 mos old) college. However, the more I look into it I find (a) one cannot directly rollover a 403(b) into a college savings plan, therefore (b) we would need to cash out this investment to stick it in a college fund. Paying a 10% penalty and taxes doesn't seem like a prudent investment decision. Is there an angle at which I could look at this account in the scheme of saving for college? Or should we just chalk up this account to a little side egg and think of college savings as effectively $0 as of this moment? My wife has a nice little side gig that pulls in $100/hr, but it's not a consistent stream of income so we generally put that cash into travel/down pmt/savings. She does like for that income to "go towards something", so I thought of putting all of that money into a 529 plan after reading about Vanguard's approach (https://personal.vanguard.com/pdf/s346.pdf). We can probably swing the $6k/yr contribution level mentioned in the article. I lean toward a 529 over a Roth because even if DD doesn't go to college, I'm willing to bet that one of her future siblings will. Plus, I don't like the idea of Roth IRA withdrawals counting toward earned income the following year on FAFSA.

For some background, I'm contributing 15% to a 401(k) with ~5% discretionary match. Currently, I'm making $70k/yr. (Separately, I get a 50% annual bonus seemingly, but not, guaranteed.) Without being irrationally optimistic, I do believe this will provide us with a comfortable retirement, so I'd like to start planning for our little ones. I'm 30, DW is 28. We're in (and plan to stay in) Texas. Thus, I don't think there are really any immediate tax savings with a 529 plan.

Thanks for any help y'all can give!
dsmil
Posts: 773
Joined: Tue Sep 08, 2009 10:51 am

Re: Rollover IRA/College Fund

Post by dsmil »

If the $13k in the 403b was planned on being used for college, and you're hitting your retirement goals, than you could take the next $13k that you planned on putting in the 401k, and put that into a 529 or Roth. Or directly roll over the balance into a Roth if allowed. That way, you've basically replaced the $13k that you wanted to save for college. As you've described it, the company contribution is discretionary, based on salary, so the contribution wouldn't be affected by you diverting investments away from the 401k (my 401k is the same way and I would only contribute if I've already maxed my Roth). I personally wouldn't fund the 529 before the Roth because of the flexibility that the Roth offers. Plus, if you're pulling in over $100k at age 30, I doubt that you'll receive financial aid anyway.
Topic Author
Texanbybirth
Posts: 1612
Joined: Tue Apr 14, 2015 12:07 pm

Re: Rollover IRA/College Fund

Post by Texanbybirth »

dsmil wrote:If the $13k in the 403b was planned on being used for college, and you're hitting your retirement goals, than you could take the next $13k that you planned on putting in the 401k, and put that into a 529 or Roth. Or directly roll over the balance into a Roth if allowed. That way, you've basically replaced the $13k that you wanted to save for college. As you've described it, the company contribution is discretionary, based on salary, so the contribution wouldn't be affected by you diverting investments away from the 401k (my 401k is the same way and I would only contribute if I've already maxed my Roth). I personally wouldn't fund the 529 before the Roth because of the flexibility that the Roth offers. Plus, if you're pulling in over $100k at age 30, I doubt that you'll receive financial aid anyway.
Thanks, and let me clarify: the 5% match is "discretionary" in that the company doesn't guarantee it each year, and I have to contribute to get it. (Sorry if I used confusing wording.) Thus, I'd need to contribute at least 5% to get it. I've got that made this year, so I could stop contributing. What you're saying is to stop the 401k contributions after getting the match and deposit that cash into a Roth IRA/529? Basically just this year, or at least until I've equalized to the balance of the IRA we were initially going to use? That makes sense because we can rollover the 403b to a Vanguard IRA and buy the same Target Date Fund we're currently using in my 401k. The net effect seems to be slightly higher income taxes due to reduced pre-tax contributions for a while as we ratchet up the college savings vehicle, whatever it may be.
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
dsmil
Posts: 773
Joined: Tue Sep 08, 2009 10:51 am

Re: Rollover IRA/College Fund

Post by dsmil »

Texanbybirth wrote:
dsmil wrote:If the $13k in the 403b was planned on being used for college, and you're hitting your retirement goals, than you could take the next $13k that you planned on putting in the 401k, and put that into a 529 or Roth. Or directly roll over the balance into a Roth if allowed. That way, you've basically replaced the $13k that you wanted to save for college. As you've described it, the company contribution is discretionary, based on salary, so the contribution wouldn't be affected by you diverting investments away from the 401k (my 401k is the same way and I would only contribute if I've already maxed my Roth). I personally wouldn't fund the 529 before the Roth because of the flexibility that the Roth offers. Plus, if you're pulling in over $100k at age 30, I doubt that you'll receive financial aid anyway.
Thanks, and let me clarify: the 5% match is "discretionary" in that the company doesn't guarantee it each year, and I have to contribute to get it. (Sorry if I used confusing wording.) Thus, I'd need to contribute at least 5% to get it. I've got that made this year, so I could stop contributing. What you're saying is to stop the 401k contributions after getting the match and deposit that cash into a Roth IRA/529? Basically just this year, or at least until I've equalized to the balance of the IRA we were initially going to use? That makes sense because we can rollover the 403b to a Vanguard IRA and buy the same Target Date Fund we're currently using in my 401k. The net effect seems to be slightly higher income taxes due to reduced pre-tax contributions for a while as we ratchet up the college savings vehicle, whatever it may be.
Yes, that sounds like a plan...contribute 5% to the 401k, rollover the 403b to an IRA of your choosing (Roth or Traditional), and put $13k of future funds into the Roth or 529 for college. Or, if you decide to use the Roth instead of the 529 for college, you could just roll over the 403b into the Roth, and keep contributing to the 401k like you have been.
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