save for college or pay down mortgage

[chipperd]

Hello all,
I have been reading this board for a couple years, learning from the questions and posts and would like to call on the boglehead group knowledge regarding a question my wife and I are facing. Should we pay down the mortgage or, given federal/private college aid formulas, save for college, assuming all three kids will be attending some form of college/university.
The situation:
married, 3 kids (current ages 13, 11.5 and 10)
6+ months in emergency funds
~160k/year income (she: ~90k w2 income and he:~70k self emplyed income)
retirement:
~280k in tax deff and ~70k in roths. About 22k per year contribution split into 457, SEP and roths.(split depends on acct. advise based upon self employement income)
-she: public safety pension @50% highest 3 years income; eligible in 3 years, but will need to work longer
house:
-140k balance on home valued in the 450k range. Private mortgage agreement with benevlant relative tagged to prime rate (prime-1.01%).Current rate 2.24% Current monthly interest about $270. Note due 2028.
529 savings for the 3 kids:
-us: 50k
-grandparents: 60k
The Question:
Should we be agressively paying down the mortgage (at that great, albeit adjustable, rate) or putting more of our monthly $ into saving for college and if so what investment vehicle(s).
Note: we are not big fans of the UGMA due to the fact that kids get control of the $ at age 18.
Feel free to request additional info. Thanks for the info. We can take direct, constructive critiques.

[livesoft]

Paying down the mortgage will help with FAFSA and aid formulas.

My recommendation would be to up the contributions to retirement plans instead. It seems that your family could contribute more than $70,000 a year to retirement plans every year. Then when college time rolls around, you all will have nice retirement plans that won't count on the FAFSA. If needed, at that time you could lower contributions to retirement plans and spend $70,000 of cash flow on college expenses (plus the additional taxes for not contributing to retirement plans). You might say, "but what if we lose our jobs" and I would say, "If you lose your jobs, then financial aid is probably more likely."

I would not contribute to 529 plans nor to the mortgage, but would put that money into retirement plans instead.

[chipperd]

Livesoft,
Thanks for the idea. In concept, what you say makes sense, but we were told by our accoutant that this year we can only contribute 11k to max out the SEP. Roths and 457 max, i believe, would bring the retiremement contribution total to about 39k, no? Please correct my assumptions if incorrect. Thanks again

[livesoft]

I do not know your self-employment business and whether you have other employees. My impression was that a self-employed person could contribute $17,500 to a solo 401(k) plus an additional "employer" 401(k) contribution of 25% or so of profits. Your spouse can contribute $17,500 to the 457, right? Plus the Roths. Let's see $17,500 + $17,500 + $5,500 + $5,500 + $17,500 = $63.5K.

In any event it makes no sense to me to put money into the mortgage nor into 529 plans when there is room to put the money into retirement plans.

Full disclosure: I have a kid in college. This worked very nicely for us.

[dhodson]

id also go with retirement accounts first then house then 529 since money in 529 will count against financial aide.

[chipperd]

Thanks to you both. Livesoft, I will look into the amounts you suggested. our acct. told us that 20% was the max, but he could, and has, been wrong.

[chipperd]

Livesoft
I found this:
http://iracontributionlimits2010.com/se ... 0/2010/08/

does this jive with what you are suggesting?

[livesoft]

I don't have a self-employed plan myself, so I should probably not comment on the details of the limits.

I think you should focus on the idea that you should contribute the maximums allowed to your retirement plans before even thinking about 529 plans and thinking about paying extra on the mortgage. I think I can say that your $22K annual contribution to retirement plans is well under what you are probably allowed to do or maybe you need to change your retirement plan to something else.

[chipperd]

Ok, thanks again livesoft.

[letsgobobby]

the advice upthread is correct - max all retirement plans first. In theory, with self-employed income, you should be able to do all kinds of things with your income to look income-poor and asset-poor come financial aid time. The 529s will count against EFC as a parental asset, so certainly no value in funding those over retirement plans - which don't count.

Primary home equity is not counted in FAFSA, is counted by some schools using an alternate profile. still, better to pay off mortgage than save in a taxable brokerage; and better than saving in a 529. But better still is somehow making all of those assets and your half of the income disappear using your business.

For tantalizing and perplexing and frustrating details, read on at FatWallet:

http://www.fatwallet.com/forums/finance/1259028/

[chipperd]

Letsgobobby,
Thanks for the info and reference.

[Bulldawg]

For the FAFSA formula , retirement assets are excluded along with equity in your primary residence ; you mentioned self employment income and the net worth of small businesses ( up to 100 employees I think ) are also excluded from FAFSA calculations.

Also remember to avoid having money put in your childrens' names whenever possible as FAFSA assesses kids' assets at a higher rate than the parents.

[chipperd]

Thanks for your helpful input bulldawg

[snowman]

+1 on everything above.

With $70K of self-employed income, you can significantly increase your tax-deductible space by opening solo 401k. I would do that ASAP, and have all new contributions go there, instead of SEP IRA.