Add to 529 to Keep Funding Taxable?

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cornellmoore
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Location: west coast

Add to 529 to Keep Funding Taxable?

Post by cornellmoore » Mon Oct 02, 2017 10:28 pm

Emergency funds = 3 Years' average household expenses
Debt: None (house/cars paid off)
Tax Filing Status: Married filing Jointly
Tax Rate: (Changes due to variable income from consulting) 2017 likely 28% Federal 9.3% State
Age(s): 49.

Special considerations:
- I have a consulting business with variable income ranging from $45K to $95+K
- Spouse is "regular" W2 employee, maxes out contributions.
- We are very risk averse (probably obvious from the #'s here)

Desired Asset allocation: 20% stocks/80% bonds (currently at desired allocation)
Liquid portfolio size: $1.56M (does not include spouse's ~$225K vested pension if taken as lump sum)
Average annual portfolio gain: $125K (based on 5 year-average)

Our Taxable Acct
08% Private equity REIT
02% Individual Stocks
10% Cash

Our Rollover IRA
05% Individual Stocks
33% VTEB (Vanguard Tax-Exempt Bond ETF) E/R 0.09%

Our Roth IRA
02% Individual Stocks
05% VTEB (Vanguard Tax-Exempt Bond ETF) E/R 0.09%

Spouse's 401K
02% Indexed to SPY (S&P 500 ETF) E/R 0.05%
33% Indexed to AGG (iShares Core US Aggregate Bond ETF) E/R 0.05%

Questions -- note: I had to update my question as my original question was wrong when I asked if we should fund retirement v. 529. We already max out retirement investments allowed each year.
1. Should we start funding child's 529 or keep funding taxable investment? We don't live in a state where 529 gives us tax advantage. Our child is now in 4th grade so we have about 8 years to save, and we don't want the kid crippled with debt burden. Ideally child would go to state school, but you never know.

2. Biggest uncertainty is healthcare if spouse gets laid off b/c family covered under spouse's employer subsidized plan. Spouse's employer has pattern of offering "voluntary retirement" for age 50+ employees and spouse is going to be 50 in a few months. How do people handle this type of uncertainty if they're >10 years from Medicare eligibility? Purchase insurance directly or go on healthcare exchange?
Last edited by cornellmoore on Tue Oct 03, 2017 11:51 am, edited 1 time in total.

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FiveK
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Re: Add to 529 to Keep Funding Retirement?

Post by FiveK » Mon Oct 02, 2017 11:17 pm

cornellmoore wrote:
Mon Oct 02, 2017 10:28 pm
1. Should we start funding child's 529 or keep funding retirement? We don't live in a state where 529 gives us tax advantage. Our child is now in 4th grade so we have about 8 years to save, and we don't want the kid crippled with debt burden. Ideally child would go to state school, but you never know.

2. Biggest uncertainty is healthcare if spouse gets laid off b/c family covered under spouse's employer subsidized plan. Spouse's employer has pattern of offering "voluntary retirement" for age 50+ employees and spouse is going to be 50 in a few months. How do people handle this type of uncertainty if they're >10 years from Medicare eligibility? Purchase insurance directly or go on healthcare exchange?
1. There is a philosophy that says "don't fund children's college funds until your own retirement funding is assured." Seems reasonable, but others may have a different perspective.

2. Does spouse's employer have a retiree medical plan?

mega317
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Re: Add to 529 to Keep Funding Retirement?

Post by mega317 » Tue Oct 03, 2017 12:15 am

I agree to fund your retirement first.

You are making a big mistake with your portfolio. Tax-exempt bonds do not belong in an IRA. I don't know if this is the best comparison but BND (the total bond index ETF) has a similar duration (6.1 years vs 5.8) and similar or better credit quality, with 25% increased yield. The dividends are not taxed in an IRA.

Edit: I did the math. Maybe not a big mistake relative to your assets but you're giving up a few thousand a year.

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mhc
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Re: Add to 529 to Keep Funding Retirement?

Post by mhc » Tue Oct 03, 2017 8:34 am

Fund your retirement first. Once that is in the bag, you can cash flow college expenses.

As the previous poster said, you don't need tax exempt bonds in an IRA. Go with a regular total bond fund.

3 years of emergency fund with your portfolio size is extremely conservative.

KlangFool
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Re: Add to 529 to Keep Funding Retirement?

Post by KlangFool » Tue Oct 03, 2017 9:22 am

OP,

1) Fund your retirement account first.

2) Do a FAFSA calculation now. Check whether there is a fighting chance for your kid to receive any financial aid. The other reason of doing (1) is putting money into 529 lower the chance of your kids receiving financial.

KlangFool

Admiral
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Re: Add to 529 to Keep Funding Retirement?

Post by Admiral » Tue Oct 03, 2017 9:43 am

I get your risk aversion but:

Your portfolio is WAY too conservative. Your five-year average gain is great but overall meaningless for a long-term investor; everyone's five- (or even nine-) year average is great. Thank you bull market.

Fully fund all retirement space before 529s. You can always use Roth IRA money for education if needed, without penalty.Agree with others that it's best to put the money into tax advantaged space and let it compound, and then (if needed) forgo a few years of retirement contributions 8 years from now.

cornellmoore
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Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Tue Oct 03, 2017 10:34 am

Thank you all for your input. Having lurked around here for years, I've learned "fund retirement first" approach. But at this point we've maxed all tax-advantaged contributions we're able to max, and we were not eligible for roth contributions for 2016. 2017 will not be a good year for back door roth conversion given our tax bracket may already be high. That's why instead of adding to the taxable, I considered opening a 529. I also expect to contribute $300/month to the 529, which is a small % of the taxable savings we can put away.

MHC: I expected the pushback re: the level of risk aversion we've displayed. Part of it may be seeing how "unforeseen" issues (such as medical) and bad investment moves (which I have for the most part avoided) had devastated close relatives' families, and that's influenced my level of conservatism.

Thank you KlangFool for suggesting doing a FAFSA, that's a good idea and will help determine whether funding even one year of a public university education makes sense. Given our current retirement/liquid portfolio is >$1M I assumed we're not eligible for much or any aid, but I may be wrong.

Thank you mega317 for doing the math on BND v VTEB. We've held various VG bonds including BND and VCLT. I can consider exchanging VTEB for BND when I break even on the VTEB prices.

FiveK: spouse's employer does not have retiree med plan and unfortunately we "missed" by a couple of years the kind of pension benefits that we only dream of today: full medical upon retirement. One option is for one of us to get full time employment that has healthcare benefits during the "gap years" to Medicare. Another option is to purchase our own healthcare depending on how the insurance market plays out in a few years.

Admiral
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Re: Add to 529 to Keep Funding Retirement?

Post by Admiral » Tue Oct 03, 2017 11:20 am

cornellmoore wrote:
Tue Oct 03, 2017 10:34 am
Thank you all for your input. Having lurked around here for years, I've learned "fund retirement first" approach. But at this point we've maxed all tax-advantaged contributions we're able to max, and we were not eligible for roth contributions for 2016. 2017 will not be a good year for back door roth conversion given our tax bracket may already be high. That's why instead of adding to the taxable, I considered opening a 529. I also expect to contribute $300/month to the 529, which is a small % of the taxable savings we can put away.

MHC: I expected the pushback re: the level of risk aversion we've displayed. Part of it may be seeing how "unforeseen" issues (such as medical) and bad investment moves (which I have for the most part avoided) had devastated close relatives' families, and that's influenced my level of conservatism.

Thank you KlangFool for suggesting doing a FAFSA, that's a good idea and will help determine whether funding even one year of a public university education makes sense. Given our current retirement/liquid portfolio is >$1M I assumed we're not eligible for much or any aid, but I may be wrong.

Thank you mega317 for doing the math on BND v VTEB. We've held various VG bonds including BND and VCLT. I can consider exchanging VTEB for BND when I break even on the VTEB prices.

FiveK: spouse's employer does not have retiree med plan and unfortunately we "missed" by a couple of years the kind of pension benefits that we only dream of today: full medical upon retirement. One option is for one of us to get full time employment that has healthcare benefits during the "gap years" to Medicare. Another option is to purchase our own healthcare depending on how the insurance market plays out in a few years.
This response is not what you posted. You asked "Should we start funding child's 529 or keep funding retirement? " That reads to me as either/or, not both. If you've maxed tax advantaged space (and don't want to do a backdoor conversion) AND you get no tax deduction for a 529 plan, then the question is: Should I invest in a taxable account or a non-deductible 529 plan that can grow tax free?

That is a more difficult question and much depends on how your taxable account funds are allocated and their tax drag, as well as whether you need the flexibility of having access to your money for non-educational expenses. That, and expense ratios in both plans.

It sounds like you have a large emergency fund, so if it were me I might still lean toward the 529 plan due to its tax-free growth.

cornellmoore
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Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Tue Oct 03, 2017 11:49 am

Admiral, you're absolutely right, I did not ask the right question.

My question should have been: Add to 529 or fund taxable account?

I'll edit the original question to prevent others from answering on my erroneous premise. My brain for some reason didn't catch the error, i.e. we already max out retirement funding every year.

Right now our taxable is in a private equity REIT (with average 9-10% returns for the last 2 years we've held it), small % individual stocks, and cash.
Last edited by cornellmoore on Tue Oct 03, 2017 11:52 am, edited 1 time in total.

Admiral
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Re: Add to 529 to Keep Funding Retirement?

Post by Admiral » Tue Oct 03, 2017 11:51 am

cornellmoore wrote:
Tue Oct 03, 2017 11:49 am


Right now our taxable is in a private equity REIT (with average 9-10% returns for the last 2 years we've held it), small % individual stocks, and cash.
Uh-oh. :shock: And the ER there is...?

10YearPlan
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Re: Add to 529 to Keep Funding Retirement?

Post by 10YearPlan » Tue Oct 03, 2017 12:00 pm

You may want to re-phrase your question because I think it reads like: Should we keep saving for retirement or add to 529? And that is not really your question, right?

Instead it sounds like you have a choice AFTER maxing available retirement options about whether to fund a taxable account for yourself or open / fund a 529. Is the amount of money we're talking about on a monthly or annual basis substantial enough to possibly do both? That is how we decided to approach it. For me, that gives us a little versatility should one or both of the kids end up not going to college, or getting a scholarship or something wonky happens with tuition or aid requirements that lowers the overall out of pocket cost. Because any of these are unlikely to happen, we also fund a 529 and my hope is we will have about 50% of state tuition costs for 4 years for two kids. We can then cash flow the rest. And hopefully not have to cease retirement contributions to do so (although that is an option and I would not have thought of it before Bogleheads).

cornellmoore
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Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Tue Oct 03, 2017 12:11 pm

Admiral wrote:
Tue Oct 03, 2017 11:51 am
cornellmoore wrote:
Tue Oct 03, 2017 11:49 am
Right now our taxable is in a private equity REIT (with average 9-10% returns for the last 2 years we've held it), small % individual stocks, and cash.
Uh-oh. :shock: And the ER there is...?
Something like:
- Receive one time acquisition fee equal to 2% of purchase price of each property purchased by company
- Receive cash distributions from operations and sale/refinancing of properties

Admiral
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Re: Add to 529 to Keep Funding Retirement?

Post by Admiral » Tue Oct 03, 2017 12:19 pm

cornellmoore wrote:
Tue Oct 03, 2017 12:11 pm
Admiral wrote:
Tue Oct 03, 2017 11:51 am
cornellmoore wrote:
Tue Oct 03, 2017 11:49 am
Right now our taxable is in a private equity REIT (with average 9-10% returns for the last 2 years we've held it), small % individual stocks, and cash.
Uh-oh. :shock: And the ER there is...?
Something like:
- Receive one time acquisition fee equal to 2% of purchase price of each property purchased by company
- Receive cash distributions from operations and sale/refinancing of properties
So, 2% per year on your invested assets?

The reason I ask is because 9-10% might sound great, but Vanguard Total stock has gotten that with minimal tax drag. REITs are very tax inefficient and result in huge tax drag in a taxable account due to their high rate of distributions. Add in a dollop of 2% ER and you're not going to find may fans of those types of funds on this board.

This is, of course, somewhat off topic. But not totally, if you're choosing between that and a 529...

cornellmoore
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Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Tue Oct 03, 2017 12:29 pm

10YearPlan wrote:
Tue Oct 03, 2017 12:00 pm
You may want to re-phrase your question because I think it reads like: Should we keep saving for retirement or add to 529? And that is not really your question, right?

Instead it sounds like you have a choice AFTER maxing available retirement options about whether to fund a taxable account for yourself or open / fund a 529. Is the amount of money we're talking about on a monthly or annual basis substantial enough to possibly do both? That is how we decided to approach it. For me, that gives us a little versatility should one or both of the kids end up not going to college, or getting a scholarship or something wonky happens with tuition or aid requirements that lowers the overall out of pocket cost. Because any of these are unlikely to happen, we also fund a 529 and my hope is we will have about 50% of state tuition costs for 4 years for two kids. We can then cash flow the rest. And hopefully not have to cease retirement contributions to do so (although that is an option and I would not have thought of it before Bogleheads).
Hi 10YearPlan, yes you're right. As Admiral pointed out, I phrased my q wrong. I blame it on cold medicine + getting a flu shot yesterday when I posted the question.

I plan to both fund 529 and taxable, but not sure what the % should be, i.e. straight 50/50 split between the 529/taxable or a 25/75 split between 529/taxable.

Right now an idea I had is to take quarterly distributions from our taxable REIT and put that into the 529. This would average ~16K/year contribution to the 529, which would end up with $128K principal to the 529 at the end of 8 years.

If I take a typical state university total tuition cost with on-campus housing (more expensive), the average is about $33K/year. A bachelor's degree would cost around $132K. My above approach could cover the investment of the kid's bachelor's degree.

cornellmoore
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Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Tue Oct 03, 2017 12:33 pm

Admiral wrote:
Tue Oct 03, 2017 12:19 pm
So, 2% per year on your invested assets?

The reason I ask is because 9-10% might sound great, but Vanguard Total stock has gotten that with minimal tax drag. REITs are very tax inefficient and result in huge tax drag in a taxable account due to their high rate of distributions. Add in a dollop of 2% ER and you're not going to find may fans of those types of funds on this board.

This is, of course, somewhat off topic. But not totally, if you're choosing between that and a 529...
No, it's 2% one time acquisition cost so technically does not equate to 2% ER (not an annual recurring cost, once a property is acquired into the fund, there is no more acquisition cost. The fees involved then are part of overall cash distributions (from operations) and sale/refinance of properties.

mega317
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Re: Add to 529 to Keep Funding Retirement?

Post by mega317 » Tue Oct 03, 2017 3:05 pm

cornellmoore wrote:
Tue Oct 03, 2017 10:34 am
I can consider exchanging VTEB for BND when I break even on the VTEB prices.
Sorry to harp on this fairly minor point but can you clarify? I can't think of one reason not to make the change now.

KlangFool
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Re: Add to 529 to Keep Funding Taxable?

Post by KlangFool » Tue Oct 03, 2017 3:12 pm

OP,

Why do you need to save for your kid's college education?

<< If I take a typical state university total tuition cost with on-campus housing (more expensive), the average is about $33K/year.>>

Which can be fully funded by your annual cash flow of dividend/distribution/savings. I see no reason why you need to save for your kid's college education.

If you do not need to save for your kid's college education, why are you putting money into the 529 plan?

Keep it simple and invest in the taxable account without 529's restriction.

KlangFool
Last edited by KlangFool on Tue Oct 03, 2017 3:13 pm, edited 1 time in total.

cornellmoore
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Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Tue Oct 03, 2017 3:13 pm

mega317 wrote:
Tue Oct 03, 2017 3:05 pm
cornellmoore wrote:
Tue Oct 03, 2017 10:34 am
I can consider exchanging VTEB for BND when I break even on the VTEB prices.
Sorry to harp on this fairly minor point but can you clarify? I can't think of one reason not to make the change now.
I bought VTEB at higher price than it is right now, so was going to wait for it to break even before selling and buying BND.

cornellmoore
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Re: Add to 529 to Keep Funding Taxable?

Post by cornellmoore » Tue Oct 03, 2017 3:15 pm

KlangFool wrote:
Tue Oct 03, 2017 3:12 pm
OP,
Why do you need to save for your kid's college education?
...because it seems like a responsible thing to do, and because if the 529 is used for educational purposes the gains could be withdrawn tax-free. That won't be the case in a taxable account.

KlangFool
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Re: Add to 529 to Keep Funding Retirement?

Post by KlangFool » Tue Oct 03, 2017 3:16 pm

cornellmoore wrote:
Tue Oct 03, 2017 3:13 pm
mega317 wrote:
Tue Oct 03, 2017 3:05 pm
cornellmoore wrote:
Tue Oct 03, 2017 10:34 am
I can consider exchanging VTEB for BND when I break even on the VTEB prices.
Sorry to harp on this fairly minor point but can you clarify? I can't think of one reason not to make the change now.
I bought VTEB at higher price than it is right now, so was going to wait for it to break even before selling and buying BND.
cornellmoore,

Why does this matter? The longer that you hold on to VTEB, you will lose more money that you could make with BND. This is a "Sunk Cost" fallacy.

https://youarenotsosmart.com/2011/03/25 ... t-fallacy/

https://en.wikipedia.org/wiki/Sunk_cost

KlangFool

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FiveK
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Re: Add to 529 to Keep Funding Retirement?

Post by FiveK » Tue Oct 03, 2017 3:19 pm

KlangFool wrote:
Tue Oct 03, 2017 3:16 pm
The longer that you hold on to VTEB, you will lose more money that you could make with BND. This is a "Sunk Cost" fallacy.
+1

See also sunk cost fallacy - Google Search for even more on this

cornellmoore
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Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Tue Oct 03, 2017 3:22 pm

FiveK wrote:
Tue Oct 03, 2017 3:19 pm
KlangFool wrote:
Tue Oct 03, 2017 3:16 pm
The longer that you hold on to VTEB, you will lose more money that you could make with BND. This is a "Sunk Cost" fallacy.
+1

See also sunk cost fallacy - Google Search for even more on this
OK I will convert VTEB to BND today.

KlangFool
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Re: Add to 529 to Keep Funding Taxable?

Post by KlangFool » Tue Oct 03, 2017 3:22 pm

cornellmoore wrote:
Tue Oct 03, 2017 3:15 pm
KlangFool wrote:
Tue Oct 03, 2017 3:12 pm
OP,
Why do you need to save for your kid's college education?
...because it seems like a responsible thing to do, and because if the 529 is used for educational purposes the gains could be withdrawn tax-free. That won't be the case in a taxable account.
cornellmoore,

<<...because it seems like a responsible thing to do,>>

It is a fallacy when your dividend/interest is more than 33K per year.

<< because if the 529 is used for educational purposes the gains could be withdrawn tax-free. That won't be the case in a taxable account.>>

Versus the tax efficiency of a taxable account and one portfolio. Your 529 portfolio would have to be invested differently because you need to use it in 8 years. Meanwhile, if your taxable account is big enough, you can pay for the tuition using the qualified dividend.

It is not as clearcut as you think.

KlangFool

KlangFool
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Re: Add to 529 to Keep Funding Retirement?

Post by KlangFool » Tue Oct 03, 2017 3:25 pm

cornellmoore wrote:
Tue Oct 03, 2017 3:22 pm
FiveK wrote:
Tue Oct 03, 2017 3:19 pm
KlangFool wrote:
Tue Oct 03, 2017 3:16 pm
The longer that you hold on to VTEB, you will lose more money that you could make with BND. This is a "Sunk Cost" fallacy.
+1

See also sunk cost fallacy - Google Search for even more on this
OK I will convert VTEB to BND today.
cornellmoore,

Do it next week. Give yourself a chance to think over and reverify the information. We are not flawless. Make sure that you understand and believe the reasoning behind that decision. Don't rush into any major decision.

KlangFool

cornellmoore
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Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Tue Oct 03, 2017 3:32 pm

KlangFool wrote:
Tue Oct 03, 2017 3:25 pm
cornellmoore wrote:
Tue Oct 03, 2017 3:22 pm
FiveK wrote:
Tue Oct 03, 2017 3:19 pm
KlangFool wrote:
Tue Oct 03, 2017 3:16 pm
The longer that you hold on to VTEB, you will lose more money that you could make with BND. This is a "Sunk Cost" fallacy.
+1

See also sunk cost fallacy - Google Search for even more on this
OK I will convert VTEB to BND today.
cornellmoore,

Do it next week. Give yourself a chance to think over and reverify the information. We are not flawless. Make sure that you understand and believe the reasoning behind that decision. Don't rush into any major decision.

KlangFool
I know BND ER is 0.05% versus VTEB 0.09%. My main reason for going with VTEB was "tax exempt' but given these are in IRAs anyway the impact may not be high enough to justify a 0.04% ER increase.

KlangFool
Posts: 6727
Joined: Sat Oct 11, 2008 12:35 pm

Re: Add to 529 to Keep Funding Retirement?

Post by KlangFool » Tue Oct 03, 2017 5:21 pm

cornellmoore wrote:
Tue Oct 03, 2017 3:32 pm
KlangFool wrote:
Tue Oct 03, 2017 3:25 pm
cornellmoore wrote:
Tue Oct 03, 2017 3:22 pm
FiveK wrote:
Tue Oct 03, 2017 3:19 pm
KlangFool wrote:
Tue Oct 03, 2017 3:16 pm
The longer that you hold on to VTEB, you will lose more money that you could make with BND. This is a "Sunk Cost" fallacy.
+1

See also sunk cost fallacy - Google Search for even more on this
OK I will convert VTEB to BND today.
cornellmoore,

Do it next week. Give yourself a chance to think over and reverify the information. We are not flawless. Make sure that you understand and believe the reasoning behind that decision. Don't rush into any major decision.

KlangFool
I know BND ER is 0.05% versus VTEB 0.09%. My main reason for going with VTEB was "tax exempt' but given these are in IRAs anyway the impact may not be high enough to justify a 0.04% ER increase.
Then, go ahead.

KlangFool

Iridium
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Re: Add to 529 to Keep Funding Retirement?

Post by Iridium » Wed Oct 04, 2017 1:49 am

cornellmoore wrote:
Tue Oct 03, 2017 3:32 pm
I know BND ER is 0.05% versus VTEB 0.09%. My main reason for going with VTEB was "tax exempt' but given these are in IRAs anyway the impact may not be high enough to justify a 0.04% ER increase.
The expense ratio difference is minuscule. The problem with keeping tax exempt bonds in an IRA is that tax exempt bonds pay less interest than taxable bonds (if they paid the same amount of interest, most people wouldn't buy taxable bonds, since their after-tax return would be lower). Since tax exempt bonds provide absolutely no tax benefit in an IRA, you might as well collect the higher interest. Current SEC yield of BND is 2.37%, while VTEB is 1.88%. Switching should increase your return pretty close to a half-percent, without any tax consequences.
cornellmoore wrote:
Tue Oct 03, 2017 3:13 pm
I bought VTEB at higher price than it is right now, so was going to wait for it to break even before selling and buying BND.
BTW, it is still extremely likely that you made money on your VTEB investment. Bond funds aren't allowed to keep the interest they earn, so they have to distribute it to you as a dividend, rather than keeping it and allowing the fund price to increase. The dividends you have been collecting from the fund should far outstrip any loss you would have taken on the price going down. Really, in bond funds, most of your return is expected to come from dividends. Which is unlike a good equity index fund, where most of your return is expected to come from price appreciation.
cornellmoore wrote:
Mon Oct 02, 2017 10:28 pm
- I have a consulting business with variable income ranging from $45K to $95+K
- Spouse is "regular" W2 employee, maxes out contributions.
Your list of assets does not list your consulting business' retirement plan. Does your consulting business have any employees? If not, may I recommend a highly generous plan? If you have no employees, 401ks can be opened for free at most brokerages. If you wanted, you can have your consulting business give you up a match of up to 25% of your pay and you can make a personal elective contribution of $18,000 on top of that. Actually, next calendar year, you'll be 50, so can make an additional $6,000 contribution on top of THAT. You can then roll your rollover IRA into your 401k and the start door backdoor Roths, for an additional $5,500 this year ($6,500 next year with catch-up contribution).

How is your wife's 401k? If it is decent, she can roll her rollover IRA into her 401k, and do a backdoor herself ($5,500 this year, $6,500 next). Also, next year, she'll be able to contribute an extra $6,000 catch-up contribution into her 401k for reaching age 50.

To me it looks like you have plenty of potential tax advantaged space if you do a small amount of planning. In your situation, I would think that Roth IRAs might be a better vehicle for college savings than 529 plans. It has the same tax benefits as 529, allows you to collect any educational tax credits that may be available to you when your child is in school (529 funds can't be used 'double-dip' for additional educational tax benefits), and maintains flexibility to use the funds for retirement instead (while shielding the assets from financial aid calculations). One piece I'm not sure of is how 529 vs Roth compares for financial aid calculation. The 529 assets are counted, but money you pull out does not count as income, whereas Roth assets don't count, but the money you pull out DOES count as income. Senior year tuition should definitely be saved in a Roth, not sure about the other years.

Admiral
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Re: Add to 529 to Keep Funding Retirement?

Post by Admiral » Wed Oct 04, 2017 8:55 am

Iridium wrote:
Wed Oct 04, 2017 1:49 am
cornellmoore wrote:
Tue Oct 03, 2017 3:32 pm
I know BND ER is 0.05% versus VTEB 0.09%. My main reason for going with VTEB was "tax exempt' but given these are in IRAs anyway the impact may not be high enough to justify a 0.04% ER increase.
The expense ratio difference is minuscule. The problem with keeping tax exempt bonds in an IRA is that tax exempt bonds pay less interest than taxable bonds (if they paid the same amount of interest, most people wouldn't buy taxable bonds, since their after-tax return would be lower). Since tax exempt bonds provide absolutely no tax benefit in an IRA, you might as well collect the higher interest. Current SEC yield of BND is 2.37%, while VTEB is 1.88%. Switching should increase your return pretty close to a half-percent, without any tax consequences.
cornellmoore wrote:
Tue Oct 03, 2017 3:13 pm
I bought VTEB at higher price than it is right now, so was going to wait for it to break even before selling and buying BND.
BTW, it is still extremely likely that you made money on your VTEB investment. Bond funds aren't allowed to keep the interest they earn, so they have to distribute it to you as a dividend, rather than keeping it and allowing the fund price to increase. The dividends you have been collecting from the fund should far outstrip any loss you would have taken on the price going down. Really, in bond funds, most of your return is expected to come from dividends. Which is unlike a good equity index fund, where most of your return is expected to come from price appreciation.
cornellmoore wrote:
Mon Oct 02, 2017 10:28 pm
- I have a consulting business with variable income ranging from $45K to $95+K
- Spouse is "regular" W2 employee, maxes out contributions.
Your list of assets does not list your consulting business' retirement plan. Does your consulting business have any employees? If not, may I recommend a highly generous plan? If you have no employees, 401ks can be opened for free at most brokerages. If you wanted, you can have your consulting business give you up a match of up to 25% of your pay and you can make a personal elective contribution of $18,000 on top of that. Actually, next calendar year, you'll be 50, so can make an additional $6,000 contribution on top of THAT. You can then roll your rollover IRA into your 401k and the start door backdoor Roths, for an additional $5,500 this year ($6,500 next year with catch-up contribution).

How is your wife's 401k? If it is decent, she can roll her rollover IRA into her 401k, and do a backdoor herself ($5,500 this year, $6,500 next). Also, next year, she'll be able to contribute an extra $6,000 catch-up contribution into her 401k for reaching age 50.

To me it looks like you have plenty of potential tax advantaged space if you do a small amount of planning. In your situation, I would think that Roth IRAs might be a better vehicle for college savings than 529 plans. It has the same tax benefits as 529, allows you to collect any educational tax credits that may be available to you when your child is in school (529 funds can't be used 'double-dip' for additional educational tax benefits), and maintains flexibility to use the funds for retirement instead (while shielding the assets from financial aid calculations). One piece I'm not sure of is how 529 vs Roth compares for financial aid calculation. The 529 assets are counted, but money you pull out does not count as income, whereas Roth assets don't count, but the money you pull out DOES count as income. Senior year tuition should definitely be saved in a Roth, not sure about the other years.
I believe if he is a sole proprietor he can open a SEP, in which case the limit is much higher.... 40k? I'd have to check, I used to have one but rolled it into my employer's plan some years ago.

I would agree with Klang that if your goal is ONLY to save enough for a public university tuition (and you're confident that the cost increases over 8 years are predictable and affordable) then you may not need the 529. And, in 8-9 years your portfolio is likely to be large enough that you can take qualified distributions (using SEPP, or from a Roth) that you could use that to pay the tuition. However, what if your child wants to attend a more expensive private college? It sounds like from your assets that you would not qualify for financial aid TODAY, much less 8 years from now (unless it's all in retirement accounts.) So personally I would not stay awake at night worrying about FAFSA forms.

KlangFool
Posts: 6727
Joined: Sat Oct 11, 2008 12:35 pm

Re: Add to 529 to Keep Funding Retirement?

Post by KlangFool » Wed Oct 04, 2017 9:11 am

Admiral wrote:
Wed Oct 04, 2017 8:55 am
It sounds like from your assets that you would not qualify for financial aid TODAY, much less 8 years from now (unless it's all in retirement accounts.) So personally I would not stay awake at night worrying about FAFSA forms.
Admiral,

https://www.fastweb.com/financial-aid/a ... ligibility

I believe retirement asset is not counted in FAFSA. And, he may early retire and stop his consulting business for a few years. So, income may not be a problem for FAFSA too. So, it is not necessarily a no-brainer.

KlangFool

Admiral
Posts: 810
Joined: Mon Oct 27, 2014 12:35 pm

Re: Add to 529 to Keep Funding Retirement?

Post by Admiral » Wed Oct 04, 2017 9:15 am

KlangFool wrote:
Wed Oct 04, 2017 9:11 am
Admiral wrote:
Wed Oct 04, 2017 8:55 am
It sounds like from your assets that you would not qualify for financial aid TODAY, much less 8 years from now (unless it's all in retirement accounts.) So personally I would not stay awake at night worrying about FAFSA forms.
Admiral,

https://www.fastweb.com/financial-aid/a ... ligibility

I believe retirement asset is not counted in FAFSA. And, he may early retire and stop his consulting business for a few years. So, income may not be a problem for FAFSA too. So, it is not necessarily a no-brainer.

KlangFool
...which is why I wrote "unless it's all in retirement accounts"!

KlangFool
Posts: 6727
Joined: Sat Oct 11, 2008 12:35 pm

Re: Add to 529 to Keep Funding Retirement?

Post by KlangFool » Wed Oct 04, 2017 9:27 am

Admiral wrote:
Wed Oct 04, 2017 9:15 am
KlangFool wrote:
Wed Oct 04, 2017 9:11 am
Admiral wrote:
Wed Oct 04, 2017 8:55 am
It sounds like from your assets that you would not qualify for financial aid TODAY, much less 8 years from now (unless it's all in retirement accounts.) So personally I would not stay awake at night worrying about FAFSA forms.
Admiral,

https://www.fastweb.com/financial-aid/a ... ligibility

I believe retirement asset is not counted in FAFSA. And, he may early retire and stop his consulting business for a few years. So, income may not be a problem for FAFSA too. So, it is not necessarily a no-brainer.

KlangFool
...which is why I wrote "unless it's all in retirement accounts"!
Sorry! My mistake.

KlangFool

cornellmoore
Posts: 18
Joined: Mon Oct 02, 2017 10:11 pm
Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Wed Oct 04, 2017 10:45 am

Iridium wrote:
Wed Oct 04, 2017 1:49 am
Your list of assets does not list your consulting business' retirement plan. Does your consulting business have any employees? If not, may I recommend a highly generous plan? If you have no employees, 401ks can be opened for free at most brokerages. If you wanted, you can have your consulting business give you up a match of up to 25% of your pay and you can make a personal elective contribution of $18,000 on top of that. Actually, next calendar year, you'll be 50, so can make an additional $6,000 contribution on top of THAT. You can then roll your rollover IRA into your 401k and the start door backdoor Roths, for an additional $5,500 this year ($6,500 next year with catch-up contribution).

How is your wife's 401k? If it is decent, she can roll her rollover IRA into her 401k, and do a backdoor herself ($5,500 this year, $6,500 next). Also, next year, she'll be able to contribute an extra $6,000 catch-up contribution into her 401k for reaching age 50.

To me it looks like you have plenty of potential tax advantaged space if you do a small amount of planning. In your situation, I would think that Roth IRAs might be a better vehicle for college savings than 529 plans. It has the same tax benefits as 529, allows you to collect any educational tax credits that may be available to you when your child is in school (529 funds can't be used 'double-dip' for additional educational tax benefits), and maintains flexibility to use the funds for retirement instead (while shielding the assets from financial aid calculations). One piece I'm not sure of is how 529 vs Roth compares for financial aid calculation. The 529 assets are counted, but money you pull out does not count as income, whereas Roth assets don't count, but the money you pull out DOES count as income. Senior year tuition should definitely be saved in a Roth, not sure about the other years.
Thank you for the info re: BND/VTEB considerations. Makes a lot of sense re: bonds primarily are for distributions v. share price increase.

My consulting business has a SEP, which I contribute annually based on earnings that year. This year I should be able to contribute more to the SEP based on 2017 earnings. I'm also looking at solo 401k as an option.

We rolled part of my wife's 401k into a rollover IRA as well as do a backdoor roth IRA conversion about 2 years ago when I anticipated my consulting income to be low that year; that conversion counted toward our taxable income for the year. The 401K has index funds with good ER (i.e. 0.05%) as long as we go with passive versus active managed funds. She already contributes max of 30% of paycheck, and we will take advantage of catch-up contribution limits as well.

Given the feedback here, and thinking about our situation, I've decided not to continue funding the 529, and instead keep funding taxable and look into SEP v. solo 401K to see if I can increase tax-advantaged contributions that way. I've looked into FAFSA, which does not account for retirement assets, but the other type of financial aid form (CSS?) may look at parents' retirement although I don't know how much gets counted.

cornellmoore
Posts: 18
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Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Wed Oct 04, 2017 10:56 am

Admiral wrote:
Wed Oct 04, 2017 8:55 am
However, what if your child wants to attend a more expensive private college? It sounds like from your assets that you would not qualify for financial aid TODAY, much less 8 years from now (unless it's all in retirement accounts.) So personally I would not stay awake at night worrying about FAFSA forms.
Right now we have about $300K in taxable and $1.25M in retirement account. So "most" in retirement but I don't like adding to that $300K taxable if there are avenues to increase tax-deferred that I haven't explored i.e. maybe worthwhile to open a solo 401K versus keeping a SEP IRA since contributions can be higher for a solo 401K.

Private college is also a possibility I dread but won't rule out, because it depends on kid's career interest down the road. Let's say (mechanical) engineering. Some majors are more "name brand"-sensitive like business or finance, but I'm not sure engineering needs to be as long as the school is a decent public school with a recognized program among regional employers. If going out of state for employment, then name brand may become important.

feehater
Posts: 21
Joined: Fri Jul 14, 2017 10:14 am

Re: Add to 529 to Keep Funding Taxable?

Post by feehater » Wed Oct 04, 2017 1:20 pm

Yes, contribution limits should definitely be higher for a solo 401k. Typically a similar amount to what you're currently allowed to put in your SEP will be called your employER contribution, and then an additional 18k will be allowed as your employEE contribution. Just be make sure to do the research into it as there are rules against contributing to a SEP at at the same time as an SE401k, and the contribution calculations can sometimes be a little tricky. If you search the forum there are lots of good explanations about these things, by people like Spirit Rider.

ryman554
Posts: 750
Joined: Sun Jan 12, 2014 9:44 pm

Re: Add to 529 to Keep Funding Retirement?

Post by ryman554 » Wed Oct 04, 2017 1:32 pm

cornellmoore wrote:
Tue Oct 03, 2017 3:32 pm
I know BND ER is 0.05% versus VTEB 0.09%. My main reason for going with VTEB was "tax exempt' but given these are in IRAs anyway the impact may not be high enough to justify a 0.04% ER increase.
I am late to this game, but unfortunately, this statement speaks volumes.

Not only is your impact not high enough, the impact is exactly zero. Do you understand why? If not, you need to do some reading to understand why.

Note also, that making decisions based on 0.04% is making decisions based on a rounding error. Do you understand why? Compute the difference on $100k invested.

My gut feeling is that you know enough to be dangerous. This is not a bad thing, in and of itself, because you have learned a lot, but it means you are at a point in your investing life where you are trying to get a bit too cute with your plan because you have just enough knowledge to know all the different things out there without really having the wisdom to use all these different things properly. My advice to you is to hold on and step back and revisit your entire plan.

What are your goals?
What is your risk tolerance (you indicated very low)?
Figure out a way to keep everything simple, don't chase yield, and create a "set and forget" portfolio.

Once you have the portfolio you want, *then* figure out how to efficiently place your desired assets to meat each of your goals.

cornellmoore
Posts: 18
Joined: Mon Oct 02, 2017 10:11 pm
Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Wed Oct 04, 2017 2:16 pm

ryman554 wrote:
Wed Oct 04, 2017 1:32 pm
My gut feeling is that you know enough to be dangerous.
You hit the nail on the head!

Since the prior comments occurred after the trading day ended, I was saved by the ability of undoing (deleting) sell orders until I revisit our entire plan. We have met our desired allocation % and I was messing around the details i.e. which bond ETF to choose, which may not be necessary at this point.
ryman554 wrote:
Wed Oct 04, 2017 1:32 pm
What are your goals?
What is your risk tolerance (you indicated very low)?
Figure out a way to keep everything simple, don't chase yield, and create a "set and forget" portfolio.

Once you have the portfolio you want, *then* figure out how to efficiently place your desired assets to meat each of your goals.
Main goal: (1)increase amount I can save to my retirement account, which is much lower compared with my spouse's retirement and (2) optimize tax bracket using tax-advantaged options available to us. Yes, ultimately our retirement accounts will be seen as "our combined" account, but being a 1099-MISC earner means I've lost out on tax deferred savings to "my" retirement account (I'm quirky that way). I have also put big chunks of $ to pay off the house, which had been our #1 household expense and poses a risk if spouse loses stable job.

A new item that came up, which I haven't thought of, but am checking into, is opening a solo 401K instead of sticking with a SEP IRA. This allows me to contribute much more during years when my business made more, versus what I'm allowed under a SEP.

I can then focus on increasing the tax-advantaged bucket, versus messing with the growing taxable bucket.
Last edited by cornellmoore on Wed Oct 04, 2017 2:23 pm, edited 2 times in total.

cornellmoore
Posts: 18
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Location: west coast

Re: Add to 529 to Keep Funding Taxable?

Post by cornellmoore » Wed Oct 04, 2017 2:22 pm

feehater wrote:
Wed Oct 04, 2017 1:20 pm
Yes, contribution limits should definitely be higher for a solo 401k. Typically a similar amount to what you're currently allowed to put in your SEP will be called your employER contribution, and then an additional 18k will be allowed as your employEE contribution. Just be make sure to do the research into it as there are rules against contributing to a SEP at at the same time as an SE401k, and the contribution calculations can sometimes be a little tricky. If you search the forum there are lots of good explanations about these things, by people like Spirit Rider.
Thank you for that tip! I will check into those posts.
For sure once I open a SE401K I won't contribute to SEP and risk IRS wrath.

ryman554
Posts: 750
Joined: Sun Jan 12, 2014 9:44 pm

Re: Add to 529 to Keep Funding Retirement?

Post by ryman554 » Wed Oct 04, 2017 3:00 pm

cornellmoore wrote:
Wed Oct 04, 2017 2:16 pm
ryman554 wrote:
Wed Oct 04, 2017 1:32 pm
My gut feeling is that you know enough to be dangerous.
You hit the nail on the head!

Main goal: (1)increase amount I can save to my retirement account, which is much lower compared with my spouse's retirement and (2) optimize tax bracket using tax-advantaged options available to us.

...
That is not a goal. That is an implementation detail that you can get to later.

*What* do you need your investment money for? Do you have a general idea *how much* you need? What is your timeframe? Given that, you should be able to figure out *how much* you need to save, and over what timeframe and what you need to trade-off on.

(saving for a down payment for a house is different than saving for a car is different than saving for kid's college is different than saving to supplement SocSecurity/pensions, is different from retiring by 50 is different from making your side-gig your main focus is different from.....)

Don't do anything now.
Prioritize your plan.
Look at your existing assets
Then we can help you get there.

cornellmoore
Posts: 18
Joined: Mon Oct 02, 2017 10:11 pm
Location: west coast

Re: Add to 529 to Keep Funding Retirement?

Post by cornellmoore » Wed Oct 04, 2017 6:50 pm

ryman554 wrote:
Wed Oct 04, 2017 3:00 pm
*What* do you need your investment money for? Do you have a general idea *how much* you need? What is your timeframe? Given that, you should be able to figure out *how much* you need to save, and over what timeframe and what you need to trade-off on.

(saving for a down payment for a house is different than saving for a car is different than saving for kid's college is different than saving to supplement SocSecurity/pensions, is different from retiring by 50 is different from making your side-gig your main focus is different from.....)

Don't do anything now.
Prioritize your plan.
Look at your existing assets
Then we can help you get there.
You got me.

We don't "need" our investment money for anything at the moment. We don't have an overwhelming urge to remodel our house (built in the early 90s so not quite updated kitchen/bath but things are functional). We've lived in this house for about 12 years and don't plan on moving or selling for at least another 10 years. Maybe we will need to address termite/subterranean termite issue that probably exists, but we'd have enough $ on hand for that.

We're not looking to take major vacations or trips in the near future. We live a really boring life, which is a blessing in its own way.

Hence, I started looking at funding kid's college education.

P.S. OK maybe a goal can be "funding for early retirement in case spouse gets laid off in the next 3 years"? Main uncertainty would be healthcare costs and loss of 50% household income. But this is also why we have 3+ years of annual household budget already saved up as "emergency" fund.

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