529 or not 529?

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Topic Author
loklav
Posts: 146
Joined: Fri Nov 10, 2017 11:39 pm

529 or not 529?

Post by loklav »

Hi,

This year I decided to seriously start investing! And thanks to this forum I'm sure I will take the best decisions!

I currently changed job, and so I will have access to a new 401k. I did the mistake to rollover my previous employer 401k into a tIRA, but soon I will rollover again everything in my employer 401k. Apart from that I don't have in Roth IRA or 529 or taxable account..

So to sum up:
Filling status: married filling jointed
Tax bracket : 28%
State : CA
New employer 401k : $0 ( I will know more about it soon)
rollover tIRA : 50K
MAGI : > 200K
Emergency fund : $100K (1.3%)
Mortgage : $600K (remaining), 3.75% , 30 years : but I add $1000 to the "expected" monthly payment.
Age : 41, spouse: 38
Legal status: permanent resident (green card)

My question is more about where to save my money: I can currently probably save 5-6K per month, I maxxout my 401K and I pay the additional $1000 for my mortgage.

I was planning, to reallocate one part of this money to fund 2 backdoor rIRA for my wife and I.
But one of my daughter is 15 years old, and I don't have any 529 for her.

So please, what would you advise? I will be on track with my retirement plans soon. But what could I do for my daughter's college? I'm sure I can do best than saving on my regular saving account (Barclays 1.3%).

But I don't know if opening a 529 account is a good option for her because:
- we are not yet US citizen, so she could potentially go study in a different country
- college is only in less than 3 years, so may be it's already too late?
- what kind of investments: aggressive or not?

Should I try to invest in IBonds or CD or something else instead?

I will create a different post to get advises for my retirement funds, but don't hesitate to give me any advises non related to saving for college...

Loklav
Last edited by loklav on Sat Nov 18, 2017 7:05 pm, edited 1 time in total.
Bacchus01
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Re: 529 or not 529?

Post by Bacchus01 »

Is there a state tax benefit in CA?

Don’t think about it as in 3 years. What if you could save for her 4th or 5th year, which is 7-8 years away. Does that change your thoughts?

Lastly, why are you paying extra on your mortgage?
katnok
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Re: 529 or not 529?

Post by katnok »

loklav wrote: Sat Nov 18, 2017 6:48 pm
- we are not yet US citizen, so she could potentially go study in a different country

She does not have to be a citizen. As long as she is a permanent resident, she should be fine.

What's her current status? H4 or a legal permanent resident?
KlangFool
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Re: 529 or not 529?

Post by KlangFool »

OP,

How old are you?

KlangFool
Topic Author
loklav
Posts: 146
Joined: Fri Nov 10, 2017 11:39 pm

Re: 529 or not 529?

Post by loklav »

Bacchus01 wrote: Sat Nov 18, 2017 6:54 pm Is there a state tax benefit in CA?

Don’t think about it as in 3 years. What if you could save for her 4th or 5th year, which is 7-8 years away. Does that change your thoughts?
I don't know about state tax benefit.... are you talking about https://www.irs.gov/taxtopics/tc457 (http://www.taxes.ca.gov/income_tax/cred ... ions.shtml) ?

but what if she decides to go study in a different country? Will I have to pay some penalties because it could not be considered as US college studies...
Why is it relevant CA state tax benefit? I though I could open a 529 in any state and use it to study in a different state too... ? Sorry but I don't know really how a 529 works...

You are right about not using the 529 for the first years... But in this case, where should I saved for the first years?
Bacchus01 wrote: Sat Nov 18, 2017 6:54 pm Lastly, why are you paying extra on your mortgage?
I'm paying an extra because I want to be done with this mortgage as soon as possible... But may be it's not the best thing to do now, and I could invest in something with a rate > 3.75% ... This is exactly these kind of advises that I'm looking for... :)
Last edited by loklav on Sat Nov 18, 2017 7:21 pm, edited 1 time in total.
Topic Author
loklav
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Re: 529 or not 529?

Post by loklav »

katnok wrote: Sat Nov 18, 2017 6:56 pm
loklav wrote: Sat Nov 18, 2017 6:48 pm
- we are not yet US citizen, so she could potentially go study in a different country

She does not have to be a citizen. As long as she is a permanent resident, she should be fine.

What's her current status? H4 or a legal permanent resident?
My point is that she could decide to go study in a different country even if she could stay here.... This is an option totally possible in her case. 50/50
we have a green card, and we can get the citizenship in 3 years...
Last edited by loklav on Sat Nov 18, 2017 7:17 pm, edited 1 time in total.
Topic Author
loklav
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Re: 529 or not 529?

Post by loklav »

KlangFool wrote: Sat Nov 18, 2017 7:02 pm OP,

How old are you?

KlangFool
41, my wife is 38 ( I will add these info to the main post)
kaneohe
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Re: 529 or not 529?

Post by kaneohe »

Bacchus01 wrote: Sat Nov 18, 2017 6:54 pm Is there a state tax benefit in CA?

....................................
no tax benefit for contributing to 529 in CA.
Topic Author
loklav
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Re: 529 or not 529?

Post by loklav »

kaneohe wrote: Sat Nov 18, 2017 7:32 pm
Bacchus01 wrote: Sat Nov 18, 2017 6:54 pm Is there a state tax benefit in CA?

....................................
no tax benefit for contributing to 529 in CA.
So does it mean that a 529 for me is equivalent to a rIRA if I use it for education purpose ? Except that I can save more?
Does it makes sense in my situation?
What other solution can I use for the first college's years?

Thx
veindoc
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Re: 529 or not 529?

Post by veindoc »

I would just pay cash for her school. Some schools allow you to pay monthly for a small nominal fee if that works better for your finances.

What are the ages of the other children? You could start a 529 for them. If you do decide to open a 529 for the 15 year old I would start a separate fund for each child particularly if they will overlap in school. After you’ve allowed the contributions to grow you could opt to use the funds for her 3rd or 4th year.

Another thing to consider you may not have enough to pay for college. You state you can save 5-6k/month. $60k per year is the going tuition for a private university. Leaves very little room for anything else. She should consider an instate college.

My last point, if your daughter is a permanent resident she can b a citizen now. Only adults >18 years have to wait two years before applying for citizenship. Check with an immigration attorney. If permanent citizens can take out federal loans then may not be an issue.
Topic Author
loklav
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Re: 529 or not 529?

Post by loklav »

mrsytf wrote: Sun Nov 19, 2017 12:06 pm I would just pay cash for her school. Some schools allow you to pay monthly for a small nominal fee if that works better for your finances.
What does it mean? If I don't use a 529 to pay for her tuition, I will have to pay some additional fees??
mrsytf wrote: Sun Nov 19, 2017 12:06 pm What are the ages of the other children? You could start a 529 for them. If you do decide to open a 529 for the 15 year old I would start a separate fund for each child particularly if they will overlap in school. After you’ve allowed the contributions to grow you could opt to use the funds for her 3rd or 4th year.
yes I though about that too.. with have twins, 8 yeas old
mrsytf wrote: Sun Nov 19, 2017 12:06 pm Another thing to consider you may not have enough to pay for college. You state you can save 5-6k/month. $60k per year is the going tuition for a private university. Leaves very little room for anything else. She should consider an instate college.

My last point, if your daughter is a permanent resident she can b a citizen now. Only adults >18 years have to wait two years before applying for citizenship. Check with an immigration attorney. If permanent citizens can take out federal loans then may not be an issue.
Are you sure about this last point? I did not see anything about a minor that can get the citizenship before the parent.. And for us, we have to wait 5 years after getting the green card.
Jack FFR1846
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Re: 529 or not 529?

Post by Jack FFR1846 »

Print out a FAFSA form and fill it out. It helps a lot to understand it and what goes into your expected family contribution. It can help you to understand if you have any chance for aid. If you're considering state college, paying off your mortgage and taking out a HELOC is a great strategy. Less so with private colleges who often look at everything.
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teen persuasion
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Re: 529 or not 529?

Post by teen persuasion »

loklav wrote: Sun Nov 19, 2017 12:19 pm
mrsytf wrote: Sun Nov 19, 2017 12:06 pm I would just pay cash for her school. Some schools allow you to pay monthly for a small nominal fee if that works better for your finances.
What does it mean? If I don't use a 529 to pay for her tuition, I will have to pay some additional fees??
I believe mrsytf is referring to cash flow. Colleges expect you to pay an entire semester's bills upfront before the semester begins. So that's tuition, fees, room rent and the semester meal plan. If the school's annual cost is $26k, that means $13k due in August before classes begin. Some schools sponsor a payment plan: for a fee, you can spread payments out monthly. It costs a bit more in total, but it allows you to fund out of your income, if you haven't saved up the whole first chunk.

You said you didn't fully understand 529 accounts. They are a bit like retirement accounts, but for college expenses. You can put money in ahead of time, taxes are deferred on growth while in the account, and there are strict rules on withdrawing the funds or you face penalties. The big difference is that many retirement accounts save you on federal taxes, and usually state taxes, for contributing. For 529s there is no federal tax break for contributing, and only some states have a state income tax break for contributions. So the biggest advantage is the tax break on growth while funds are in the account. The longer they are in the account, the longer they have to grow (hopefully) without a tax drag.

You always have the option to save in taxable accounts, or even savings accounts. You also have the option to pay cash for college expenses, from said savings or from your income, if it is great enough.
Topic Author
loklav
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Re: 529 or not 529?

Post by loklav »

teen persuasion wrote: Sun Nov 19, 2017 8:54 pm
loklav wrote: Sun Nov 19, 2017 12:19 pm
mrsytf wrote: Sun Nov 19, 2017 12:06 pm I would just pay cash for her school. Some schools allow you to pay monthly for a small nominal fee if that works better for your finances.
What does it mean? If I don't use a 529 to pay for her tuition, I will have to pay some additional fees??
I believe mrsytf is referring to cash flow. Colleges expect you to pay an entire semester's bills upfront before the semester begins. So that's tuition, fees, room rent and the semester meal plan. If the school's annual cost is $26k, that means $13k due in August before classes begin. Some schools sponsor a payment plan: for a fee, you can spread payments out monthly. It costs a bit more in total, but it allows you to fund out of your income, if you haven't saved up the whole first chunk.

You said you didn't fully understand 529 accounts. They are a bit like retirement accounts, but for college expenses. You can put money in ahead of time, taxes are deferred on growth while in the account, and there are strict rules on withdrawing the funds or you face penalties. The big difference is that many retirement accounts save you on federal taxes, and usually state taxes, for contributing. For 529s there is no federal tax break for contributing, and only some states have a state income tax break for contributions. So the biggest advantage is the tax break on growth while funds are in the account. The longer they are in the account, the longer they have to grow (hopefully) without a tax drag.

You always have the option to save in taxable accounts, or even savings accounts. You also have the option to pay cash for college expenses, from said savings or from your income, if it is great enough.
Ok, it all makes sense...
Since I live in CA, I won't have any tax break on the contributions. So as you said, the biggest advantage is the tax break on growth.
What could be an expected growth rate? If she is not going to a college where a 529 can be used, I will have to pay penalties to have access to this money to do something else... These penalties could they counterbalance the hypothetical growth...? Well, I suppose you won't be able to answer this question .. :)

Let say that I decide not to use a 529, where can I save my money to let it grow... Something better than a saving plan at 1.3%. I'm already using the Roth IRA.
Some IBonds?

Thanks
Topic Author
loklav
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Re: 529 or not 529?

Post by loklav »

any new advice?
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ray.james
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Re: 529 or not 529?

Post by ray.james »

If I were in your shoes, I would execute slightly differently. There are student loans and FAFSA for kids. Whatever, I would max your 401k and roth ira like you are planning to do. I would not overpay for mortgage. Paying 1k is good long term but it will still take a lot of good years few years before you can finish the payments especially since you are planning to fund kids.

For education, I would contribute to 529 in moderate risk funds or 50- 60% stock fund, 40% bond portion. In 3 years when she heads to college if you had good gains, use the 529 for her. However market dropping off is a risk . In that case cash flow her from current(and bond portion) and let the 529 ride along for the next kids in 10 years. The gains will be substantial then and will be put to good use for either of the twins. On an off chance very possible risk of job loss and deep recession with market loses, she can take a loan for now and you can help her in future once your finances come back.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
Topic Author
loklav
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Re: 529 or not 529?

Post by loklav »

ray.james wrote: Mon Nov 20, 2017 3:11 pm If I were in your shoes, I would execute slightly differently. There are student loans and FAFSA for kids. Whatever, I would max your 401k and roth ira like you are planning to do. I would not overpay for mortgage. Paying 1k is good long term but it will still take a lot of good years few years before you can finish the payments especially since you are planning to fund kids.

For education, I would contribute to 529 in moderate risk funds or 50- 60% stock fund, 40% bond portion. In 3 years when she heads to college if you had good gains, use the 529 for her. However market dropping off is a risk . In that case cash flow her from current(and bond portion) and let the 529 ride along for the next kids in 10 years. The gains will be substantial then and will be put to good use for either of the twins. On an off chance very possible risk of job loss and deep recession with market loses, she can take a loan for now and you can help her in future once your finances come back.
Ok Thank you for your advices.
What if I contribute only partially to a 529? Let say I can fund it now with $20K, and then add less than $1000 per month... This way in 3 years, I will have enough for one year but not more.

The advantage is that if I can not use the fund for her (any reason), I will have two options: pay penalties on a small amount (50K) to use it for something else or let it grow for the twins.
Independently, I need to save money for her studies, somewhere else. Roth IRAs is limited to 2*5500 per year. So where would you save this extra money?

Because, even if I stop overpaying for my mortgage, I still need to find a place where I could save this money for college... And something safe. (note that in this case, I could take more risk with the 529 since it would represent only 1 year of college's savings)
harvestbook
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Re: 529 or not 529?

Post by harvestbook »

I like the plan of starting one mostly with the idea of using it for the later kids. That way you can be a little more aggressive since you won't be forced into using it even if the market takes a downturn. My daughter starts next year and it's 60 percent stocks/40 percent bonds, but I quit adding to it since the date is so near. Given the risk, a 1.3 percent bank account is a good choice, too. As much as I hate debt, I'd still probably put off the extra mortgage payments until you had a better handle on the college choice and costs and just keep it in the bank (after maxing your retirement accounts.)
I'm not smart enough to know, and I can't afford to guess.
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ray.james
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Re: 529 or not 529?

Post by ray.james »

loklav wrote: Mon Nov 20, 2017 4:21 pm So where would you save this extra money?
In a brokerage account/Taxable account. If she chose to study in foreign country where tuition/college fee is much less, you can use the funds to pay down mortgage. this is indeed a flexible option than 529. You can choose all 529 or taxable or just go 50-50 for flexibility.

As the risk profile goes -
short term bonds < medium/10 year treasury (or I bonds) < high quality corporate bonds < total market stock funds < riskier funds/individual stocks. Pick a ratio/investments that are comfortable to you.


Also, let me explain what I meant by cash flow during market downturns. You mentioned you can save 5-6K. Assuming 1k for Roth through the year, that is still 4.5K solid savings per month ~=50K. This/partial amount will go to pay the college of the kid.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
Topic Author
loklav
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Re: 529 or not 529?

Post by loklav »

ray.james wrote: Mon Nov 20, 2017 5:17 pm
loklav wrote: Mon Nov 20, 2017 4:21 pm So where would you save this extra money?
In a brokerage account/Taxable account. If she chose to study in foreign country where tuition/college fee is much less, you can use the funds to pay down mortgage. this is indeed a flexible option than 529. You can choose all 529 or taxable or just go 50-50 for flexibility.
The more I think about, the less I'm convinced than a 529 is good for her...
Considering that we are in CA, the only advantage is the tax break on growth.
But considering the timeline, and that she could potentially not use it and the limited funds option I suppose, this is lot of cons ...
ray.james wrote: Mon Nov 20, 2017 5:17 pm
As the risk profile goes -
short term bonds < medium/10 year treasury (or I bonds) < high quality corporate bonds < total market stock funds < riskier funds/individual stocks. Pick a ratio/investments that are comfortable to you.


Also, let me explain what I meant by cash flow during market downturns. You mentioned you can save 5-6K. Assuming 1k for Roth through the year, that is still 4.5K solid savings per month ~=50K. This/partial amount will go to pay the college of the kid.
In this case may be in the short term (3 years) the best option is a mix between something safe like IBonds and a taxable account. IBonds are still better than my high saving account and available after 1 year (can anybody buy IBnds?)... 50/50 as you suggested.
And in the brokerage account, I would have 30/70 (bonds/stocks)? A 3 fund portfolio like VTI/VXUS/BND ?

Well, I would have liked to be able to use some tax-advantaged solution but looks like there is not...
Actually it

For the twins, I will look at it in 2 years... when we will have more clarity...
wasaver
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Re: 529 or not 529?

Post by wasaver »

I would be more concerned about retirement than 529 or mortgage pre-payment. Can't you save more in retirement accounts? mega-backdoor 401k, Roth IRA, HSA,
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LiveSimple
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Re: 529 or not 529?

Post by LiveSimple »

Do not think 529 will pan out well for your situation.

Too less time, many decisions to make.

Cash is the king
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