Funding 529s and retirement from taxable investment accounts

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Iowa David
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Joined: Mon Dec 18, 2017 9:53 pm

Funding 529s and retirement from taxable investment accounts

Post by Iowa David » Sun Jan 14, 2018 9:24 am

Every year my wife and I make an annual contribution to our children's 529 and our individual Roth IRAs.

In the past we've been able to fund these with savings, while still keeping our emergency savings amount intact.

This year will be different and my question is should we liquidate any of our taxable investment accounts to help fund the 529s and Roth IRAs?

This does not seem like a tax efficient way of doing things so I am looking for guidance. I'm sure there may be other details needed so please let me know and thanks in advance for the input.
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

kaneohe
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Re: Funding 529s and retirement from taxable investment accounts

Post by kaneohe » Sun Jan 14, 2018 9:37 am

If you have a taxable acct w/ little gain, seems like it would be more tax-efficient to put in a more tax-efficient account. Both taxable and
Roth/529 get no tax breaks for the contribution. However after that, both Roth/529 aren't taxed on withdrawals (if rules followed) while taxable is taxed on CGs.

If you have large CGs in taxable that you will be taxed on if liquidated, you'd have to take that into account in making decision.

noco-hawkeye
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Re: Funding 529s and retirement from taxable investment accounts

Post by noco-hawkeye » Sun Jan 14, 2018 10:01 am

I agree with kaneohe above.

My other question would be - what are these assets currently earmarked for? Is you taxable account going to be used for <anything>? My taxable is really part of my retirement savings, and if I took from my retirement savings to go into a 529 I would need to then make that up in some other way.

miamivice
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Re: Funding 529s and retirement from taxable investment accounts

Post by miamivice » Sun Jan 14, 2018 10:17 am

Iowa David wrote:
Sun Jan 14, 2018 9:24 am
Every year my wife and I make an annual contribution to our children's 529 and our individual Roth IRAs.

In the past we've been able to fund these with savings, while still keeping our emergency savings amount intact.

This year will be different and my question is should we liquidate any of our taxable investment accounts to help fund the 529s and Roth IRAs?

This does not seem like a tax efficient way of doing things so I am looking for guidance. I'm sure there may be other details needed so please let me know and thanks in advance for the input.
Whether this is a good idea is based largely on how many years you have until your kids are college age, and how much you expect the 529 money to grow (based in large part on how aggressively you invest, considering your desire to not liqudate the 529 money when the market is down).

I really can't give good advice without that information.

livesoft
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Re: Funding 529s and retirement from taxable investment accounts

Post by livesoft » Sun Jan 14, 2018 10:22 am

While we have used 529 plans, our income is low enough to use the education tax credits by paying non-529 money for some of college tuition. Those are described in IRS publication 970 which everyone who intends to help pay for someone's college should read. Example: Pay $4,000 and get $2,500 back. That's a huge return on one's money and is free from the Federal Government. (Or at least other taxpayers help pay for your children's college education.)

We routinely sell shares held in a taxable account and use the money to contribute to our Roth IRAs. I recommend it.
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Train2bogle
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Re: Funding 529s and retirement from taxable investment accounts

Post by Train2bogle » Sun Jan 14, 2018 10:43 am

I am in a similar boat as OP, so I’m curious about the responses.

So far I’ve funded one Roth IRA. To do this, I transferred $5500 from my emergency cash (what little amount I had left) to my Roth IRA.

Then I sold $5500 of fidelity total market index (FSTVX) from my taxable with a ~$1200 long term capital gain (I will easily be in the 12% tax bracket this year and this long term capital gain should be taxed at 0%.)

Simultaneously I purchased $5500 of FSTVX in my Roth IRA.

Then when the funds became available, I withdrew $5500 from taxable to replenish my emergency cash.

If your tax situation is similar, perhaps this strategy makes sense.

staythecourse
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Re: Funding 529s and retirement from taxable investment accounts

Post by staythecourse » Sun Jan 14, 2018 10:50 am

Interesting question.

If the capital gains tax is nil or low I would not miss liquidating and putting into at least the IRA. If you want to do the same with 529 that is up to you, but keep in mind YOUR retirement is first, second, third, etc... vs. paying for kids education.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Iowa David
Posts: 47
Joined: Mon Dec 18, 2017 9:53 pm

Re: Funding 529s and retirement from taxable investment accounts

Post by Iowa David » Sun Jan 14, 2018 1:29 pm

miamivice wrote:
Sun Jan 14, 2018 10:17 am
Iowa David wrote:
Sun Jan 14, 2018 9:24 am
Every year my wife and I make an annual contribution to our children's 529 and our individual Roth IRAs.

In the past we've been able to fund these with savings, while still keeping our emergency savings amount intact.

This year will be different and my question is should we liquidate any of our taxable investment accounts to help fund the 529s and Roth IRAs?

This does not seem like a tax efficient way of doing things so I am looking for guidance. I'm sure there may be other details needed so please let me know and thanks in advance for the input.
Whether this is a good idea is based largely on how many years you have until your kids are college age, and how much you expect the 529 money to grow (based in large part on how aggressively you invest, considering your desire to not liqudate the 529 money when the market is down).

I really can't give good advice without that information.
We expect the kids entering college in the Fall of 2028, 2030 and 2034 respectively.

We are contributing to our tax-advantaged retirement accounts, although not currently at the $18,000/year limit.

The taxable accounts aren't necessarily earmarked for retirement, but they are in place to provide some buffer if we don't have the savings in place to cover expenses like this. We've never made a withdrawal from the taxable accounts so haven't experience dealing with capital gains & taxes.
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

miamivice
Posts: 961
Joined: Tue Jun 11, 2013 11:46 am

Re: Funding 529s and retirement from taxable investment accounts

Post by miamivice » Mon Jan 15, 2018 10:13 am

Iowa David wrote:
Sun Jan 14, 2018 1:29 pm
miamivice wrote:
Sun Jan 14, 2018 10:17 am
Iowa David wrote:
Sun Jan 14, 2018 9:24 am
Every year my wife and I make an annual contribution to our children's 529 and our individual Roth IRAs.

In the past we've been able to fund these with savings, while still keeping our emergency savings amount intact.

This year will be different and my question is should we liquidate any of our taxable investment accounts to help fund the 529s and Roth IRAs?

This does not seem like a tax efficient way of doing things so I am looking for guidance. I'm sure there may be other details needed so please let me know and thanks in advance for the input.
Whether this is a good idea is based largely on how many years you have until your kids are college age, and how much you expect the 529 money to grow (based in large part on how aggressively you invest, considering your desire to not liqudate the 529 money when the market is down).

I really can't give good advice without that information.
We expect the kids entering college in the Fall of 2028, 2030 and 2034 respectively.

We are contributing to our tax-advantaged retirement accounts, although not currently at the $18,000/year limit.

The taxable accounts aren't necessarily earmarked for retirement, but they are in place to provide some buffer if we don't have the savings in place to cover expenses like this. We've never made a withdrawal from the taxable accounts so haven't experience dealing with capital gains & taxes.
I would recommend liquidating some taxable funds to fund a 529. You will have to pay taxes today but any future gains will be tax free, as long as you use the money for qualified educational expenses (i.e., your kids go to college). Your tax hit on your taxable liqudation will be small (15% on gains) so it shouldn't be too expensive.

Be careful not to overfund your 529, as any extra that isn't used for education you have to pay ordinary income tax plus penalty on.

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DaftInvestor
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Re: Funding 529s and retirement from taxable investment accounts

Post by DaftInvestor » Mon Jan 15, 2018 3:43 pm

miamivice wrote:
Mon Jan 15, 2018 10:13 am
Be careful not to overfund your 529, as any extra that isn't used for education you have to pay ordinary income tax plus penalty on.
Just to be clear (I'm sure this is what miamivice meant but a lot of people think there are huge penalties with the FULL account balance) statement above could be clarified as follows:
Be careful not to overfund your 529, as any extra that isn't used for education you have to pay ordinary income tax plus penalty on its growth.

You don't pay taxes or penalties on the balance if overfunded - just on the growth. If you overfund slightly and have to pay 10% extra tax on the GROWTH of whatever remains in the account it may not amount to very much (especially as compared to all the taxes you have saved by allowing all the rest of the money in your 529 having grown tax free for 18+ years).

Getting back to OPs question:
I would take from taxable to fund a 529 - if you plan on using that money for education anyway - why not convert the growth to tax-free growth as soon as you can? (Provided you aren't hurting your retirement savings plan and have ample emergency savings).

miamivice
Posts: 961
Joined: Tue Jun 11, 2013 11:46 am

Re: Funding 529s and retirement from taxable investment accounts

Post by miamivice » Mon Jan 15, 2018 9:26 pm

DaftInvestor wrote:
Mon Jan 15, 2018 3:43 pm
miamivice wrote:
Mon Jan 15, 2018 10:13 am
Be careful not to overfund your 529, as any extra that isn't used for education you have to pay ordinary income tax plus penalty on.
Just to be clear (I'm sure this is what miamivice meant but a lot of people think there are huge penalties with the FULL account balance) statement above could be clarified as follows:
Be careful not to overfund your 529, as any extra that isn't used for education you have to pay ordinary income tax plus penalty on its growth.

You don't pay taxes or penalties on the balance if overfunded - just on the growth. If you overfund slightly and have to pay 10% extra tax on the GROWTH of whatever remains in the account it may not amount to very much (especially as compared to all the taxes you have saved by allowing all the rest of the money in your 529 having grown tax free for 18+ years).

Getting back to OPs question:
I would take from taxable to fund a 529 - if you plan on using that money for education anyway - why not convert the growth to tax-free growth as soon as you can? (Provided you aren't hurting your retirement savings plan and have ample emergency savings).
Yeah it's what I meant.

One always writes from one's perspective. For me, since I massively superfunded 529s when my children were born, they have tripled in value so far and will continue to rise, so probably about 80 or 90% of the value will be in growth rather contributions, so for planning purposes I just assume its 100% growth for my case.

honduranhurricane
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Location: boston, ma

Re: Funding 529s and retirement from taxable investment accounts

Post by honduranhurricane » Tue Jan 16, 2018 9:00 pm

Just to make sure I get this. The limits on the 529 are for funding only. If the 529 grows beyond limit it can all still be used for education (grad school etc..) or beneficiary switch.. the limit just prevents further funding, correct?

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