529 vs. student loans vs. taxable account
529 vs. student loans vs. taxable account
First time poster here. We've finally reached the point where we have an e-fund, are maxing available retirement vehicles, and have some money left over each month. We are trying to decide what to do with the money we have left over.
Details:
37 and 40
6 months of expenses in an emergency fund
1.6x salary in retirement (we both have advanced degrees and therefore got a late start, plus recent salary growth)
Maxing 2 401ks. 5% and 7.5% matches
Not Roth eligible and not really interested in backdoor Roth gymnastics
$28k in student loans at 3.9%
2 children, 1 and 3
Currently contribute $100/month/kid to a 529
Live in a state with a 529 tax deduction
Will almost certainly not qualify for financial aid
Have about $30k per year cash flow to do something with
It seems the choices are to pay off the student loans, fund the kids' 529s, or invest in a taxable account. I think the 529 makes the most sense mathematically, but I am hesitating. It seems like given we are behind on retirement, the flexibility of a taxable account might be better.
Thoughts?
Details:
37 and 40
6 months of expenses in an emergency fund
1.6x salary in retirement (we both have advanced degrees and therefore got a late start, plus recent salary growth)
Maxing 2 401ks. 5% and 7.5% matches
Not Roth eligible and not really interested in backdoor Roth gymnastics
$28k in student loans at 3.9%
2 children, 1 and 3
Currently contribute $100/month/kid to a 529
Live in a state with a 529 tax deduction
Will almost certainly not qualify for financial aid
Have about $30k per year cash flow to do something with
It seems the choices are to pay off the student loans, fund the kids' 529s, or invest in a taxable account. I think the 529 makes the most sense mathematically, but I am hesitating. It seems like given we are behind on retirement, the flexibility of a taxable account might be better.
Thoughts?
-
- Posts: 2212
- Joined: Tue May 21, 2013 8:49 pm
Re: 529 vs. student loans vs. taxable account
Congrats on not only getting 401K matches, but maxing out your 401Ks. That's some serious savings.MMMM wrote: ↑Wed Feb 14, 2018 9:02 pm First time poster here. We've finally reached the point where we have an e-fund, are maxing available retirement vehicles, and have some money left over each month. We are trying to decide what to do with the money we have left over.
Details:
37 and 40
6 months of expenses in an emergency fund
1.6x salary in retirement (we both have advanced degrees and therefore got a late start, plus recent salary growth)
Maxing 2 401ks. 5% and 7.5% matches
Not Roth eligible and not really interested in backdoor Roth gymnastics
$28k in student loans at 3.9%
2 children, 1 and 3
Currently contribute $100/month/kid to a 529
Live in a state with a 529 tax deduction
Will almost certainly not qualify for financial aid
Have about $30k per year cash flow to do something with
It seems the choices are to pay off the student loans, fund the kids' 529s, or invest in a taxable account. I think the 529 makes the most sense mathematically, but I am hesitating. It seems like given we are behind on retirement, the flexibility of a taxable account might be better.
Thoughts?
Do you have anything else you're saving up for? (House? Replacement cars?)
I think you need to look out for yourself and prioritize your retirement. Note also that after-tax investing in equities that are held long-term can be pretty tax efficient, especially given favorable low rates on long term capital gains and qualified dividends.
Do you make too much to benefit from writing off student loan interest? Even if you don't, keep in mind that student loan debt is among the most toxic in that, unlike other debt, you can't get away from it in bankruptcy. I'd be tempted to pay that off for a guaranteed 3.9% return, then go w/ a taxable account (3 fund portfolio, w/ the bond portion of the fund in the 401k). Your kids are young -- waiting several years to fund their 529 while you build up a nest egg is perfectly fine.
Re: 529 vs. student loans vs. taxable account
If you know the funds will be used for college expenses, I am a big fan of 529 plans over taxable investments, especially if you get a state tax break.MMMM wrote: ↑Wed Feb 14, 2018 9:02 pm First time poster here. We've finally reached the point where we have an e-fund, are maxing available retirement vehicles, and have some money left over each month. We are trying to decide what to do with the money we have left over.
Details:
37 and 40
6 months of expenses in an emergency fund
1.6x salary in retirement (we both have advanced degrees and therefore got a late start, plus recent salary growth)
Maxing 2 401ks. 5% and 7.5% matches
Not Roth eligible and not really interested in backdoor Roth gymnastics
$28k in student loans at 3.9%
2 children, 1 and 3
Currently contribute $100/month/kid to a 529
Live in a state with a 529 tax deduction
Will almost certainly not qualify for financial aid
Have about $30k per year cash flow to do something with
It seems the choices are to pay off the student loans, fund the kids' 529s, or invest in a taxable account. I think the 529 makes the most sense mathematically, but I am hesitating. It seems like given we are behind on retirement, the flexibility of a taxable account might be better.
Thoughts?
If you think you will need the funds to bolster your retirement savings (which should take priority over college savings), then a taxable would make more sense.
Having said that, I am an even bigger fan of Roth IRAs. Not sure what backdoor "gymnastics" you are referring to, i have done it every year for a number of years now, it takes me about 2 minutes a year to accomplish. If you have a large tax-deferred Traditional IRA, then there is the complication of needing roll that into 401k (if allowed), so that might be a reason to avoid backdoor Roth. But, otherwise, i think you are leaving one of the best savings vehicles out of your options.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Re: 529 vs. student loans vs. taxable account
Agreed that there are really no gymnastics to the backdoor Roth. At Vanguard the conversion happens with a click of a button, and then you just tell your tax software what you did at the end of the year and it fills out the right form. You might have the tiniest bit of uncertainty the first time you perform it, but then it will be straightforward from that point on. $11k of Roth space is too valuable to ignore.
Above that I agree with prioritizing paying down student debt. Too many people still are dealing with this into their 40's and beyond these days.
Above that I agree with prioritizing paying down student debt. Too many people still are dealing with this into their 40's and beyond these days.
Re: 529 vs. student loans vs. taxable account
We own a home and have about $200k in equity. We'll probably buy a larger home in 5-7 years, when our childcare costs are lower. We're kind of counting on our equity for the down payment, but we know that's risky in a hot housing market, which is probably another plus for saving with flexibility.random_walker_77 wrote: ↑Wed Feb 14, 2018 9:57 pm Congrats on not only getting 401K matches, but maxing out your 401Ks. That's some serious savings.
Do you have anything else you're saving up for? (House? Replacement cars?)
I think you need to look out for yourself and prioritize your retirement. Note also that after-tax investing in equities that are held long-term can be pretty tax efficient, especially given favorable low rates on long term capital gains and qualified dividends.
Do you make too much to benefit from writing off student loan interest? Even if you don't, keep in mind that student loan debt is among the most toxic in that, unlike other debt, you can't get away from it in bankruptcy. I'd be tempted to pay that off for a guaranteed 3.9% return, then go w/ a taxable account (3 fund portfolio, w/ the bond portion of the fund in the 401k). Your kids are young -- waiting several years to fund their 529 while you build up a nest egg is perfectly fine.
We're putting aside $200/month for car replacement, which is in a cash account. It has about $4k in it right now, but reasonably if we need to buy a car before it's fully funded we'll use some of our cash savings and then pay it back.
We do make too much to deduct the student loan interest. I also sort of want the loans gone, just for emotional reasons.
The other good news is we already adhere to the Bogleheads investment philosophies - our retirement is in a 3 fund portfolio already.
Re: 529 vs. student loans vs. taxable account
We actually did backdoor Roths for a few years, and the gymnastics I refer to are keeping the assets out of a trad IRA. My current job 401k doesn't accept incoming transfers, the investment choices in my spouse's IRA aren't great, etc. I am not sure Roth benefits are great enough to have to rejigger everything every time we have a job change. At the moment I could do a backdoor Roth for me because everything is in my former employer's 401k, but my spouse's retirement is in a trad IRA.onourway wrote: ↑Thu Feb 15, 2018 5:21 am Agreed that there are really no gymnastics to the backdoor Roth. At Vanguard the conversion happens with a click of a button, and then you just tell your tax software what you did at the end of the year and it fills out the right form. You might have the tiniest bit of uncertainty the first time you perform it, but then it will be straightforward from that point on. $11k of Roth space is too valuable to ignore.
Above that I agree with prioritizing paying down student debt. Too many people still are dealing with this into their 40's and beyond these days.
Re: 529 vs. student loans vs. taxable account
I’d probably just pay off the loan in year one. For year 2 and beyond, I’d increase 529 contributions to a level I was comfortable with and put the rest in taxable. Of course you could split the difference across all three right from the start if doing so met your priorities.
Re: 529 vs. student loans vs. taxable account
Kick Sallie Mae to the curb this year.
Re: 529 vs. student loans vs. taxable account
+1Compound wrote: ↑Thu Feb 15, 2018 7:38 am I’d probably just pay off the loan in year one. For year 2 and beyond, I’d increase 529 contributions to a level I was comfortable with and put the rest in taxable. Of course you could split the difference across all three right from the start if doing so met your priorities.
I'd do the same, diversification is key.
I'm now building taxable as I'm at a comfortable point with my 529 size.
Re: 529 vs. student loans vs. taxable account
Some people don't believe in loans. I believe in good loans vs. bad loans. I don't believe in free lunches (i.e. zero interest loans are paid for somewhere else or subsidized by someone else). In any case, once you have the loan it's your's, and student loans at 2% fixed or less are good loans. Student loans of 5-6% or more are bad loans. These are given our current interest rate environment and variable loans are more bad than good. Around 4%, I'm somewhat indifferent about them, so depends more on alternatives.
I don't like gymnastics either, but Roth is worth doing above everything else suggested, so reconsider the work involved and try to get it done. You don't change jobs that often, do you?MMMM wrote: ↑Thu Feb 15, 2018 7:09 amWe actually did backdoor Roths for a few years, and the gymnastics I refer to are keeping the assets out of a trad IRA. My current job 401k doesn't accept incoming transfers, the investment choices in my spouse's IRA aren't great, etc. I am not sure Roth benefits are great enough to have to rejigger everything every time we have a job change. At the moment I could do a backdoor Roth for me because everything is in my former employer's 401k, but my spouse's retirement is in a trad IRA.
I agree that 529 is financially the most advantageous. It's a free statistical arbitrage of 2% (assume 6% market return vs 3.9% student loan). Again, Roth is better and similar in terms of tax free gains benefit, just much longer.
What is your AA? How much do you have in tax deferred. Specifically, how much do you have invested in bonds and what is it returning? If you're not 100% equities, I suggest you switch your bonds for student loan. (think if it as lending to yourself)
https://www.bogleheads.org/wiki/Paying_ ... parison.3F
Re: 529 vs. student loans vs. taxable account
I have to wrap my head around the "switch bonds for student loan" thing, but our AA is 40% bonds and cash (which is actually 30% bonds yielding around 2.8% and the rest cash yielding 1.5%), 40% domestic equities, 20% international equities. About 20% of our total money is outside tax-deferred investments, so we could use it to pay of the loans right now if we wanted.inbox788 wrote: ↑Thu Feb 15, 2018 10:44 am What is your AA? How much do you have in tax deferred. Specifically, how much do you have invested in bonds and what is it returning? If you're not 100% equities, I suggest you switch your bonds for student loan. (think if it as lending to yourself)
https://www.bogleheads.org/wiki/Paying_ ... parison.3F
Re: 529 vs. student loans vs. taxable account
It's a debatable issue whether you consider mortgage or other loans in your AA, but I'm a firm believer that you should. Actual loan adjusted AA is fairly meaningless in some situations, since you wind up with things like 150/-50 type where you're leveraged, but it really does better illustrate your actual overall position. Sometimes, it's simpler just to think in dollar terms. Say you have $10k invested in bonds at 2% and you borrow $10k in student loans at 3.9%. In effect, you have borrowed at 3.9% to invest at 2%, losing 1.9% in the process. At the end of the year you've got $10,200 in bonds, but you'll have paid $10,390 to the loan, so you're down $190. If you simply sold the bonds and paid off the loan, you'd be even. This is the reverse of having an interest free loan (subsidized car loan) and taking the cash and putting it in a CD earning 1.5% interest.MMMM wrote: ↑Thu Feb 15, 2018 10:59 amI have to wrap my head around the "switch bonds for student loan" thing, but our AA is 40% bonds and cash (which is actually 30% bonds yielding around 2.8% and the rest cash yielding 1.5%), 40% domestic equities, 20% international equities. About 20% of our total money is outside tax-deferred investments, so we could use it to pay of the loans right now if we wanted.inbox788 wrote: ↑Thu Feb 15, 2018 10:44 am What is your AA? How much do you have in tax deferred. Specifically, how much do you have invested in bonds and what is it returning? If you're not 100% equities, I suggest you switch your bonds for student loan. (think if it as lending to yourself)
https://www.bogleheads.org/wiki/Paying_ ... parison.3F
In both cases, your balance sheet is nearly zero (assets - liability), but depending on whether you have a positive or negative interest rates arbitrage, one is worth doing, the other avoiding.
With the student loan, think of taking the cash and lending it to yourself, and paying yourself the 3.9% in interest. It's a better bet to invest in yourself than 1.5% in a savings account. And you yourself know the credit risk you're taking; something that you wouldn't know if you lent it to corporations or other individuals.
Re: 529 vs. student loans vs. taxable account
So backdoor Roth turned out to be irrelevant for 2017, because between higher phase out limits and reduced income from maternity leave, we are Roth eligible (albeit in the phase out) for last year. Which is good since we didn't backdoor last year. We'll definitely have to backdoor this year, so I'll have to figure that out.
Re: 529 vs. student loans vs. taxable account
Speaking of gymnastics, we had the same issue and the prorata rule was making it less than valuable. Our solution was to generate some schedule C income - my wife is heavy into fitness and enjoyed teaching people so she started to teach a fitness class a handful of times a month - then we set up a solo 401(k) and rolled the traditional into it. Certainly gymnastics in year one but super easy going forward.MMMM wrote: ↑Thu Feb 15, 2018 7:09 amWe actually did backdoor Roths for a few years, and the gymnastics I refer to are keeping the assets out of a trad IRA. My current job 401k doesn't accept incoming transfers, the investment choices in my spouse's IRA aren't great, etc. I am not sure Roth benefits are great enough to have to rejigger everything every time we have a job change. At the moment I could do a backdoor Roth for me because everything is in my former employer's 401k, but my spouse's retirement is in a trad IRA.onourway wrote: ↑Thu Feb 15, 2018 5:21 am Agreed that there are really no gymnastics to the backdoor Roth. At Vanguard the conversion happens with a click of a button, and then you just tell your tax software what you did at the end of the year and it fills out the right form. You might have the tiniest bit of uncertainty the first time you perform it, but then it will be straightforward from that point on. $11k of Roth space is too valuable to ignore.
Above that I agree with prioritizing paying down student debt. Too many people still are dealing with this into their 40's and beyond these days.