Advice on moving from Taxable Acct to 529 accts

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Topic Author
bpfwt
Posts: 8
Joined: Thu Feb 01, 2018 10:12 am

Advice on moving from Taxable Acct to 529 accts

Post by bpfwt » Mon Aug 06, 2018 4:48 pm

Long-time forum lurker/learner here, but first time to post. Hoping y’all will be willing to give me some advice.

Emergency/checking funds: $54k, primarily in “high” interest savings and MM accts

Debt: $102k 20-yr fixed mortgage at 3.5%, 17 yrs remaining

Income: $110,000

Tax Filing Status: Married Filing Jointly

Tax Rate: Federal 22%, State 0%

State of Residence: TX

Ages: 38 (him) & 36 (her) + two children, ages 11 & 2


Current Portfolio:
His RothIRA: 107k invested according to Paul Merriman’s Ultimate Buy-&-Hold Strategy using Vanguard ETFs, contributing $5500 per year.

Her RothIRA: $92k invested according to Paul Merriman’s Ultimate Buy-&-Hold Strategy using Vanguard ETFs, contributing $5500 per year.

CMA (Taxable Account): $101k invested according to Paul Merriman’s Ultimate Buy-&-Hold using Vanguard ETFs, now contributing on an irregular basis.

His 403b (from full-time job): $26k
--Contributing up to company match of $1,250 per year
--Invested in DFA funds with low expense ratios

His Roth 401k (from very part-time job): $1,400 held at Fidelity and invested in low-fee Fidelity index funds
--Company match of 6% of paycheck
--Now contributing 100% of paycheck (approx $2000 annually)

Child #1 Vanguard 529: $0

Child #2 Vanguard 529: $0



When we started investing, we were working with a Merrill Lynch advisor who established our 3-account system of 2 Roth IRAs and a taxable CMA. Over the years, a few things changed:
--Transferred away from Merrill Lynch over to Merrill Edge and doing self-directed investing (with Paul Merriman’s help)
--I acquired two jobs that offer 403b/Roth401k benefits. I’m currently contributing up to the $1,250 company match on the 403b and 100% of my small part-time paycheck to the Roth401k

I remember some sage Boglehead advice: You can borrow for education but you can’t borrow for retirement. We’d like to be prepared to help the kids with college at a significant level, even if not 100%. I’ve been operating on the assumption that both our CMA is for earmarked for kids’ college education. I’m trying to get smarter, though, so here are my questions:

1. I opened the 529 plans with Vanguard last week. Would it be wise to move most/all of the CMA account to the 529s ($30k per child (annual max) now and move the remainder next year)? I’d incur some capital gains taxes, but would be moving it to a tax-advantaged account for the same savings goal. Anyone think I’d be better off paying off all/part of 3.5% mortgage?

2. Regarding account priorities for investing: I understand that contributing to the Roth401k and 403b up to the employer match is first priority and we are contributing maximum annual amounts to the Roth IRAs. However, if we have more to invest in a given year, what’s the best next step? Increase contribution to the 403b, increase funding in 529s, or something else?

3. Anyone see any holes in the strategy as I've explained it?

Thanks in advance for any guidance/input you can offer!

bloom2708
Posts: 6531
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Advice on moving from Taxable Acct to 529 accts

Post by bloom2708 » Mon Aug 06, 2018 5:33 pm

With 0% state tax, your incentive for the 529 is left to the gains (over the years) being tax-free upon usage for college expenses. With a long ramp, that is still a reason to adopt a 529 strategy for at least some of the college funds. We did 50% 529 and 50% taxable.

Your advisor is not doing you a service by skipping your pre-tax 401k. (I see at the time you did not have a 401k/403b). Now at the 22% Federal tax bracket you can defer 22% in tax and use the tax savings to fund much of one of your Roth IRAs.

Pre-tax 401k + Roth IRA allows you to save more. Let the investments grow. Long ramp to grow. Roth conversions could always be a possibility between 59.5 and SS.

The advisor needs the money under their umbrella. Hence Roth and Taxable. 401k is under "someone elses" fee umbrella. This no longer applies but it likely did at one point.

You still have a long ramp. I would switch to maxing pre-tax 401k + $5,500 to each Roth. 529 and or taxable after that. Only what you can still save.

You can look at moving some of the taxable (track gains/losses) to the 529. It maybe makes more sense for the 2 year old. 11 year old is quickly in the window of 5 or less years to college. The opportunity for gains is closing as is the amount of risk you want to take with 7 years to go.

Hopefully others share their thoughts. 529 or taxable (earmarked for college) work great. We actually had Vanguard create 3 brokerage accounts (one for each kid) and kept the funds split for each kid. I know I didn't need to do this, but it helped keep things on par and we could track progress and keep each at an appropriate risk level as they approach 18/college. Now oldest is in college and we took some $ from 529 and some from taxable to pay. Worked slick. You don't want all coming from the 529 to claim the American Opportunity Tax Credit if you meet the qualifications income wise.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

Juice3
Posts: 102
Joined: Sun Nov 05, 2017 7:40 am

Re: Advice on moving from Taxable Acct to 529 accts

Post by Juice3 » Mon Aug 06, 2018 6:05 pm

bloom2708 wrote:
Mon Aug 06, 2018 5:33 pm
[..] we took some $ from 529 and some from taxable to pay. Worked slick. You don't want all coming from the 529 to claim the American Opportunity Tax Credit if you meet the qualifications income wise.

This is great advice and I wanted to make sure everyone found this tidbit at the end of blooms post.

You can not "double dip". This means you can not apply Qualified Higher Education Expenses to both 529 and AOTC (or LLC - Lifetime Learning Credit). In English, if you pay with 529 only, you can not get the AOTC (or LLC) tax credit.

You must pay 4K in QHEE expenses for AOTC and 10K for LLC to qualify for the maximum 2.5K AOTC or 2K LLC tax credit not using money from a 529.

The AOTC is 40% refundable. The LLC is not refundable. Meaning your tax liability must be used to offset the credit for non refundable component.

You may only claim the AOTC for 4 years per student (and other rules apply).

Dyons
Posts: 12
Joined: Thu Dec 15, 2016 3:35 pm

Re: Advice on moving from Taxable Acct to 529 accts

Post by Dyons » Thu Dec 27, 2018 7:13 pm

Responding to Juice3's comment:

"You can not "double dip". This means you can not apply Qualified Higher Education Expenses to both 529 and AOTC (or LLC - Lifetime Learning Credit). In English, if you pay with 529 only, you can not get the AOTC (or LLC) tax credit.

You must pay 4K in QHEE expenses for AOTC and 10K for LLC to qualify for the maximum 2.5K AOTC or 2K LLC tax credit not using money from a 529."

I'm not sure these statements are true. You can still get the AOTC (or LLC) even if you pay ALL expenses from a 529. You just have to ensure that you include the taxable amount from the 529 distribution earnings in your income. This is described in Pub.970, which provides the formula for how to calculate the taxable part of the earnings and avoid double dipping. If the earnings are not that substantial, the taxable part of the earnings added to your income are not very much. You still get the 2500 credit, assuming you meet all the other criteria for qualifying for the AOTC (or LLC).

Topic Author
bpfwt
Posts: 8
Joined: Thu Feb 01, 2018 10:12 am

Re: Advice on moving from Taxable Acct to 529 accts

Post by bpfwt » Thu Jan 10, 2019 10:58 pm

bloom2708 wrote:
Mon Aug 06, 2018 5:33 pm


You still have a long ramp. I would switch to maxing pre-tax 401k + $5,500 to each Roth. 529 and or taxable after that. Only what you can still save.

I realized, all these months later, that I never thanked the 3 of you for your advice on this thread. I've utilized and implemented many of your recommendations, particularly this quoted piece from Bloom2708. Thank you all!
-BP

Juice3
Posts: 102
Joined: Sun Nov 05, 2017 7:40 am

Re: Advice on moving from Taxable Acct to 529 accts

Post by Juice3 » Thu Jan 17, 2019 10:49 pm

Dyons wrote:
Thu Dec 27, 2018 7:13 pm
Responding to Juice3's comment:

"You can not "double dip". This means you can not apply Qualified Higher Education Expenses to both 529 and AOTC (or LLC - Lifetime Learning Credit). In English, if you pay with 529 only, you can not get the AOTC (or LLC) tax credit.

You must pay 4K in QHEE expenses for AOTC and 10K for LLC to qualify for the maximum 2.5K AOTC or 2K LLC tax credit not using money from a 529."

I'm not sure these statements are true. You can still get the AOTC (or LLC) even if you pay ALL expenses from a 529. You just have to ensure that you include the taxable amount from the 529 distribution earnings in your income. This is described in Pub.970, which provides the formula for how to calculate the taxable part of the earnings and avoid double dipping. If the earnings are not that substantial, the taxable part of the earnings added to your income are not very much. You still get the 2500 credit, assuming you meet all the other criteria for qualifying for the AOTC (or LLC).
Dyons, You can find some additional discussion on your point here:
https://forum.savingforcollege.com/t/ca ... tc/11810/4

Non qualified 529 withdrawals will likely have to not only deal with federal taxation if gains exist but also state clawbacks but they will qualify for AOTC.

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