Taxable investment account for college?

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Topic Author
angelescrest
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Location: Texas

Taxable investment account for college?

Post by angelescrest » Sun Oct 06, 2019 9:43 am

I have about $90,000 in a taxable investment account. About 18k is in cash and 72k are in blue chip stocks. $29,000 in gains at this point. The cash is from some equities I sold off in the past year or two. The stocks have done ok but I recognize it affects how diversified I am. The rest of my retirement accounts, 401k and his and hers Roth IRA is mostly standard three portfolio stuff.

We have largely viewed this money as mostly being dedicated for college funds for two children, the first of whom won’t be in college until 10 years, the second in 13.

Our income is very modest, and I put away about 10% of income in 401k, and then in most years we max out the two Roths, but not always. Occasionally I use any cash holdings in the taxable account to max the Roth out, including this year. I know we can use Roth contributions for college without penalty, but I hope we don’t need to do that since it’s an important part of our retirement plan.

Should I be moving the investments over to a 529, and is it worth the taxable gain hit? If so, what’s the strategy? All at once, or spread it out over the years? A part of me likes how flexible the money is at the moment, but that may just be some twisted sense of security it brings.

I also read the wiki on the EFC but I don’t know how much I factor that into my decision.

zlandar
Posts: 119
Joined: Wed Apr 10, 2019 8:51 am

Re: Taxable investment account for college?

Post by zlandar » Sun Oct 06, 2019 10:16 am

I would keep the money in the brokerage account and fund a 529 account with new money. That is assuming you are putting away enough money for retirement.

Your retirement is more important then your children's college fund.

KlangFool
Posts: 13715
Joined: Sat Oct 11, 2008 12:35 pm

Re: Taxable investment account for college?

Post by KlangFool » Sun Oct 06, 2019 10:50 am

angelescrest wrote:
Sun Oct 06, 2019 9:43 am
I have about $90,000 in a taxable investment account. About 18k is in cash and 72k are in blue chip stocks. $29,000 in gains at this point. The cash is from some equities I sold off in the past year or two. The stocks have done ok but I recognize it affects how diversified I am. The rest of my retirement accounts, 401k and his and hers Roth IRA is mostly standard three portfolio stuff.

We have largely viewed this money as mostly being dedicated for college funds for two children, the first of whom won’t be in college until 10 years, the second in 13.

Our income is very modest, and I put away about 10% of income in 401k, and then in most years we max out the two Roths, but not always. Occasionally I use any cash holdings in the taxable account to max the Roth out, including this year. I know we can use Roth contributions for college without penalty, but I hope we don’t need to do that since it’s an important part of our retirement plan.

Should I be moving the investments over to a 529, and is it worth the taxable gain hit? If so, what’s the strategy? All at once, or spread it out over the years? A part of me likes how flexible the money is at the moment, but that may just be some twisted sense of security it brings.

I also read the wiki on the EFC but I don’t know how much I factor that into my decision.
angelescrest,

<<Occasionally I use any cash holdings in the taxable account to max the Roth out, including this year. >>

If your income is modest, you should continue to do this. Then, the money would not be counted for EFC.

<<Should I be moving the investments over to a 529, and is it worth the taxable gain hit? >>

If you move the money into 529, it would be counted towards EFC. It is a one-way street.

<<I also read the wiki on the EFC but I don’t know how much I factor that into my decision.>>

You should calculate your EFC now. Then, you would know whether your income is low enough that you could qualify for financial aid.

<<Our income is very modest, and I put away about 10% of income in 401k, >>

Why? You should max up your Trad. 401K with your money from your taxable account. Then, you could spend the money from Roth IRA if you need to. Money is fungible.

I know no idea what do you mean by your income is modest? What is your marginal tax rate? Folks with modest income would not spend 90K on their kids' college education. They cannot afford to.

Sell your blue-chip stock and put them into the total world index fund. It is too risky for you unless that 90K is less than 5% of your portfolio.

I would not fund 529 at all. You have enough room in the 401K for that money.
<< We have largely viewed this money as mostly being dedicated for college funds for two children, the first of whom won’t be in college until 10 years, the second in 13.>>

What is the point of paying 10% to 20+% taxes every year for the next 10 to 13 years because you choose not to max up your 401K?

KlangFool

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Sun Oct 06, 2019 11:09 am

OP,

It is very simple.

Max up your Trad. 401K and put the tax savings into Roth IRAs. If you need to use the money in the taxable account to do this, go ahead. There is no reason why this should not work in your case.

KlangFool

User avatar
vineviz
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Re: Taxable investment account for college?

Post by vineviz » Sun Oct 06, 2019 11:13 am

angelescrest wrote:
Sun Oct 06, 2019 9:43 am
Should I be moving the investments over to a 529, and is it worth the taxable gain hit? If so, what’s the strategy? All at once, or spread it out over the years? A part of me likes how flexible the money is at the moment, but that may just be some twisted sense of security it brings.
If you genuinely expect to use the money to pay for college, then you're going to have a taxable gain on the stocks at some point: either now or later. And it's probably going to be less now than it will be 15 years from now.

Moving the money to a 529 plan allows you to get tax-free gains on that money for the next 10 to 17 years, which could easily mean $10k to $12k more money available (due to tax savings) for college even if you never contribute more to the accounts later on. And if you're in a state which allows a tax deduction for the contribution, the benefit is even greater.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Topic Author
angelescrest
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Sun Oct 06, 2019 3:33 pm

zlandar wrote:
Sun Oct 06, 2019 10:16 am
I would keep the money in the brokerage account and fund a 529 account with new money. That is assuming you are putting away enough money for retirement.

Your retirement is more important then your children's college fund.
Definitely agree with saving for retirement first. I don't think, though, that we'll be in a position to save $150,000-$200,000 over the next 10 years or so for the kids' college fund, at least not with it impacting our retirement savings. But maybe we can save half that, and then have them take out a higher amount of loans and then possibly help them pay those off in the future?

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

Re: Taxable investment account for college?

Post by KlangFool » Sun Oct 06, 2019 5:03 pm

angelescrest wrote:
Sun Oct 06, 2019 3:33 pm
zlandar wrote:
Sun Oct 06, 2019 10:16 am
I would keep the money in the brokerage account and fund a 529 account with new money. That is assuming you are putting away enough money for retirement.

Your retirement is more important then your children's college fund.
Definitely agree with saving for retirement first. I don't think, though, that we'll be in a position to save $150,000-$200,000 over the next 10 years or so for the kids' college fund, at least not with it impacting our retirement savings. But maybe we can save half that, and then have them take out a higher amount of loans and then possibly help them pay those off in the future?
angelescrest,

<< I don't think, though, that we'll be in a position to save $150,000-$200,000 over the next 10 years or so for the kids' college fund, at least not with it impacting our retirement savings. >>

1) You have that amount in your Roth IRA contribution after 10 years. Why do you think you need 529?

2) If you think tax-free growth in the 529 for 10+ years is a good idea, then, tax-free growth in the Roth IRA for the next 20 to 30 years is an even better idea.

3) Why won't you use all your 401K space? It is a use it or loses its proposition. If you do not contribute to it now, you can never get it back.

KlangFool

Topic Author
angelescrest
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Sun Oct 06, 2019 6:03 pm

KlangFool wrote:
Sun Oct 06, 2019 5:03 pm
angelescrest wrote:
Sun Oct 06, 2019 3:33 pm
zlandar wrote:
Sun Oct 06, 2019 10:16 am
I would keep the money in the brokerage account and fund a 529 account with new money. That is assuming you are putting away enough money for retirement.

Your retirement is more important then your children's college fund.
Definitely agree with saving for retirement first. I don't think, though, that we'll be in a position to save $150,000-$200,000 over the next 10 years or so for the kids' college fund, at least not with it impacting our retirement savings. But maybe we can save half that, and then have them take out a higher amount of loans and then possibly help them pay those off in the future?
angelescrest,

<< I don't think, though, that we'll be in a position to save $150,000-$200,000 over the next 10 years or so for the kids' college fund, at least not with it impacting our retirement savings. >>

1) You have that amount in your Roth IRA contribution after 10 years. Why do you think you need 529?

2) If you think tax-free growth in the 529 for 10+ years is a good idea, then, tax-free growth in the Roth IRA for the next 20 to 30 years is an even better idea.

3) Why won't you use all your 401K space? It is a use it or loses its proposition. If you do not contribute to it now, you can never get it back.

KlangFool
1) Money in a Roth IRA is valuable, and I don't want to pull contributions out for educational purposes. That money needs to be saved for retirement. I'm asking about a 529 so that I can consider the financial aid application process as well as plan out an effective tax strategy.

2) I don't understand your question--I am trying to max out Roth IRA every year, and am asking about possibly transferring existing money in a taxable investment account over to a 529. Ideally we continue funding Roth IRA.

3) You're proposing I max out my 401K over contribute to a 529? So exclusively save for retirement, and then do what for college? I'm not sure how this applies to my original question. I take the company match and more, and then try to max out the Roth to balance paying tax now vs later in retirement.

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

Re: Taxable investment account for college?

Post by KlangFool » Sun Oct 06, 2019 6:19 pm

angelescrest wrote:
Sun Oct 06, 2019 6:03 pm

3) You're proposing I max out my 401K over contribute to a 529? So exclusively save for retirement, and then do what for college? I'm not sure how this applies to my original question. I take the company match and more, and then try to max out the Roth to balance paying tax now vs later in retirement.
angelescrest,

<<You're proposing I max out my 401K over contribute to a 529? >>

Yes.

<<then do what for college? >>

Use the Roth IRA's contribution to fund college educations.

<<1) Money in a Roth IRA is valuable, and I don't want to pull contributions out for educational purposes. That money needs to be saved for retirement. >>

That is not a problem when you have a lot more money in the 401K because of the additional tax savings that you get from maxing the 401K.


<< 2) I don't understand your question--I am trying to max out Roth IRA every year, and am asking about possibly transferring existing money in a taxable investment account over to a 529. Ideally we continue funding Roth IRA.>>

Think about this.

A) Contribute 90K to 529/Roth IRAs

B) Contribute 90K to 401K plus using the tax savings from 401K contribution to contribute to Roth IRAs.

Which one gives you more money? (A) or (B)?

C) Put money into 529 and let it grow for 10+ years.

D) Put money into Roth IRA. Only withdraw a portion after 10+ years. Then, let the rest grow for 20 to 30 years.

Which one gives you more money? (C) or (D)?

401K is not retirement money. You can withdraw them penalty-free before 59 1/2 years old.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

zlandar
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Re: Taxable investment account for college?

Post by zlandar » Mon Oct 07, 2019 8:55 am

I would max out your 401k before you put anything in a 529 or in the brokerage account.

Assets in retirement accounts (401k, Roth, IRA) are not counted when applying for financial aid.

Assets in a 529 can be counted up to ~6% of the value.

Assets in a brokerage account will be counted at a much higher value than a 529.

User avatar
teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Mon Oct 07, 2019 12:41 pm

zlandar wrote:
Mon Oct 07, 2019 8:55 am
I would max out your 401k before you put anything in a 529 or in the brokerage account.

Assets in retirement accounts (401k, Roth, IRA) are not counted when applying for financial aid.

Assets in a 529 can be counted up to ~6% of the value.

Assets in a brokerage account will be counted at a much higher value than a 529.
No, assets in a 529 and assets in taxable accounts are included exactly the same on the FAFSA: 12% of assets are labeled Available Assets, and then a progressive rate is applied, the top rate is 47% . This results in the oft quoted 5.64% of assets included in your EFC.

The advantage of 529 over taxable is the state tax deduction (if any) and the tax free growth inside the 529 (if funds are used for college expenses).

If the OP wants to minimize his EFC, he should minimize BOTH taxable and 529 account balances by putting as much as possible into retirement accounts (not included in FAFSA Available Assets). The problem may be, however, that the OP's income may be high enough to trigger a high EFC even without any included Available Assets. If that is the case, then the OP should forget about trying to minimize his EFC and save for college expenses in a 529 AS WELL AS maximize retirement savings.

The trick is knowing which camp you fall into. Generally, Bogleheads who max out retirement accounts and have to save the rest into taxable accounts have a high enough income to have a high EFC. Therefore they should save to a 529 for the tax savings (over taxable accounts). Those who have to choose between filling retirement accounts and 529 or taxable accounts are more likely to benefit more from leaning more heavily to retirement savings and less to 529/taxable.

zlandar
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Re: Taxable investment account for college?

Post by zlandar » Mon Oct 07, 2019 1:06 pm

teen persuasion wrote:
Mon Oct 07, 2019 12:41 pm
zlandar wrote:
Mon Oct 07, 2019 8:55 am
I would max out your 401k before you put anything in a 529 or in the brokerage account.

Assets in retirement accounts (401k, Roth, IRA) are not counted when applying for financial aid.

Assets in a 529 can be counted up to ~6% of the value.

Assets in a brokerage account will be counted at a much higher value than a 529.
No, assets in a 529 and assets in taxable accounts are included exactly the same on the FAFSA: 12% of assets are labeled Available Assets, and then a progressive rate is applied, the top rate is 47% . This results in the oft quoted 5.64% of assets included in your EFC.
Thanks didn't know that.

Topic Author
angelescrest
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Tue Oct 08, 2019 9:27 am

teen persuasion wrote:
Mon Oct 07, 2019 12:41 pm
zlandar wrote:
Mon Oct 07, 2019 8:55 am
I would max out your 401k before you put anything in a 529 or in the brokerage account.

Assets in retirement accounts (401k, Roth, IRA) are not counted when applying for financial aid.

Assets in a 529 can be counted up to ~6% of the value.

Assets in a brokerage account will be counted at a much higher value than a 529.
No, assets in a 529 and assets in taxable accounts are included exactly the same on the FAFSA: 12% of assets are labeled Available Assets, and then a progressive rate is applied, the top rate is 47% . This results in the oft quoted 5.64% of assets included in your EFC.

The advantage of 529 over taxable is the state tax deduction (if any) and the tax free growth inside the 529 (if funds are used for college expenses).

If the OP wants to minimize his EFC, he should minimize BOTH taxable and 529 account balances by putting as much as possible into retirement accounts (not included in FAFSA Available Assets). The problem may be, however, that the OP's income may be high enough to trigger a high EFC even without any included Available Assets. If that is the case, then the OP should forget about trying to minimize his EFC and save for college expenses in a 529 AS WELL AS maximize retirement savings.

The trick is knowing which camp you fall into. Generally, Bogleheads who max out retirement accounts and have to save the rest into taxable accounts have a high enough income to have a high EFC. Therefore they should save to a 529 for the tax savings (over taxable accounts). Those who have to choose between filling retirement accounts and 529 or taxable accounts are more likely to benefit more from leaning more heavily to retirement savings and less to 529/taxable.
Thanks for the input. A few follow up questions:

1) You asked "if the OP wants to minimize his EFC, he should minimize BOTH taxable and 529..." - my question is, given our situation, how concerned should we be about minimizing our EFC by the time our kids are going to college? Does it generally make that big of a difference in what kind of scholarships or financial aid one is qualified for?

2) Given our circumstances, would you recommend moving money from the taxable account into a 529 so that the $90k + future gains doesn't factor into the EFC calculation? Or alternatively, if we believe our income will be higher, should we just spend down the taxable account and max the 401k, with the plan to borrow from the 401k or Roth to pay for future college expenses?

We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.

miamivice
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Re: Taxable investment account for college?

Post by miamivice » Tue Oct 08, 2019 9:37 am

Any money that you expect to pay for college should be in a 529, as gains from today on will be tax free. There is no other account that you can save for college and avoid taxes on growth as effectively as a 529.

I concur that you should ensure that you'll be able to retire per your plan, but am sure you are considering that already.

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 9:38 am

angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

Please verify that whether you qualify for the following tax credits if you max up your Trad. 401K.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool

miamivice
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Re: Taxable investment account for college?

Post by miamivice » Tue Oct 08, 2019 9:42 am

KlangFool wrote:
Sun Oct 06, 2019 6:19 pm
401K is not retirement money. You can withdraw them penalty-free before 59 1/2 years old.
This statement is plain wrong. You generally cannot access 401k money prior to retirement penalty / 59.5 penalty free.

KlangFool
Posts: 13715
Joined: Sat Oct 11, 2008 12:35 pm

Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 9:46 am

angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

1) At 12% tax bracket, your long-term capital gain tax rate is 0%. You get tax-free growth at your taxable account. Why do you want to contribute to the 529?

2) When your spouse is working more, you could max up the 401K and drop yourself back to the 12% tax bracket. Why do you want to contribute to the 529?

3) Your decision should be between the taxable and 401K.

KlangFool

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 9:47 am

miamivice wrote:
Tue Oct 08, 2019 9:42 am
KlangFool wrote:
Sun Oct 06, 2019 6:19 pm
401K is not retirement money. You can withdraw them penalty-free before 59 1/2 years old.
This statement is plain wrong. You generally cannot access 401k money prior to retirement penalty / 59.5 penalty free.
miamivice,

You are wrong!

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

miamivice
Posts: 2194
Joined: Tue Jun 11, 2013 11:46 am

Re: Taxable investment account for college?

Post by miamivice » Tue Oct 08, 2019 9:48 am

KlangFool wrote:
Tue Oct 08, 2019 9:46 am
angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

1) At 12% tax bracket, your long-term capital gain tax rate is 0%. You get tax-free growth at your taxable account. Why do you want to contribute to the 529?

2) When your spouse is working more, you could max up the 401K and drop yourself back to the 12% tax bracket. Why do you want to contribute to the 529?

3) Your decision should be between the taxable and 401K.

KlangFool
A 529 is guaranteed tax free growth, regardless of withdrawal amount, as long as withdrawals are qualified.

Liquidating taxable will bump you into a higher tax rate depending on how much you liquidate. It is not like you can liquidate $50,000 plus make enough income to be in 12% tax bracket and still pay no income taxes.

miamivice
Posts: 2194
Joined: Tue Jun 11, 2013 11:46 am

Re: Taxable investment account for college?

Post by miamivice » Tue Oct 08, 2019 9:50 am

KlangFool wrote:
Tue Oct 08, 2019 9:47 am
miamivice wrote:
Tue Oct 08, 2019 9:42 am
KlangFool wrote:
Sun Oct 06, 2019 6:19 pm
401K is not retirement money. You can withdraw them penalty-free before 59 1/2 years old.
This statement is plain wrong. You generally cannot access 401k money prior to retirement penalty / 59.5 penalty free.
miamivice,

You are wrong!

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool
Rather than posting links, can you explain to me how I can withdraw 401k money penalty free prior to 59.5 and without leaving my job?

Topic Author
angelescrest
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Tue Oct 08, 2019 9:54 am

KlangFool wrote:
Tue Oct 08, 2019 9:38 am
angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

Please verify that whether you qualify for the following tax credits if you max up your Trad. 401K.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
Interesting. No, not for EITC but we could get to the 10% on the savers credit.

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

Re: Taxable investment account for college?

Post by miamivice » Tue Oct 08, 2019 9:55 am

angelescrest wrote:
Tue Oct 08, 2019 9:54 am
KlangFool wrote:
Tue Oct 08, 2019 9:38 am
angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

Please verify that whether you qualify for the following tax credits if you max up your Trad. 401K.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
Interesting. No, not for EITC but we could get to the 10% on the savers credit.
You'll have to be careful as to what is considered income. For example, liquidating stocks will give you unearned income. I am not sure if sufficient amounts of unearned income (long term capital gains from taxable) will disqualify you from the savers credit, but it might. I don't believe that qualified 529 withdrawals count as unearned income.

KlangFool
Posts: 13715
Joined: Sat Oct 11, 2008 12:35 pm

Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 9:58 am

angelescrest wrote:
Tue Oct 08, 2019 9:54 am
KlangFool wrote:
Tue Oct 08, 2019 9:38 am
angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

Please verify that whether you qualify for the following tax credits if you max up your Trad. 401K.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
Interesting. No, not for EITC but we could get to the 10% on the savers credit.
And, you get the 12% tax savings too.

KlangFool

miamivice
Posts: 2194
Joined: Tue Jun 11, 2013 11:46 am

Re: Taxable investment account for college?

Post by miamivice » Tue Oct 08, 2019 9:59 am

KlangFool wrote:
Tue Oct 08, 2019 9:58 am
angelescrest wrote:
Tue Oct 08, 2019 9:54 am
KlangFool wrote:
Tue Oct 08, 2019 9:38 am
angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

Please verify that whether you qualify for the following tax credits if you max up your Trad. 401K.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
Interesting. No, not for EITC but we could get to the 10% on the savers credit.
And, you get the 12% tax savings too.

KlangFool
You don't get a 12% tax savings by putting money in a 401k. While contributions are tax free, you pay income taxes on withdrawals, so you will eventually pay taxes on the money. It is tax advantaged though because money grows tax free (i.e., you get an amount equivalent to tax free growth although the mechanics work slightly differently).

nix4me
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Re: Taxable investment account for college?

Post by nix4me » Tue Oct 08, 2019 10:36 am

miamivice wrote:
Tue Oct 08, 2019 9:42 am
KlangFool wrote:
Sun Oct 06, 2019 6:19 pm
401K is not retirement money. You can withdraw them penalty-free before 59 1/2 years old.
This statement is plain wrong. You generally cannot access 401k money prior to retirement penalty / 59.5 penalty free.
Wrong. Rule of 55 a you should research it.

nix4me
Posts: 305
Joined: Sat Oct 13, 2018 9:32 am

Re: Taxable investment account for college?

Post by nix4me » Tue Oct 08, 2019 10:39 am

KlangFool wrote:
Tue Oct 08, 2019 9:58 am
angelescrest wrote:
Tue Oct 08, 2019 9:54 am
KlangFool wrote:
Tue Oct 08, 2019 9:38 am
angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

Please verify that whether you qualify for the following tax credits if you max up your Trad. 401K.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
Interesting. No, not for EITC but we could get to the 10% on the savers credit.
And, you get the 12% tax savings too.

KlangFool
Tax deferred, not tax savings. He will pay the tax.

KlangFool
Posts: 13715
Joined: Sat Oct 11, 2008 12:35 pm

Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 11:02 am

nix4me wrote:
Tue Oct 08, 2019 10:39 am
KlangFool wrote:
Tue Oct 08, 2019 9:58 am
angelescrest wrote:
Tue Oct 08, 2019 9:54 am
KlangFool wrote:
Tue Oct 08, 2019 9:38 am
angelescrest wrote:
Tue Oct 08, 2019 9:27 am


We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
angelescrest,

Please verify that whether you qualify for the following tax credits if you max up your Trad. 401K.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
Interesting. No, not for EITC but we could get to the 10% on the savers credit.
And, you get the 12% tax savings too.

KlangFool
Tax deferred, not tax savings. He will pay the tax.
nix4me,

<<He will pay the tax.>>

A) Or not. At a modest tax-deferred account size and Roth IRAs, the retirement tax rate could be zero. Only 10% of the USA household has a net worth of 1 million or more. Even assuming 1 million (100% in the tax-deferred account - unrealistic) with 4% SWR, it is equal to 40K per year. How much tax do you pay for 40K of income per year?

B) Even at 12% retirement tax rate,

If you are given a choice of paying $10,000 to IRS now or 20 years later, what would you choose? The answer should be obvious.

KlangFool

miamivice
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Re: Taxable investment account for college?

Post by miamivice » Tue Oct 08, 2019 11:15 am

KlangFool wrote:
Tue Oct 08, 2019 11:02 am
nix4me wrote:
Tue Oct 08, 2019 10:39 am
KlangFool wrote:
Tue Oct 08, 2019 9:58 am
angelescrest wrote:
Tue Oct 08, 2019 9:54 am
KlangFool wrote:
Tue Oct 08, 2019 9:38 am


angelescrest,

Please verify that whether you qualify for the following tax credits if you max up your Trad. 401K.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
Interesting. No, not for EITC but we could get to the 10% on the savers credit.
And, you get the 12% tax savings too.

KlangFool
Tax deferred, not tax savings. He will pay the tax.
nix4me,

<<He will pay the tax.>>

A) Or not. At a modest tax-deferred account size and Roth IRAs, the retirement tax rate could be zero. Only 10% of the USA household has a net worth of 1 million or more. Even assuming 1 million (100% in the tax-deferred account - unrealistic) with 4% SWR, it is equal to 40K per year. How much tax do you pay for 40K of income per year?

B) Even at 12% retirement tax rate,

If you are given a choice of paying $10,000 to IRS now or 20 years later, what would you choose? The answer should be obvious.

KlangFool
You're forgetting social security. If the couple earns $25,000 a year in social security, then they would have $65,000 a year in taxable income. I am not sure of the tax rates for $65,000 a year in income, but it's not zero.

Bottom line is most people pay taxes on 401k withdrawals in retirement.

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teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Tue Oct 08, 2019 11:17 am

angelescrest wrote:
Tue Oct 08, 2019 9:27 am
teen persuasion wrote:
Mon Oct 07, 2019 12:41 pm
zlandar wrote:
Mon Oct 07, 2019 8:55 am
I would max out your 401k before you put anything in a 529 or in the brokerage account.

Assets in retirement accounts (401k, Roth, IRA) are not counted when applying for financial aid.

Assets in a 529 can be counted up to ~6% of the value.

Assets in a brokerage account will be counted at a much higher value than a 529.
No, assets in a 529 and assets in taxable accounts are included exactly the same on the FAFSA: 12% of assets are labeled Available Assets, and then a progressive rate is applied, the top rate is 47% . This results in the oft quoted 5.64% of assets included in your EFC.

The advantage of 529 over taxable is the state tax deduction (if any) and the tax free growth inside the 529 (if funds are used for college expenses).

If the OP wants to minimize his EFC, he should minimize BOTH taxable and 529 account balances by putting as much as possible into retirement accounts (not included in FAFSA Available Assets). The problem may be, however, that the OP's income may be high enough to trigger a high EFC even without any included Available Assets. If that is the case, then the OP should forget about trying to minimize his EFC and save for college expenses in a 529 AS WELL AS maximize retirement savings.

The trick is knowing which camp you fall into. Generally, Bogleheads who max out retirement accounts and have to save the rest into taxable accounts have a high enough income to have a high EFC. Therefore they should save to a 529 for the tax savings (over taxable accounts). Those who have to choose between filling retirement accounts and 529 or taxable accounts are more likely to benefit more from leaning more heavily to retirement savings and less to 529/taxable.
Thanks for the input. A few follow up questions:

1) You asked "if the OP wants to minimize his EFC, he should minimize BOTH taxable and 529..." - my question is, given our situation, how concerned should we be about minimizing our EFC by the time our kids are going to college? Does it generally make that big of a difference in what kind of scholarships or financial aid one is qualified for?

2) Given our circumstances, would you recommend moving money from the taxable account into a 529 so that the $90k + future gains doesn't factor into the EFC calculation? Or alternatively, if we believe our income will be higher, should we just spend down the taxable account and max the 401k, with the plan to borrow from the 401k or Roth to pay for future college expenses?

We are in the 12?% tax bracket at the moment, and would likely move up to 22% later when spouse is working more.
Best way to go is to look at the actual EFC formulas: https://ifap.ed.gov/efcformulaguide/at ... Guide.pdf

Start on page 9. Then you can see if your "very modest" income will give you a high or low EFC. Then add your taxable assets OR 529 assets (they will count exactly the same on the FAFSA).

If you can manage an EFC below ~$5k, then you are eligible for federal PELL grants (max is almost $6k) and possibly state grants (like TAP in NYS, similar to PELL). An EFC = 0 nets you approx full PELL and TAP, EFC = $6k and they are reduced to zero. School grants are highly variable by the school, and by your student's achievements (merit aid). Everyone is offered loans first. Work Study is roughly $1k to $1.2k, and your student has to earn it before it is in hand, so is useless for paying tuition/R&B bills before the semester begins.

There are two special cases where you can game a better EFC: 1) if you can get your AGI below $50k (and meet another condition from the list) then you can skip reporting assets (Simplified Needs Test); and 2) if you can get your AGI below $26k (and meet another condition from the list) then you can get an auto EFC = 0. These are useful if you can push a lot of income into tax deferred accounts to drive your AGI down. The regular EFC calculations add back retirement contributions to Available Income (so retirement contributions don't permanently reduce your income for FAFSA), but these 2 special tests are before the add-back. The auto EFC = 0 never goes thru the rest of the calculations, it just short circuits around the calculations to the end. The SNT skips the add back for the test, and if you pass you can skip reporting assets (great if you have 529s or taxable), but then your retirement contributions ARE added back for the Available Income portion of the EFC calculation (so high gross income may increase your EFC).

Big take away is that you need to know if it's at all possible to hit one of those 2 special tests, or no chance. Other thing is that the FAFSA is always evolving, it will be different in 10 years, it's certainly different from 10 years ago when I filed for DD1. That makes planning hard.

The problem everyone is having, trying to give advice, is that terms like "very modest" income mean different things to different people. Very modest income to me was when we had ~$35k income for a family of 7 - yes, we qualified for an Auto EFC = 0 (the limit was $32k, but was retroactively dropped to $23k, and had slowly risen to $26k today). Yet you say you don't qualify for EITC, even with 401k contributions, and could hit the 10% retirement Saver's credit. Your current annual retirement saving is Roth IRAs plus 401k contributions of only 10%. It's not clear if that is enough; if it is not, you should save more for retirement BEFORE anything gets earmarked for college. Anything saved outside of retirement accounts is fair game as far as FAFSA is concerned, so the best place to stash extra savings is in retirement accounts, especially if you still have unused space available this year. If you save heavily for retirement now, you may find yourself in a position where you can pause retirement saving (or most of it, still capture a match) while the kids are in college and cash flow college expenses.

nolesrule
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Re: Taxable investment account for college?

Post by nolesrule » Tue Oct 08, 2019 11:48 am

UTMA accounts might be a reasonable alternate choice.

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Wiggums
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Re: Taxable investment account for college?

Post by Wiggums » Tue Oct 08, 2019 11:50 am

Teen Persuasion— Thanks for the detailed explanation and link.

User avatar
teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Tue Oct 08, 2019 12:08 pm

miamivice wrote:
Tue Oct 08, 2019 11:15 am
KlangFool wrote:
Tue Oct 08, 2019 11:02 am
nix4me wrote:
Tue Oct 08, 2019 10:39 am
KlangFool wrote:
Tue Oct 08, 2019 9:58 am
angelescrest wrote:
Tue Oct 08, 2019 9:54 am

Interesting. No, not for EITC but we could get to the 10% on the savers credit.
And, you get the 12% tax savings too.

KlangFool
Tax deferred, not tax savings. He will pay the tax.
nix4me,

<<He will pay the tax.>>

A) Or not. At a modest tax-deferred account size and Roth IRAs, the retirement tax rate could be zero. Only 10% of the USA household has a net worth of 1 million or more. Even assuming 1 million (100% in the tax-deferred account - unrealistic) with 4% SWR, it is equal to 40K per year. How much tax do you pay for 40K of income per year?

B) Even at 12% retirement tax rate,

If you are given a choice of paying $10,000 to IRS now or 20 years later, what would you choose? The answer should be obvious.

KlangFool
You're forgetting social security. If the couple earns $25,000 a year in social security, then they would have $65,000 a year in taxable income. I am not sure of the tax rates for $65,000 a year in income, but it's not zero.

Bottom line is most people pay taxes on 401k withdrawals in retirement.
It's all about finding the sweet spot. First mistake: assuming retirement = collecting SS. We plan to retire well before SS age, Roth convert, and hold off collecting SS until age 70. So lots of years of 401k income w/o SS income.

Even if we were collecting SS without any Roth conversions, we already are at approximately 1/3 Roth to 2/3 traditional IRA/401k. I expect $26k in SS. If our retirement accounts totaled $900k, that's $300k Roth (no tax) and $600k traditional, for about $24k at a 4% withdrawal rate. How much of SS is taxable? Take one half of SS and add to other income: $13k + $24k = $37k. The portion over $34k is 50% taxable SS, so 50% of $3k, or $1500. That plus the $24k traditional withdrawal is $25.5k, under the $27k standard deduction for seniors MFJ. So zero tax owed federal. And NYS does not tax SS, or the first $20k in retirement withdrawals for each spouse (plus a standard deduction of $16k-ish), so no state tax either.

557880yvi
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Re: Taxable investment account for college?

Post by 557880yvi » Tue Oct 08, 2019 12:16 pm

Just my 2 cents worth having worked in higher ed for the past 12 years.

1. Many in higher ed (we talk about this incessantly) believe that college education or "higher education" as we know it is going to undergo a major paradigm shift in the next 10 years - we are already seeing it happen at the root level, has just not become as obvious to the public. Folks will ask for examples - don't want to turn this into a conversation about higher ed in general but here are a few:
  • Massive exodus already happening of brick and motor classes to online - and to online where tuition is very inexpensive, and schools not AACSB
    accredited. Severely impacting Cash Flow for brick and mortar schools
  • Employers no longer place much emphasis on where one got a degree (exceptions for certain professions like physician but not for the mass employed
  • Employers not longer even requiring a degree specific to job hired for, because they know they will train their own way (case in point, some major accounting firms are no longer requiring an accounting degree, they say they want candidates who can think out of box (yikes, they won't even know a dr from a cr or how to prepare a SCF's!)
  • The prospect of unbearable burden of education debt is directing many towards non-degree or short degree jobs(associates degree or technical licensure)
2.In 10 and 13 years the criteria for financial aid and tax incentives/scholarships/grants is likely to change significantly

3. In most states, send your kids to 2 years community college, have them live at home, save mega dollars. Did you know that most states 4-yr universities accept all credits from CC's AND here's the best part, the GPA for the 1st 2 years does not transfer - so you graduate with the 4-yr school name, much less cost and the GPA only for the 2nd 2 years.

So to help answer this question - absolutely focus on your retirement first. Start a new 529 if you find this a good way to save specifically, but I believe that any current strategies implemented now to meet current Financial Aid/Scholarship/Grant rules in the future will be different so don't try too hard to tailor your decisions to something 10-17 years ahead. Like who thought a few years ago that we could no longer re-characterize ROTH's, that there would be cap of $10k on state & local taxes?

Topic Author
angelescrest
Posts: 1010
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Tue Oct 08, 2019 1:57 pm

teen persuasion wrote:
Tue Oct 08, 2019 11:17 am
Best way to go is to look at the actual EFC formulas: https://ifap.ed.gov/efcformulaguide/at ... Guide.pdf

Start on page 9. Then you can see if your "very modest" income will give you a high or low EFC. Then add your taxable assets OR 529 assets (they will count exactly the same on the FAFSA).

If you can manage an EFC below ~$5k, then you are eligible for federal PELL grants (max is almost $6k) and possibly state grants (like TAP in NYS, similar to PELL). An EFC = 0 nets you approx full PELL and TAP, EFC = $6k and they are reduced to zero. School grants are highly variable by the school, and by your student's achievements (merit aid). Everyone is offered loans first. Work Study is roughly $1k to $1.2k, and your student has to earn it before it is in hand, so is useless for paying tuition/R&B bills before the semester begins.

There are two special cases where you can game a better EFC: 1) if you can get your AGI below $50k (and meet another condition from the list) then you can skip reporting assets (Simplified Needs Test); and 2) if you can get your AGI below $26k (and meet another condition from the list) then you can get an auto EFC = 0. These are useful if you can push a lot of income into tax deferred accounts to drive your AGI down. The regular EFC calculations add back retirement contributions to Available Income (so retirement contributions don't permanently reduce your income for FAFSA), but these 2 special tests are before the add-back. The auto EFC = 0 never goes thru the rest of the calculations, it just short circuits around the calculations to the end. The SNT skips the add back for the test, and if you pass you can skip reporting assets (great if you have 529s or taxable), but then your retirement contributions ARE added back for the Available Income portion of the EFC calculation (so high gross income may increase your EFC).

Big take away is that you need to know if it's at all possible to hit one of those 2 special tests, or no chance. Other thing is that the FAFSA is always evolving, it will be different in 10 years, it's certainly different from 10 years ago when I filed for DD1. That makes planning hard.

The problem everyone is having, trying to give advice, is that terms like "very modest" income mean different things to different people. Very modest income to me was when we had ~$35k income for a family of 7 - yes, we qualified for an Auto EFC = 0 (the limit was $32k, but was retroactively dropped to $23k, and had slowly risen to $26k today). Yet you say you don't qualify for EITC, even with 401k contributions, and could hit the 10% retirement Saver's credit. Your current annual retirement saving is Roth IRAs plus 401k contributions of only 10%. It's not clear if that is enough; if it is not, you should save more for retirement BEFORE anything gets earmarked for college. Anything saved outside of retirement accounts is fair game as far as FAFSA is concerned, so the best place to stash extra savings is in retirement accounts, especially if you still have unused space available this year. If you save heavily for retirement now, you may find yourself in a position where you can pause retirement saving (or most of it, still capture a match) while the kids are in college and cash flow college expenses.
This is extremely informative, thank you! I have noted all the points made about saving for retirement first, and that has always been our priority. Based on my calculations, we are saving enough. I saved from early on, and also a higher percentage earlier in my career when I had higher income in a different job. That is also why we are looking at earmarking the $90k for college expenses; otherwise I would keep it as a part of my overall retirement investment portfolio where capital gains rates are favorable to using it in retirement. Looking more closely, yes, we could qualify for EITC this year.

It would be nice if we are in a position to fund college via our work income at that time, but we'll just see.

As noted elsewhere, there is a lot of uncertainty about the future of higher education, but these trends are hard to predict, and one has to plan with what information they have now. I don't exactly trust policy makers to move quickly.

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 2:17 pm

angelescrest wrote:
Tue Oct 08, 2019 1:57 pm

It would be nice if we are in a position to fund college via our work income at that time, but we'll just see.
angelescrest,

This statement does not make any sense if you actually do the calculation.

A) You said that you had saved enough for retirement. If that is true, then, when your kids go to college, you can stop or slow down your retirement savings and pay for the college. Your plan is to pay about 100K. It is about 25K per year. This is about the same number that you save every year.

B) If you do not save enough for retirement, you cannot afford to pay for your kids' college education anyhow.

C) Your statement about you saved enough for retirement is probably based on the assumption that you will be fully-employed continuously for the next 10 to 15 years. What if that is not true, then, do you save enough for retirement?

D) Many of my peers are permanently unemployed and under-employed in their 40s and 50s. This may or may not apply to your profession.

In summary, saving for our retirement first is a very good idea given that we cannot see our future.

I paid for my kids' college education when my net worth excluding my house is 1 million. I used my annual savings and asset to pay for my kids' college education. I knew that even if I am permanently unemployed and/or under-employed, I will be fine.

I was laid off and unemployed for more than 1 year when my son started college. My daughter started college the following year. Thank goodness that it did not happen in a recession.

KlangFool

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angelescrest
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Tue Oct 08, 2019 3:57 pm

KlangFool wrote:
Tue Oct 08, 2019 2:17 pm
angelescrest wrote:
Tue Oct 08, 2019 1:57 pm

It would be nice if we are in a position to fund college via our work income at that time, but we'll just see.
This statement does not make any sense if you actually do the calculation.
KlangFool, do you enjoy finding problems where they don't exist? My statement was a very general assertion. Yes, we would be pleased to be able to fund college via our work income at that time, and that we won't know until we get there as many things could happen and change. What's not making sense?

KlangFool
Posts: 13715
Joined: Sat Oct 11, 2008 12:35 pm

Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 4:13 pm

angelescrest wrote:
Tue Oct 08, 2019 3:57 pm
KlangFool wrote:
Tue Oct 08, 2019 2:17 pm
angelescrest wrote:
Tue Oct 08, 2019 1:57 pm

It would be nice if we are in a position to fund college via our work income at that time, but we'll just see.
This statement does not make any sense if you actually do the calculation.
KlangFool, do you enjoy finding problems where they don't exist? My statement was a very general assertion. Yes, we would be pleased to be able to fund college via our work income at that time, and that we won't know until we get there as many things could happen and change. What's not making sense?
angelescrest,

It is just a number game. There are only three possibilities when you reach that point. And, you can calculate and find out the numbers.

A) Your retirement is fully funded and you can use your annual savings to pay for a college education.

B) You are so short of money for retirement that you cannot pay for a college education.

C) Something in between (A) and (B).

1) You can calculate the number for (A)

2) You can calculate the number for (B)

3) You know your investment net worth now and you know your current annual saving. If you put in a realistic return number (5% to 7%), you can forecast whether you will reach (A) in 10+ years.

<<My statement was a very general assertion. >>

It is your choice as to whether you want to find out the numbers. But, it is very simple to find out whether (A) is a realistic possibility.

I know my number for a very long time. It is at 1 million. It is not hard to calculate.

KlangFool

Topic Author
angelescrest
Posts: 1010
Joined: Tue May 27, 2008 10:48 am
Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Tue Oct 08, 2019 4:32 pm

KlangFool wrote:
Tue Oct 08, 2019 4:13 pm
angelescrest wrote:
Tue Oct 08, 2019 3:57 pm
KlangFool wrote:
Tue Oct 08, 2019 2:17 pm
angelescrest wrote:
Tue Oct 08, 2019 1:57 pm

It would be nice if we are in a position to fund college via our work income at that time, but we'll just see.
This statement does not make any sense if you actually do the calculation.
KlangFool, do you enjoy finding problems where they don't exist? My statement was a very general assertion. Yes, we would be pleased to be able to fund college via our work income at that time, and that we won't know until we get there as many things could happen and change. What's not making sense?
angelescrest,

It is just a number game. There are only three possibilities when you reach that point. And, you can calculate and find out the numbers.

A) Your retirement is fully funded and you can use your annual savings to pay for a college education.

B) You are so short of money for retirement that you cannot pay for a college education.

C) Something in between (A) and (B).

1) You can calculate the number for (A)

2) You can calculate the number for (B)

3) You know your investment net worth now and you know your current annual saving. If you put in a realistic return number (5% to 7%), you can forecast whether you will reach (A) in 10+ years.

<<My statement was a very general assertion. >>

It is your choice as to whether you want to find out the numbers. But, it is very simple to find out whether (A) is a realistic possibility.

I know my number for a very long time. It is at 1 million. It is not hard to calculate.

KlangFool
I think we are talking about different things. My statement, that you quoted, was referring to my W-2 income, not the retirement accounts. I do not know what our income will be in 10 years, and will have to wait and see if the income can directly cover college expenses. As for our retirement savings, yes, we know our "number" as well as an estimation (based on a combination of historical data and informed guessing) of how large it will be in 10 years.

KlangFool
Posts: 13715
Joined: Sat Oct 11, 2008 12:35 pm

Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 5:00 pm

angelescrest wrote:
Tue Oct 08, 2019 4:32 pm

I think we are talking about different things. My statement, that you quoted, was referring to my W-2 income, not the retirement accounts. I do not know what our income will be in 10 years, and will have to wait and see if the income can directly cover college expenses. As for our retirement savings, yes, we know our "number" as well as an estimation (based on a combination of historical data and informed guessing) of how large it will be in 10 years.
angelescrest,

A) If you know your retirement savings in 10 years, then, you know whether you can use your annual savings at that time to pay for college education in 10 years.

<<see if the income can directly cover college expenses.>>

B) If you keep the same saving rate, then, it will be about the same amount that you plan to pay anyhow. Aka, about 25K per year.

C) So, where is the question about whether your income can cover college expenses?

KlangFool

Topic Author
angelescrest
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Tue Oct 08, 2019 5:11 pm

KlangFool wrote:
Tue Oct 08, 2019 5:00 pm
angelescrest wrote:
Tue Oct 08, 2019 4:32 pm

I think we are talking about different things. My statement, that you quoted, was referring to my W-2 income, not the retirement accounts. I do not know what our income will be in 10 years, and will have to wait and see if the income can directly cover college expenses. As for our retirement savings, yes, we know our "number" as well as an estimation (based on a combination of historical data and informed guessing) of how large it will be in 10 years.
angelescrest,

A) If you know your retirement savings in 10 years, then, you know whether you can use your annual savings at that time to pay for college education in 10 years.

<<see if the income can directly cover college expenses.>>

B) If you keep the same saving rate, then, it will be about the same amount that you plan to pay anyhow. Aka, about 25K per year.

C) So, where is the question about whether your income can cover college expenses?

KlangFool
Our annual savings is not enough to pay for college in today’s dollars for two kids and certainly not in future dollars.

KlangFool
Posts: 13715
Joined: Sat Oct 11, 2008 12:35 pm

Re: Taxable investment account for college?

Post by KlangFool » Tue Oct 08, 2019 5:29 pm

angelescrest wrote:
Tue Oct 08, 2019 5:11 pm
KlangFool wrote:
Tue Oct 08, 2019 5:00 pm
angelescrest wrote:
Tue Oct 08, 2019 4:32 pm

I think we are talking about different things. My statement, that you quoted, was referring to my W-2 income, not the retirement accounts. I do not know what our income will be in 10 years, and will have to wait and see if the income can directly cover college expenses. As for our retirement savings, yes, we know our "number" as well as an estimation (based on a combination of historical data and informed guessing) of how large it will be in 10 years.
angelescrest,

A) If you know your retirement savings in 10 years, then, you know whether you can use your annual savings at that time to pay for college education in 10 years.

<<see if the income can directly cover college expenses.>>

B) If you keep the same saving rate, then, it will be about the same amount that you plan to pay anyhow. Aka, about 25K per year.

C) So, where is the question about whether your income can cover college expenses?

KlangFool
Our annual savings is not enough to pay for college in today’s dollars for two kids and certainly not in future dollars.
But, it is enough for the amount that you plan to pay anyhow. So, it is not a problem.

Klangfool

Topic Author
angelescrest
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Joined: Tue May 27, 2008 10:48 am
Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Tue Oct 08, 2019 5:56 pm

KlangFool wrote:
Tue Oct 08, 2019 5:29 pm
angelescrest wrote:
Tue Oct 08, 2019 5:11 pm
KlangFool wrote:
Tue Oct 08, 2019 5:00 pm
angelescrest wrote:
Tue Oct 08, 2019 4:32 pm

I think we are talking about different things. My statement, that you quoted, was referring to my W-2 income, not the retirement accounts. I do not know what our income will be in 10 years, and will have to wait and see if the income can directly cover college expenses. As for our retirement savings, yes, we know our "number" as well as an estimation (based on a combination of historical data and informed guessing) of how large it will be in 10 years.
angelescrest,

A) If you know your retirement savings in 10 years, then, you know whether you can use your annual savings at that time to pay for college education in 10 years.

<<see if the income can directly cover college expenses.>>

B) If you keep the same saving rate, then, it will be about the same amount that you plan to pay anyhow. Aka, about 25K per year.

C) So, where is the question about whether your income can cover college expenses?

KlangFool
Our annual savings is not enough to pay for college in today’s dollars for two kids and certainly not in future dollars.
But, it is enough for the amount that you plan to pay anyhow. So, it is not a problem.

Klangfool
Sure, keep telling me what I know and don’t know about my own savings rate and income, the specific details of which I did not post. This is my last response to your posts, some of which are in trolling territory. I deeply value the sharing of divergent viewpoints on BG, but this is just you invalidating my questions and comments. As it is, I can’t really imagine you know what I mean by that.

Broken Man 1999
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Joined: Wed Apr 08, 2015 11:31 am

Re: Taxable investment account for college?

Post by Broken Man 1999 » Tue Oct 08, 2019 6:24 pm

OP, do you receive any state tax reductions if you contribute to a 529 plan?

I have always felt dedicated savings for college expenses were best and were preferable to hoping to cash-flow. I'm sure any who are planning to cash-flow the education expenses are sincere in their plans, but, life happens when you haven't dedicated the savings. You cannot fund college expenses on hope.

We are using 529 plans at Vanguard for some of the college expenses for the grandchildren. We have already prepaid four years of the in-state university tuition for all four, so the 529 plans won't be needed for the tuition. Books, possible dorm fees, etc. will be expenses; expenses even when tuition has been covered.

And, since Florida has no income tax, there are no tax benefits for us.

Just my preference, others feel differently, and that is OK. I don't like having an unfunded commitment I have made to be left to the whims of life. The prepaid tuition and the 529 plans are tangible evidence of the commitment.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

mmmodem
Posts: 1748
Joined: Thu May 20, 2010 1:22 pm

Re: Taxable investment account for college?

Post by mmmodem » Tue Oct 08, 2019 7:54 pm

angelescrest wrote:
Tue Oct 08, 2019 5:56 pm
Sure, keep telling me what I know and don’t know about my own savings rate and income, the specific details of which I did not post. This is my last response to your posts, some of which are in trolling territory. I deeply value the sharing of divergent viewpoints on BG, but this is just you invalidating my questions and comments. As it is, I can’t really imagine you know what I mean by that.
angelescrest

Klangfool is really trying to help. The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529. $90k earmarked for college can be placed in a 529 or in retirement accounts. The money is fungible, it wouldn't matter where the $90k is placed. It can still be used college either way. Yes, you don't want to decrease your retirement accounts to pay for college, but if you din't put the $90k in there, it wouldn't be there for you to take out.

The main differences favoring maxing retirement before a 529 are these two things:

1. Money in a 529 must be used for education or you will be penalized for the distribution. Perhaps your children will get full scholarships or for other reasons not need help to pay for college.

2. Money in a 529 is counted against you for FAFSA calculations while money in retirement accounts and your primary home is not.

Say, for example, your household income takes a dive prior to your children going to college. If you had invested $90k in a 529, then your kids education is secured. Your expected family contribution is high. Thank goodness you have a 529 for your children. Maybe they'll need to get some loans but they will be small loans. But what about retirement and day to day living expenses? It's going to be tough.

Now let's say you listened to that argumentative Klangfool on the internet and invested in your 401k instead. You have very little in your 529, however, your EFC is low because your income is low and assets in your primary home and retirement accounts are not included. Thank goodness your children gets financial aid to go to college. Maybe they'll need to get some loans but they will be small loans. Retirement is on a much better footing because you invested $90k extra into it. What about day to day living expenses? Follow the link above that Klangfool provided for how to take money out of retirement accounts without paying penalties. Perhaps even without taxes if you your income is really low. Yes, you don't ever want to take out retirement money. but that $90k wasn't going to go to retirement anyway. Or money is fungible.

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teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Tue Oct 08, 2019 8:58 pm

Looking more closely, yes, we could qualify for EITC this year.
Note that investment income greater than ~$3500 will disqualify you from EITC eligibility, even if your wage income/AGI are in range. Another reason to save in retirement accounts instead of taxable.

Does your state have a credit analogous to EITC? NYS does, they match at 30%, and both are refundable credits. I've been using our tax refunds for years to fund our Roth IRAs. EITC, CTC, AOTC all have refundable portions. The phaseout rate for EITC with more than one child is 21%. That means an extra $1k to a 401k is an extra $210 in EITC, and an extra $63 in state EITC, on top of the federal tax avoided ($120 if you are 12%, $100 or 10% for us) plus state tax avoided of $40. That's a 41.3% return on 401k contributions for us, maybe more for you as you are in a higher bracket. Multiply that $413 by ten for an extra $10k contribution instead. You could leverage your taxable savings by shifting them to a 401k (spend savings, contribute most of earnings). Lower AGI could make you eligible for a larger % retirement Saver's credit, too.

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teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Tue Oct 08, 2019 9:08 pm

Going back to the taxable vs 529 for funds for college - if there's a state tax credit, that favors 529. If you are above the 0% LTCG bracket, that favors using 529 for the tax avoidance. If neither, it's a wash, and I'd stay in taxable for the flexibility.

Unless, of course, you are in the 0% LTCG bracket now (for selling the taxable to fund the 529) but might not be at college time. Then the risk to funding a 529 is if you need to tap it for non-college expenses (either because you need those $ for something else, or because they can't be used for college if your kid(s) don't go or college funding changes drastically). You would pay taxes plus a penalty.

HereToLearn
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Re: Taxable investment account for college?

Post by HereToLearn » Tue Oct 08, 2019 9:13 pm

mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
angelescrest wrote:
Tue Oct 08, 2019 5:56 pm
Sure, keep telling me what I know and don’t know about my own savings rate and income, the specific details of which I did not post. This is my last response to your posts, some of which are in trolling territory. I deeply value the sharing of divergent viewpoints on BG, but this is just you invalidating my questions and comments. As it is, I can’t really imagine you know what I mean by that.
angelescrest

Klangfool is really trying to help. The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529. $90k earmarked for college can be placed in a 529 or in retirement accounts. The money is fungible, it wouldn't matter where the $90k is placed. It can still be used college either way. Yes, you don't want to decrease your retirement accounts to pay for college, but if you din't put the $90k in there, it wouldn't be there for you to take out.

The main differences favoring maxing retirement before a 529 are these two things:

1. Money in a 529 must be used for education or you will be penalized for the distribution. Perhaps your children will get full scholarships or for other reasons not need help to pay for college.

2. Money in a 529 is counted against you for FAFSA calculations while money in retirement accounts and your primary home is not.

Say, for example, your household income takes a dive prior to your children going to college. If you had invested $90k in a 529, then your kids education is secured. Your expected family contribution is high. Thank goodness you have a 529 for your children. Maybe they'll need to get some loans but they will be small loans. But what about retirement and day to day living expenses? It's going to be tough.

Now let's say you listened to that argumentative Klangfool on the internet and invested in your 401k instead. You have very little in your 529, however, your EFC is low because your income is low and assets in your primary home and retirement accounts are not included. Thank goodness your children gets financial aid to go to college. Maybe they'll need to get some loans but they will be small loans. Retirement is on a much better footing because you invested $90k extra into it. What about day to day living expenses? Follow the link above that Klangfool provided for how to take money out of retirement accounts without paying penalties. Perhaps even without taxes if you your income is really low. Yes, you don't ever want to take out retirement money. but that $90k wasn't going to go to retirement anyway. Or money is fungible.
I want to correct two comments above.

1. If a student receives a scholarship, the parent will not pay a penalty on the corresponding 529 disbursement. Income tax will be owed on the earnings, but the 10% penalty is waived when a scholarship is awarded.

2. Home equity is considered by many schools that use the CSS Profile in calculating financial aid awards. The amount of home equity varies from a multiple of income (I have seen 1X to 4X) up to 100% of home equity.

miamivice
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Re: Taxable investment account for college?

Post by miamivice » Tue Oct 08, 2019 9:27 pm

mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
Klangfool is really trying to help.
No, he has a vendetta against 529s and has made it his mission on Bogleheads to discourage people from using them for any purpose. He is 100% opposed to the existence of a 529.
$90k earmarked for college can be placed in a 529 or in retirement accounts. The money is fungible, it wouldn't matter where the $90k is placed. It can still be used college either way.
People keep saying this, but it makes no sense to me. If you stick $90k into a 401k via pretax paycheck contributions, you cannot use that money for college (penalty free). Period. If you put it into a Roth IRA, you can use that $90k in contributions for college but cannot use any growth. If you put that $90k into a 529, you can use both the contributions and growth for college.

Those are three distinct uses for the $90k that all would result in different abilities to use the money:

1. 401k - cannot be used for college
2. Roth IRA - contributions only can be used for college
3. 529 - contributions and earnings can be used for college.
You have very little in your 529, however, your EFC is low because your income is low and assets in your primary home and retirement accounts are not included. Thank goodness your children gets financial aid to go to college. Maybe they'll need to get some loans but they will be small loans.
My understanding is that most financial aid is disbursed in loans primarily and only a small part in scholarships/grants.

mmmodem
Posts: 1748
Joined: Thu May 20, 2010 1:22 pm

Re: Taxable investment account for college?

Post by mmmodem » Wed Oct 09, 2019 4:53 am

miamivice wrote:
Tue Oct 08, 2019 9:27 pm
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
Klangfool is really trying to help.
No, he has a vendetta against 529s and has made it his mission on Bogleheads to discourage people from using them for any purpose. He is 100% opposed to the existence of a 529.
$90k earmarked for college can be placed in a 529 or in retirement accounts. The money is fungible, it wouldn't matter where the $90k is placed. It can still be used college either way.
People keep saying this, but it makes no sense to me. If you stick $90k into a 401k via pretax paycheck contributions, you cannot use that money for college (penalty free). Period. If you put it into a Roth IRA, you can use that $90k in contributions for college but cannot use any growth. If you put that $90k into a 529, you can use both the contributions and growth for college.

Those are three distinct uses for the $90k that all would result in different abilities to use the money:

1. 401k - cannot be used for college
2. Roth IRA - contributions only can be used for college
3. 529 - contributions and earnings can be used for college.
You have very little in your 529, however, your EFC is low because your income is low and assets in your primary home and retirement accounts are not included. Thank goodness your children gets financial aid to go to college. Maybe they'll need to get some loans but they will be small loans.
My understanding is that most financial aid is disbursed in loans primarily and only a small part in scholarships/grants.
I don't disagree with any of the statements you wrote above. But given OP has not maxed out retirement yet, I don't think a 529 is appropriate. That is where our opinion differs.

Basically, it comes down to I'd rather take money out of a Roth IRA to pay for college and yes it will only be contribution only. The 401k can be accessed through Roth IRA conversions. Most people are employed by more than one company in their career and may access their previous employer's 401k for the conversion. Assuming they didn't work for more than one company or it isn't enough, they can stop retirement contribution altogether and cash flow college. All of this with minimizing EFC on FAFSA will maximize their children's potential at paying for college whether they be loans or free money.

OP can do the math on what $90k invested will be and make sure that they cash flow the growth when their children go to college. That original $90k will still experience tax advantaged growth in OP's retirement accounts. There is no net loss in growth whether one places the money in retirement accounts or a 529 if you consider the 529 and retirement accounts as a whole. Even if you don't agree you can access your retirement accounts with any degree of feasibility to pay college, I hope you can see that.

And thus, for the two reasons of your child not needing the 529 and lowering your EFC calculation, funding retirement first and then 529 makes sense. The side benefit is as I already illustrated above, if you experience a decrease in household income you'll receive more financial aid.

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angelescrest
Posts: 1010
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Wed Oct 09, 2019 6:31 am

Broken Man 1999 wrote:
Tue Oct 08, 2019 6:24 pm
OP, do you receive any state tax reductions if you contribute to a 529 plan?

I have always felt dedicated savings for college expenses were best and were preferable to hoping to cash-flow. I'm sure any who are planning to cash-flow the education expenses are sincere in their plans, but, life happens when you haven't dedicated the savings. You cannot fund college expenses on hope.

We are using 529 plans at Vanguard for some of the college expenses for the grandchildren. We have already prepaid four years of the in-state university tuition for all four, so the 529 plans won't be needed for the tuition. Books, possible dorm fees, etc. will be expenses; expenses even when tuition has been covered.

And, since Florida has no income tax, there are no tax benefits for us.

Just my preference, others feel differently, and that is OK. I don't like having an unfunded commitment I have made to be left to the whims of life. The prepaid tuition and the 529 plans are tangible evidence of the commitment.

Broken Man 1999
We are in Texas, so I think we are in the same boat. I like the way you describe this as a commitment. We’d also like more than just hope, but evidence of how much we value this. I like the teaching/learning opportunity that comes with discussing this with our children and having a specific set of funds they know are there and growing, and can thus set their expectations around.

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