Contribute to 529 or ROTH via After tax 401k

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Topic Author
nptit
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Joined: Sun Mar 29, 2015 5:51 pm

Contribute to 529 or ROTH via After tax 401k

Post by nptit »

Hello,

Soon to be new parent. I am faced with the following choice assuming I can continue to invest this much money when the baby comes:

My employer offers an after tax 401k that I can contribute to and roll over to my vanguard IRA. Should I continue to invest the 20% (following 57K limit) of my salary to the after tax 401k which I then convert to my roth ira. Or should I lower my after tax contributions to 10% and start a 529 and invest 10% into that for the new born?

Thanks!
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Contribute to 529 or ROTH via After tax 401k

Post by lakpr »

Is this an either/or question, and if so why?

The answer depends on your tax bracket, your state of residence, and what you think you can contribute to after-tax 401k on an yearly basis.
Spirit Rider
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Re: Contribute to 529 or ROTH via After tax 401k

Post by Spirit Rider »

It also depends on whether the parents/student will be eligible for financial aid. Retirement accounts are not assessed as assets for financial aid, but distributions (including Roth) are considered income assessed at 20% for the parents and 50% for the student. This can have severe adverse effects on financial aid.

Not to mention, your state may have tax deductions for 529 contributions.
Topic Author
nptit
Posts: 57
Joined: Sun Mar 29, 2015 5:51 pm

Re: Contribute to 529 or ROTH via After tax 401k

Post by nptit »

Regarding state tax deduction we are in Texas, so not a factor.
Regarding either/or question; It would be tight to cashflow our expenses; mortgage, daycare, etc...while maxing out the after tax portion of the 401ks for wife and I and 529s
So I am mainly asking what do you think I should prioritize more?
Household income is around 350k, though we would likely/hope to be retired by the time kids are in college
scubadiver
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Re: Contribute to 529 or ROTH via After tax 401k

Post by scubadiver »

Go for the Roth via after tax 401k.

529s are great, but I take advantage of all available 401k and IRA space first. A substantial state income tax bill that could be mitigated with 529 contributions might change the calculation a little. Since this isn't the case, the choice is easy.
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1789
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Re: Contribute to 529 or ROTH via After tax 401k

Post by 1789 »

Make sure if you go after tax 401k route, you are NOT doing automatic in plan conversions but you are using 2nd route which is taking your contributions (and gains if any) from after tax 401k to your Roth IRA directly. You already mentioned that you want to do this but i wanted to remind you again. Because If you were to do in plan conversion and want to take them out later, your plan may not allow partial distributions during employment.
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HockeyFan99
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Re: Contribute to 529 or ROTH via After tax 401k

Post by HockeyFan99 »

If you go the additional retirement savings route (which I could certainly see here) I’d consider still opening a 529 and starting with a nominal monthly savings amount. It’ll give you a place to park future gifts to your child, and an easy way to start saving more if your financial picture changes. Getting started at anything, including saving for college, is often the hardest part.
"I'm spending a year dead for tax reasons." - Hotblack Desiato
lakpr
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Re: Contribute to 529 or ROTH via After tax 401k

Post by lakpr »

nptit wrote: Fri Dec 27, 2019 2:40 pm Regarding state tax deduction we are in Texas, so not a factor.
Regarding either/or question; It would be tight to cashflow our expenses; mortgage, daycare, etc...while maxing out the after tax portion of the 401ks for wife and I and 529s
So I am mainly asking what do you think I should prioritize more?
Household income is around 350k, though we would likely/hope to be retired by the time kids are in college
Prioritize the After Tax 401k for sure.

However, not being able to save $50k (I assume at least $7k as employer match) on your $350k salary is really a huge red flag. That's barely 14% savings rate. Too much mortgage? I understand childcare is expensive (I live in NJ! here the rates are $2200 per infant and $1800 per todder), but even accounting for a full year of infant care, that's about 6% of your income
Topic Author
nptit
Posts: 57
Joined: Sun Mar 29, 2015 5:51 pm

Re: Contribute to 529 or ROTH via After tax 401k

Post by nptit »

I should clarify this is for both my wife and I, so it's not just 50K it's 50K for me and another 50K for her. So in total 100K. We had been saving what additional we had in a taxable account as well, so will have to look at things closer. Our mortgage is 15 years as well.
lakpr wrote: Fri Dec 27, 2019 4:30 pm
nptit wrote: Fri Dec 27, 2019 2:40 pm Regarding state tax deduction we are in Texas, so not a factor.
Regarding either/or question; It would be tight to cashflow our expenses; mortgage, daycare, etc...while maxing out the after tax portion of the 401ks for wife and I and 529s
So I am mainly asking what do you think I should prioritize more?
Household income is around 350k, though we would likely/hope to be retired by the time kids are in college
Prioritize the After Tax 401k for sure.

However, not being able to save $50k (I assume at least $7k as employer match) on your $350k salary is really a huge red flag. That's barely 14% savings rate. Too much mortgage? I understand childcare is expensive (I live in NJ! here the rates are $2200 per infant and $1800 per todder), but even accounting for a full year of infant care, that's about 6% of your income
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