Should I have a taxable account if I'm not maxing retirement accounts?

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jb3
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Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

I'm not able to fully fund all my retirement accounts each year. Is there any reason to have a taxable account?

My wife and I fund:
Full Roths
About 8% combined to 401ks
Two 529 accounts
Cash to emergency fund
Wife Teacher's pension

All funds are in target retirement funds.
Combined income is 165k.
We have two kids, 12 and 14.

Thanks.
JBTX
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by JBTX »

Absolutely. Save as much as you reasonably can, even if in taxable account. If invested in tax efficient index funds the ongoing tax liability will be minimal.
barranquilla
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by barranquilla »

you can still have the taxable/brokerage account

but why not work on maximizing your retirement accounts ?

you get more tax benefits that way !
Mike Scott
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Mike Scott »

You already have one if your cash is in a bank/savings account. Generally it depends on lots of things but taxable brokerage accounts can be very tax efficient. This blog post popped up today and is a good starting point for considering taxable as an "extension of Roth space" which has been discussed here off and on. https://www.whitecoatinvestor.com/taxab ... -roth-ira/
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Folly
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Folly »

If the purpose of the investment is for retirement, you should work to max your tax advantaged space before moving on to a taxable account, as long as your 401Ks have reasonable options. A dollar contributed to your 401K is worth more than a dollar contributed to a taxable account.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by ivgrivchuck »

jb3 wrote: Sat Oct 17, 2020 1:16 pm I'm not able to fully fund all my retirement accounts each year. Is there any reason to have a taxable account?

My wife and I fund:
Full Roths
About 8% combined to 401ks
Two 529 accounts
Cash to emergency fund
Wife Teacher's pension

All funds are in target retirement funds.
Combined income is 165k.
We have two kids, 12 and 14.

Thanks.
Make sure that you have a big enough emergency fund. Use taxable to save for any medium term needs (car, house, dream vacation).

Other than that maxing out 401ks sounds like the way to go.
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RetiredAL
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by RetiredAL »

I'm now retired and I wish we had more taxable. Although our overall tax bill is now significantly lower than when I worked, thanks to the SS Hump any additional IRA withdrawal is incrementally taxed heavily. Thus I find paying taxes for my annual Roth Conversions using additional IRA withdrawal $ is mentally painful.

On the plus side, having that initial taxable pot to draw on did partially fund full ROTH contributions for near 20 years for both DW and I.
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ruralavalon
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by ruralavalon »

jb3 wrote: Sat Oct 17, 2020 1:16 pm I'm not able to fully fund all my retirement accounts each year. Is there any reason to have a taxable account?

My wife and I fund:
Full Roths
About 8% combined to 401ks
Two 529 accounts
Cash to emergency fund
Wife Teacher's pension

All funds are in target retirement funds.
Combined income is 165k.
We have two kids, 12 and 14.

Thanks.
In general make maximum annual contributions to all available tax-advantaged accounts as a priority ahead of using a taxable account.

Exceptions might be (1) your emergency fund, (2) saving for a home downpayment, (3) extraordinarily bad funds offered in the 401ks, (4) a very large balance already in traditional tax-deferred accounts, etc.

Is there a reason you are considering using a taxable account?

Wiki article "Prioritizing Investments".
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retiredjg
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by retiredjg »

In general, I would not place retirement money in a taxable account unless I had filled both a 401k (or similar) and an IRA (traditional or Roth). I'm sure there are exceptions but I think they are probably not common.

You should have a taxable account for your emergency fund and any money you are saving for short term goals (house, car, vacation, etc.)
nix4me
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by nix4me »

If you plan on retiring early then you absolutely need a taxable account.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by grabiner »

The main reason to have a non-retirement account when you are not maxing out retirement accounts is that you may need the money before you can use the retirement account. For example, a taxable account is the proper place to save for a home down payment or a car purchase.

One other reason, not very common, is that the retirement account is so bad that you lose more to expenses than you would lose to taxes in a taxable account. My rule of thumb for considering this is that the product of the extra expenses on the retirement account and the number of years you will be with the employer must exceed twice your tax rate on qualified dividends. For example, if you pay the usual 15% dividend tax and no state tax, and your 403(b) charges 1.5% higher expenses than stock index funds, you should still use it unless you are confident you will be with this employer for over 20 years. (When you leave the employer, you can roll over the high-cost 403(b) into an IRA, getting low expenses while keeping tax deferral.)
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by grabiner »

RetiredAL wrote: Sat Oct 17, 2020 1:53 pm I'm now retired and I wish we had more taxable. Although our overall tax bill is now significantly lower than when I worked, thanks to the SS Hump any additional IRA withdrawal is incrementally taxed heavily. Thus I find paying taxes for my annual Roth Conversions using additional IRA withdrawal $ is mentally painful.
Even if you are paying 40.7% on the IRA withdrawals (which only applies to a small range; the rate is 22.2% in most of the phase-in), you probably got a 22%-28% deduction on the contributions, and would have lost a significant amount to dividend taxes. In addition, if you are in that 40.7% range, withdrawals from a taxable account would be subject to a 40.7% tax on non-qualified dividends (from a bond fund), 33.7% tax on qualified dividends or the capital-gain portion of stock sales, and 18.7% tax on municipal-bond interest (not taxed but does count for the SS phase-in). Thus you probably come out ahead even in the hump. And any IRA withdrawal taxed at 22.2% (still in the 12% bracket) or 22% or 24% (once you hit the max for SS taxation) is a clear gain compared to a taxable account.

And Roth accounts are always better than taxable accounts if you can use them tax-free; if you contributed to a traditional account when you were working, converting it to Roth after retirement gives you the same benefit.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by aristotelian »

JBTX wrote: Sat Oct 17, 2020 1:25 pm Absolutely. Save as much as you reasonably can, even if in taxable account. If invested in tax efficient index funds the ongoing tax liability will be minimal.
The problem is he is not maxing his retirement accounts. Unless for some reason he needs liquidity he is likelier better off maximizing tax advantages first before investing in taxable. Once their retirement accounts are maxed I would agree.
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jb3
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

It was mentioned that for shorter term (non retirement) goals, like a car, to use a taxable account. I have always saved for that in my emergency Ally savings account. I overfund it ahead of a planned purchase.

Is that not recommended?
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by 1789 »

No. Max out 401k pre tax and then Roth Ira and HSA
Don't put any money in 529 before you max above three. If you are done with above three then you can think of putting money to 529/taxable account.

Of course you need to save money for a car or a house or a vacation. That money can be in taxable account but depending on when you need the money you can pick which fund to invest. MMF/some stocks/bonds/balanced funds etc....
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by JD2775 »

jb3 wrote: Sat Oct 17, 2020 3:29 pm It was mentioned that for shorter term (non retirement) goals, like a car, to use a taxable account. I have always saved for that in my emergency Ally savings account. I overfund it ahead of a planned purchase.

Is that not recommended?
I wouldnt keep funds that you need in the next 5 years (a car?) in a taxable account. I would keep those funds in a regular savings or MM account
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by anon_investor »

1789 wrote: Sat Oct 17, 2020 3:37 pm No. Max out 401k pre tax and then Roth Ira and HSA
Don't put any money in 529 before you max above three. If you are done with above three then you can think of putting money to 529/taxable account.

Of course you need to save money for a car or a house or a vacation. That money can be in taxable account but depending on when you need the money you can pick which fund to invest. MMF/some stocks/bonds/balanced funds etc....
I agree the 529 plans should be lower in priority than the pretax accounts.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by ruralavalon »

jb3 wrote: Sat Oct 17, 2020 3:29 pm It was mentioned that for shorter term (non retirement) goals, like a car, to use a taxable account. I have always saved for that in my emergency Ally savings account. I overfund it ahead of a planned purchase.

Is that not recommended?
An Ally savings account is a reasonable way to accumulate money for a car purchase.

That is a type of taxable account, meaning the interest paid is subject to income tax.
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jb3
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

Sorry, by taxable account I think of a taxable investment account (eg, a mutual fund of some kind). My Ally account I think of as cash.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by ruralavalon »

jb3 wrote: Sat Oct 17, 2020 3:55 pm Sorry, by taxable account I think of a taxable investment account (eg, a mutual fund of some kind). My Ally account I think of as cash.
In general its best to make maximum annual contributions to all available tax-advantaged accounts as a priority ahead of a taxable brokerage account for investments like mutual funds.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by qwertyjazz »

It matters what the size of your emergency fund, the types of things you are saving for (duration and ability to take risk) or basically separating liquidity issues from investment risk issues. So yes it might make sense to have a taxable account for things other than retirement. The specifics matter.
How large is your EF? How risky is your job?
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by RetiredAL »

grabiner wrote: Sat Oct 17, 2020 3:01 pm
RetiredAL wrote: Sat Oct 17, 2020 1:53 pm I'm now retired and I wish we had more taxable. Although our overall tax bill is now significantly lower than when I worked, thanks to the SS Hump any additional IRA withdrawal is incrementally taxed heavily. Thus I find paying taxes for my annual Roth Conversions using additional IRA withdrawal $ is mentally painful.
Even if you are paying 40.7% on the IRA withdrawals (which only applies to a small range; the rate is 22.2% in most of the phase-in), you probably got a 22%-28% deduction on the contributions, and would have lost a significant amount to dividend taxes. In addition, if you are in that 40.7% range, withdrawals from a taxable account would be subject to a 40.7% tax on non-qualified dividends (from a bond fund), 33.7% tax on qualified dividends or the capital-gain portion of stock sales, and 18.7% tax on municipal-bond interest (not taxed but does count for the SS phase-in). Thus you probably come out ahead even in the hump. And any IRA withdrawal taxed at 22.2% (still in the 12% bracket) or 22% or 24% (once you hit the max for SS taxation) is a clear gain compared to a taxable account.

And Roth accounts are always better than taxable accounts if you can use them tax-free; if you contributed to a traditional account when you were working, converting it to Roth after retirement gives you the same benefit.
My working income was always right at the top of the 15% bracket, so those 15% deduction $ are now taxed 22% when I convert.

I convert today because when DW or I become 'single', the survivor will be solidly in the 22% bracket -- possibly 24% in a few years. Without the joint std deduction, the 22% bracket will start much sooner, thus my modeling says actual the tax bill will more than double above today's tax bill that includes my modest conversion.

So I chose the middle of the road as good enough. I have two more tax years before I reach the new RMD age. Our normal living expense withdrawal is just under 50% of what my RMD will be, and I take that projected RMD total $ today by converting the other 50%. When I reach RMD age, those extra $ will accumulate in taxable. After RMD age, I haven't yet decided if I will continue to routinely convert above the RMD or not, but I do consider any large market drop to be a gift horse in the conversion conversation.

All of the variants is enough to make my head spin "a la BeetleJuice".
Last edited by RetiredAL on Sat Oct 17, 2020 4:59 pm, edited 1 time in total.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by JBTX »

jb3 wrote: Sat Oct 17, 2020 3:55 pm Sorry, by taxable account I think of a taxable investment account (eg, a mutual fund of some kind). My Ally account I think of as cash.
It would.help if you clarify something :

When you say you aren't able to max retirement accounts, is that because:
- you don't have enough money
- you make too much and don't qualify
- your 401k does not allow you to max because of income/discrimination limits.

I assumed the last.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by dru808 »

I don’t see a problem with it. some may want to use money before 60 for big ticket items or just a general slush fund with growth more than a savings account.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Nottooold »

Kind of depends on how old you are.

I have a brokerage account that I fund with "play" money", money I am willing to risk.
A place to try things out, see how I feel about a new fund or portfolio.
A place to learn hard lessons sometimes.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

jb3 wrote: Sat Oct 17, 2020 1:16 pm Combined income is 165k.
We have two kids, 12 and 14.
One aspect no one mentioned in this thread is college financial aid planning.

If your kids go to college that provides need-based financial aid for which you could qualify based on income (which, with your income, you could at some schools), any taxable assets you have will reduce that aid by approx 5% of total taxable (and 529) funds you have per year. That is a 20% tax over 4 years of college. 40% for two kids.

That is another strong argument for maximizing tax-advantaged savings, as these funds are not counted against you in college financial aid calculations (unlike taxable and 529 plans).
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jb3
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

I have 529s for college. I don't know of a better way to save for it. Also do full Roths.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

Replying to this question:

>When you say you aren't able to max retirement accounts, is that because:
- you don't have enough money
- you make too much and don't qualify
- your 401k does not allow you to max because of income/discrimination limits.

Answer is because we don't have enough money and we choose to contribute to two 529s, which reduces how close we could get to maxing. And we have to contribute to wife's pension plan. We are in HCOL area.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

jb3 wrote: Sat Oct 17, 2020 6:57 pm I have 529s for college. I don't know of a better way to save for it. Also do full Roths.
It is my strongly held opinion that 529s should not be funded until tax-deferred space is maxed out because you are hurting your own finaid chances very significantly, as described above.

At your income level you should be able to max out retirement accounts (or get close to that) and then cash flow college.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

jb3 wrote: Sat Oct 17, 2020 7:02 pm Answer is because we don't have enough money and we choose to contribute to two 529s
This may prove to be a very costly mistake if your kids are good students who end up getting into one of the "full need/no loans" schools.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

I'd be happy to pay the penalty on 529 if that happens! I think it's very unlikely. We can also use for potential grad school.

We feel we have an obligation to pay what we can for college while also funding our retirement. I think that's a philosophical thing. Didn't really want to get into the 529 issue. Thanks.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

> At your income level you should be able to max out retirement accounts (or get close to that) and then cash flow college.

That assumes no layoffs over a long period of time. And that the next job isn't at a significantly reduced salary. I am not confident in either. Especially given my age (late 40s) and current economic conditions.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by ThankYouJack »

jb3 wrote: Sat Oct 17, 2020 7:24 pm I'd be happy to pay the penalty on 529 if that happens! I think it's very unlikely. We can also use for potential grad school.

We feel we have an obligation to pay what we can for college while also funding our retirement. I think that's a philosophical thing. Didn't really want to get into the 529 issue. Thanks.
Realize you don't want to get into it, but if others want to reply about how much this penalty could be. I think it could be a 3 way penalty: impact one's EFC, then a non-qualified withdrawal penalty, and then extra taxes moving forward since the person would lose tax advantage space.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

ThankYouJack wrote: Sat Oct 17, 2020 7:46 pm Realize you don't want to get into it, but if others want to reply about how much this penalty could be. I think it could be a 3 way penalty: impact one's EFC, then a non-qualified withdrawal penalty, and then extra taxes moving forward since the person would lose tax advantage space.
Increased EFC alone is 5% a year, so that could be a 20% total "tax" per kid over 4 years assuming they attend a "full need" school (which, of course, is not a given, but certainly something to consider in planning if that is a distinct possibility).

I do not believe college finaid optimization is any less ethical than tax optimization.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

jb3 wrote: Sat Oct 17, 2020 7:31 pm > At your income level you should be able to max out retirement accounts (or get close to that) and then cash flow college.

That assumes no layoffs over a long period of time. And that the next job isn't at a significantly reduced salary. I am not confident in either. Especially given my age (late 40s) and current economic conditions.
If you suffer a reduction or loss of income while your kid attends a full need school, your COA can go down (potentially all the way to zero).
But a large taxable or a 529 account can be a hurdle.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by KlangFool »

jb3 wrote: Sat Oct 17, 2020 7:31 pm > At your income level you should be able to max out retirement accounts (or get close to that) and then cash flow college.

That assumes no layoffs over a long period of time. And that the next job isn't at a significantly reduced salary. I am not confident in either. Especially given my age (late 40s) and current economic conditions.
jb3,


Then, how does the 529 makes any sense? You could do Roth conversion for any low-income years and pay fewer taxes. With the 529, you had paid the taxes. You cannot get the money back from the IRS.

529 can only work out if everything works out over the next 10 to 20 years.

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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by KlangFool »

jb3 wrote: Sat Oct 17, 2020 7:02 pm Replying to this question:

>When you say you aren't able to max retirement accounts, is that because:
- you don't have enough money
- you make too much and don't qualify
- your 401k does not allow you to max because of income/discrimination limits.

Answer is because we don't have enough money and we choose to contribute to two 529s, which reduces how close we could get to maxing. And we have to contribute to wife's pension plan. We are in HCOL area.

jb3,

If you have money for the 529, you have the money for the tax-advantaged account. You just choose to pay a lot more taxes and do an after-tax contribution to the 529s.


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jb3
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

Appreciate the input.

But the suggestion is to not save anything for my children's college? Hope they get full scholarships. Hope I don't get laid off so I can cash flow it? If I get laid off, hope it means they get more aid?

Hope is not a plan, as they say. :)
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by KlangFool »

jb3 wrote: Sat Oct 17, 2020 8:18 pm Appreciate the input.

But the suggestion is to not save anything for my children's college? Hope they get full scholarships. Hope I don't get laid off so I can cash flow it? If I get laid off, hope it means they get more aid?

Hope is not a plan, as they say. :)

jb3,


<<Hope is not a plan,>>

<<Hope I don't get laid off so I can cash flow it? >>

If you are laid off and you cannot afford to pay for a college education and you need the money to feed your family, how does the 529 helps you?

Hoping that you are Financially Independence before your kids go to college is not a plan. Are you that lucky?

<<save anything for my children's college?>>

Why do you need to use the 529 to save for college education? If you can afford to pay, you can use your Roth IRA contribution to pay for the college education.


Not putting money into the 529 is a good plan. It works in both situations.

A) If things work out, you can use the Roth IRA's contribution plus your annual saving to pay for the college education.


B) If things don't work out, the money in your tax-advantaged account do not count towards the EFC.


Money is fungible. 12K x 10 years = 120K of Roth IRA contribution.

<<Hope is not a plan, as they say. :)>>

Correct! You do not need to hope for 529. It is a lousy choice for you. You are guaranteed to pay more taxes than necessary and leave less money in your own pocket. There is no situation where it will work out for you.


If you disagree, please show us the calculation how it makes sense for you? You are guaranteed to pay 20+% taxes on the money you spent on the college education.

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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

Klang, not following this.

I already max our two Roths. 529s are in addition to that. My Roth contributions alone will not cover 8 years of college costs (2 kids) . I may not have the income to add cash flow if I am laid off or have reduced income. The 529s give me a fund to pay for some of college in that scenario.

Also, kids are fairly close to college, 12 and 14. Any changes now in my strategy might have a small impact.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by ThankYouJack »

jb3 wrote: Sat Oct 17, 2020 8:18 pm Appreciate the input.

But the suggestion is to not save anything for my children's college? Hope they get full scholarships. Hope I don't get laid off so I can cash flow it? If I get laid off, hope it means they get more aid?

Hope is not a plan, as they say. :)
Are you certain you'll have enough for retirement, or are you hoping with retirement?

My spouse and I paid for our own very expensive educations through grants, loans, small scholarships and work studies. I would 100 times rather do that than have to worry about my parents running out of money in their later years. So my suggestion is to put plenty towards retirement so you and your family don't have to hope you won't run out of money
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by KlangFool »

jb3 wrote: Sat Oct 17, 2020 8:48 pm Klang, not following this.

I already max our two Roths. 529s are in addition to that. My Roth contributions alone will not cover 8 years of college costs. I may not have the income to add cash flow if I am laid off or have reduced income. The 529s give me a fund to pay for some of college in that scenario.

jb3,

<<I may not have the income to add cash flow if I am laid off or have reduced income.>>


If you are laid off or have reduced income, you cannot afford to pay much more than your Roth IRA's contribution to the college education. So, where is the problem?


<<The 529s give me a fund to pay for some of college in that scenario.>>

After paying 20+% taxes. If you do not contribute to the 529, you have more money in your pocket. You can afford to pay more for a college education.

<<My Roth contributions alone will not cover 8 years of college costs. >

It is an installment plan. You do not need to pay the whole lump sum in one year.

You really need to do the calculation.

Let's assume that your combined Federal and State Income taxes are 25%.


You could pay 10K of taxes and put 40K into your 529. Or, you could put 50K into your 403B. Which one gives you more money?


Lets' be realistic here. The truth here is you cannot pay significantly more than your Roth IRA's contribution plus your annual savings to college education.


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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by KlangFool »

OP,

I saved 50K to 60K per year. After my portfolio reached 1 million, I choose to pay 240K for my 2 kids' college education. What is your realistic budget for a college education?

At our income/wealth level, we cannot afford to pay for an expensive college education. The college education costs have to be a percentage of our current net worth. The kids can borrow for a college education. We cannot borrow for our retirement.


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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by BernardShakey »

jb3 wrote: Sat Oct 17, 2020 8:18 pm Appreciate the input.

But the suggestion is to not save anything for my children's college? Hope they get full scholarships. Hope I don't get laid off so I can cash flow it? If I get laid off, hope it means they get more aid?

Hope is not a plan, as they say. :)
+1 Everyone has their own priorities. For this poster, college is such a priority that he is not going to fail to save for it and hope for aid. Maybe he plans to work to 65 to compensate.
An important key to investing is having a well-calibrated sense of your future regret.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by BernardShakey »

Vulcan wrote: Sat Oct 17, 2020 8:00 pm
ThankYouJack wrote: Sat Oct 17, 2020 7:46 pm Realize you don't want to get into it, but if others want to reply about how much this penalty could be. I think it could be a 3 way penalty: impact one's EFC, then a non-qualified withdrawal penalty, and then extra taxes moving forward since the person would lose tax advantage space.
Increased EFC alone is 5% a year, so that could be a 20% total "tax" per kid over 4 years assuming they attend a "full need" school (which, of course, is not a given, but certainly something to consider in planning if that is a distinct possibility).

I do not believe college finaid optimization is any less ethical than tax optimization.
I interpret OP's reference to his "philosophical" view, not as a societal ethical dilemma, but rather that he has an obligation to help his kids with higher education costs.
An important key to investing is having a well-calibrated sense of your future regret.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

BernardShakey wrote: Sat Oct 17, 2020 9:13 pm I interpret OP's reference to his "philosophical" view, not as a societal ethical dilemma, but rather that he has an obligation to help his kids with higher education costs.
I share that view, but I feel that optimizing finaid is part of responsible fiscal stewardship.

The simple truth is, 529 is a rotten deal for many in middle class, and prioritizing it over retirement vehicles should not be taken lightly.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by KlangFool »

jb3 wrote: Sat Oct 17, 2020 1:16 pm I'm not able to fully fund all my retirement accounts each year. Is there any reason to have a taxable account?

My wife and I fund:
Full Roths
About 8% combined to 401ks

Two 529 accounts
Cash to emergency fund
Wife Teacher's pension

All funds are in target retirement funds.
Combined income is 165k.
We have two kids, 12 and 14.

Thanks.
jb3,

Your annual saving is at least 8% of 165K = 13.2K + 2 X Roth IRA (12K) ~ 25K.


Assuming 10 years of Roth IRA contribution = 120K.


If you use your annual saving of 8 years while the kids in college plus Roth IRA contribution,


you have 25K X 8 years = 200K + 120K (10 years of Roth IRA contribution) = 320K to pay for the college education.

Unless you plan to pay much more than 320K for 8 years of college education, why do you need to contribute to the 529?


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jb3
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by jb3 »

The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
Not "to college". "To 529". Different things.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by KlangFool »

jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
jb3,

1) They are not retirement accounts. You could get the money out tax-free and penalty-free before 59 1/2 years old. They are tax-advantaged accounts.

<<The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me. >>


2) It is simple math. Please explain how paying 20+% taxes towards your college saving in the 529 versus other tax-advantaged account makes any sense.


3) You could save for college in other tax-advantaged accounts. It does not have to be the 529.


Do you enjoy paying an additional 20+% taxes towards your college education expenses?


KlangFool
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