How to use Retirement Funds for College Savings

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Topic Author
cal91
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How to use Retirement Funds for College Savings

Post by cal91 »

I've looked through a lot of threads and I understand that it is always better to max out 401k and IRA accounts before putting anything in a college savings account such as a 529. Therefore, this is what my wife and I plan to do.

I am a long way off (oldest is 3) before I will have to pay for any college expenses, but I want to plan ahead on how to do so. None of the threads I looked through explained exactly how to use 401k or IRA funds to pay for college.

Could anyone please share their experience with this and state (or give a link to) specific step by step instructions on how to use retirement accounts to pay for college expenses?

Thank you!

Edit: I wasn't clear. I do not make enough to max out a 401k, an IRA for myself and and IRA for my wife. For this reason I am trying to understand the best way to pay for college down the road using these accounts. All discussion should assume that retirement accounts are not yet maxed out.
Last edited by cal91 on Wed Jul 12, 2017 1:10 pm, edited 2 times in total.
keystone
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Re: How to use Retirement Funds for College Savings

Post by keystone »

Just a few thoughts off the top of my head:

Roth contributions can be withdrawn anytime free and clear of tax and penalties.

One could take out a 401K loan.

There's IRS rule 72(t) which permits early withdrawals free of penalties.

For older parents who will be 59.5 or older while their kids are in college, withdrawals can be made free and clear of penalties.
alex_686
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Re: How to use Retirement Funds for College Savings

Post by alex_686 »

keystone wrote:One could take out a 401K loan.
To extend on this a little, this is probably worst choice that Keystone offers. So save it for last.

That being said, what is the chance that you will be continuously employed under the same 401k plan for the next 15 years? Maybe you will switch jobs. Maybe the employer will redo their plan. In either case this is a chance to move your funds from the 401k to a IRA.

The IRA allows limited penalty free withdraws for education. See the IRS website - there are a thicket of rules. Or you could a Roth conversion, where the conversion amount would be free for withdrawals.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
KlangFool
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

cal91 wrote:I've looked through a lot of threads and I understand that it is always better to max out 401k and IRA accounts before putting anything in a college savings account such as a 529. Therefore, this is what my wife and I plan to do.

I am a long way off (oldest is 3) before I will have to pay for any college expenses, but I want to plan ahead on how to do so. None of the threads I looked through explained exactly how to use 401k or IRA funds to pay for college.

Could anyone please share their experience with this and state (or give a link to) specific step by step instructions on how to use retirement accounts to pay for college expenses?

Thank you!
cal91,

If you are saving 30K to 60K per year, you just stop contributing to those accounts when the kids go to college. Then, you just pay the college education out of your annual savings.

KlangFool
Grt2bOutdoors
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Re: How to use Retirement Funds for College Savings

Post by Grt2bOutdoors »

The whole idea of retirement designated funds are for retirement, not college, not your car.
While others suggest it, doesn't make for a good idea.

Yes, you can withdraw principal contributions from a ROTH, by doing so you eliminate the ability to earn tax-free gains/interest and dividends so why would anyone suggest this as a way to pay for anything beyond retirement? Not to mention possible estate planning benefits under current tax law - tax free withdrawals for beneficiaries over their lifespan.

To suggest using a 72(t) election - one ought to get thoroughly versed in the IRS rules around this because if you screw it up, you will feel the pain of the IRS. Use of a tax accountant is recommended if filing taxes and understanding the underlying rules is not your thing.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
cal91
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Re: How to use Retirement Funds for College Savings

Post by cal91 »

Thank you!

So if I'm not yet maxing out all retirement accounts, I should prioritize (after 401k match) a Roth IRA (even though I like my 401k options)? That way I ensure I will have plenty of contributions to pay for college? If in a couple years I start investing in a Triaditional IRA instead of Roth, can I still withdraw contributions (after paying taxes presumably)?

With respect to tax reporting, what tax forms do I need to file that show contributions and withdrawals (when college expenses start) for my IRAs, and thats all?
keystone
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Re: How to use Retirement Funds for College Savings

Post by keystone »

Grt2bOutdoors wrote:
Yes, you can withdraw principal contributions from a ROTH, by doing so you eliminate the ability to earn tax-free gains/interest and dividends so why would anyone suggest this as a way to pay for anything beyond retirement?
I didn't recommend it, but if my choices were withdraw from the Roth (assuming I had enough in tax advantaged accounts for a secure retirement) or my child takes out student loans, I'd give consideration to the Roth option. Hopefully most of us will have better options than this.
Topic Author
cal91
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Re: How to use Retirement Funds for College Savings

Post by cal91 »

Grt2bOutdoors wrote:The whole idea of retirement designated funds are for retirement, not college, not your car.
While others suggest it, doesn't make for a good idea.

Yes, you can withdraw principal contributions from a ROTH, by doing so you eliminate the ability to earn tax-free gains/interest and dividends so why would anyone suggest this as a way to pay for anything beyond retirement? Not to mention possible estate planning benefits under current tax law - tax free withdrawals for beneficiaries over their lifespan.

To suggest using a 72(t) election - one ought to get thoroughly versed in the IRS rules around this because if you screw it up, you will feel the pain of the IRS. Use of a tax accountant is recommended if filing taxes and understanding the underlying rules is not your thing.
What do you suggest then, for someone who does make enough to max out their retirement accounts?

From what I understand, it doesn't matter what the "idea of retirement designated funds are for." In the end it's just money, and you trade the money for something you'd rather have than the money. You argue shouldn't use money that is capable of tax-free gains/interest and dividends to pay for college. I ask then why would you use that money for retirement? The only reason we care about our money growing is so we can spend it. If we are [edit - instert "not"] going to spend it then why do we care about it growing?

The idea of using retirement designated funds for college (for someone who is not maxing out their retirement accounts all ready) is that it is the most efficient way to trade as little of that money in the future for college. Sure, I could contribute less to my retirement accounts in order to fund a 529 account, but there is no reason to. I can always use my retirement accounts to fund college penalty free. Until I max out my retirement accounts I see no reason to fund a specific college savings account.

Having said this, I am young and still learning a lot. I am open to changing my mind if there is a reasonable argument, and I appreciate the discussion.

Thanks!
Last edited by cal91 on Wed Jul 12, 2017 12:46 pm, edited 1 time in total.
KlangFool
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

cal91 wrote:
Grt2bOutdoors wrote:The whole idea of retirement designated funds are for retirement, not college, not your car.
While others suggest it, doesn't make for a good idea.

Yes, you can withdraw principal contributions from a ROTH, by doing so you eliminate the ability to earn tax-free gains/interest and dividends so why would anyone suggest this as a way to pay for anything beyond retirement? Not to mention possible estate planning benefits under current tax law - tax free withdrawals for beneficiaries over their lifespan.

To suggest using a 72(t) election - one ought to get thoroughly versed in the IRS rules around this because if you screw it up, you will feel the pain of the IRS. Use of a tax accountant is recommended if filing taxes and understanding the underlying rules is not your thing.
What do you suggest then, for someone who does make enough to max out their retirement accounts?
cal91,

Your annual savings is big enough to pay for your kid's college education of 30K to 60K per year. Why do you need to take money out of the 401K and IRA accounts?

You do not need to save for college education.

KlangFool
Last edited by KlangFool on Wed Jul 12, 2017 12:41 pm, edited 1 time in total.
bayview
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Re: How to use Retirement Funds for College Savings

Post by bayview »

cal91, the problem with pulling money out of accounts that are specifically retirement accounts is that you will lose that space, and you can't get it back.

So if you have $11k in a Roth IRA, and you pull $6k for something, then you only have $5k of space in that Roth. Yes, of course you can make future contributions, but you can't put the $6k back. Having tax-advantaged space can be key on down the road. (An exception would be a loan against your 401k or other similar employer vehicle, but they have their own set of pitfalls.)

I actually like KlangFool's suggestion: If you're able to put this amount of money away yearly, just pay for college as you (or your kids) go. Alternatively, if you start having enough disposable income, max out your retirement vehicles and then put the rest in a taxable account, planning to use that. But then, if you could do that, you could probably do a 529.
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alex_686
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Re: How to use Retirement Funds for College Savings

Post by alex_686 »

cal91 wrote:Having said this, I am young and still learning a lot. I am open to changing my mind if there is a reasonable argument, and I appreciate the discussion.
Cal91, you are spot on. Having different accounts for different things is a example of "mental accounting". See behavioral economics, cognitive defects, information processing errors. Having multiple accounts is easier for people to mentally process but leads to sub-optimal asset allocations and use of tax advantaged accounts.

The IRA and Roth are tax advantaged vehicles. They give you greater flexibility than a 529 plan and may offer other advantages as well. Why does it matter that the word "retirement" is attached to them? It is just a label.
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Topic Author
cal91
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Re: How to use Retirement Funds for College Savings

Post by cal91 »

KlangFool wrote:
cal91 wrote:
Grt2bOutdoors wrote:The whole idea of retirement designated funds are for retirement, not college, not your car.
While others suggest it, doesn't make for a good idea.

Yes, you can withdraw principal contributions from a ROTH, by doing so you eliminate the ability to earn tax-free gains/interest and dividends so why would anyone suggest this as a way to pay for anything beyond retirement? Not to mention possible estate planning benefits under current tax law - tax free withdrawals for beneficiaries over their lifespan.

To suggest using a 72(t) election - one ought to get thoroughly versed in the IRS rules around this because if you screw it up, you will feel the pain of the IRS. Use of a tax accountant is recommended if filing taxes and understanding the underlying rules is not your thing.
What do you suggest then, for someone who does make enough to max out their retirement accounts?
cal91,

Your annual savings is big enough to pay for your kid's college education of 30K to 60K per year. Why do you need to take money out of the 401K and IRA accounts?

You do not need to save for college education.

KlangFool
Maybe I was not clear. I do not make/save enough to max out my 401k, an IRA for myself, and an IRA for my wife. I probably won't for a while. That is why I am interested in using my retirement accounts to pay for college.

If I did max out my retirement accounts, then I would simply do as you say.
bayview
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Re: How to use Retirement Funds for College Savings

Post by bayview »

When your kids reach college age, and presumably your earnings have increased, how much money do you think you'll have available at that point?

If that covers a year of tuition, just pay tuition instead of funding your savings, if it's an even swap.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
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Re: How to use Retirement Funds for College Savings

Post by Jack FFR1846 »

Consider iBonds. Only in your/your wife's name. If cashed to pay college expenses (the entire bond amount), it can be withdrawn totally tax free. $10k for each of you and if desired, another $5k from federal tax refund per year. So $25k. I'm currently paying for college and pulling some number of bonds out and doing just this. Look into income limits....I don't remember if there are any....if there are, they're way above my pay grade.
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Topic Author
cal91
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Re: How to use Retirement Funds for College Savings

Post by cal91 »

Jack FFR1846 wrote:Consider iBonds. Only in your/your wife's name. If cashed to pay college expenses (the entire bond amount), it can be withdrawn totally tax free. $10k for each of you and if desired, another $5k from federal tax refund per year. So $25k. I'm currently paying for college and pulling some number of bonds out and doing just this. Look into income limits....I don't remember if there are any....if there are, they're way above my pay grade.
Thank you for the suggestion, and bringing that option to my attention. I was not aware of iBonds.

Is the advantage of this over using retirement accounts that iBonds are more likely to preserve their principal? If the market went bad during college years, I'd have to use a larger portion of my retirement account, but the iBonds would not have depreciated as much? This sounds good for when I'm 5 years out or so from college expenses.

Otherwise, I don't see the advantage. Every dollar I'm putting into the i bond is a dollar I'm taking away from retirement accounts. And I can use the retirement account money for anything.
KlangFool
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

cal91 wrote:
Maybe I was not clear. I do not make/save enough to max out my 401k, an IRA for myself, and an IRA for my wife. I probably won't for a while. That is why I am interested in using my retirement accounts to pay for college.

If I did max out my retirement accounts, then I would simply do as you say.
cal91,

<<Maybe I was not clear. I do not make/save enough to max out my 401k, an IRA for myself, and an IRA for my wife>>

Even in that case, you probably would not spend much than your annual savings for your kid's college education. So, why do you need to save for college education?

If you make a realistic projection of how much that you are willing to spend on your kid's education, you will come to the same conclusion. It does not make sense to spend a lot more on your kid's education and burden them with your retirement.

KlangFool
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cal91
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Re: How to use Retirement Funds for College Savings

Post by cal91 »

KlangFool wrote:
cal91 wrote:
Maybe I was not clear. I do not make/save enough to max out my 401k, an IRA for myself, and an IRA for my wife. I probably won't for a while. That is why I am interested in using my retirement accounts to pay for college.

If I did max out my retirement accounts, then I would simply do as you say.
cal91,

<<Maybe I was not clear. I do not make/save enough to max out my 401k, an IRA for myself, and an IRA for my wife>>

Even in that case, you probably would not spend much than your annual savings for your kid's college education. So, why do you need to save for college education?

If you make a realistic projection of how much that you are willing to spend on your kid's education, you will come to the same conclusion. It does not make sense to spend a lot more on your kid's education and burden them with your retirement.

KlangFool
I believe we are on the same page. If I am saving for my kid's college savings in my retirement account, and down the road I'm pulling in the big bucks and paying for college out of pocket, then those college savings turn into retirement savings.

If I am not pulling in the big bucks, it is still a priority for me to be able to pay for my kid's college tuition, so I will pay for it with my retirement accounts after what I've come up with out of pocket. Meanwhile, I will have been living within my means to ensure my retirement savings are sufficient for my needs.
KlangFool
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

cal91 wrote:
KlangFool wrote:
cal91 wrote:
Maybe I was not clear. I do not make/save enough to max out my 401k, an IRA for myself, and an IRA for my wife. I probably won't for a while. That is why I am interested in using my retirement accounts to pay for college.

If I did max out my retirement accounts, then I would simply do as you say.
cal91,

<<Maybe I was not clear. I do not make/save enough to max out my 401k, an IRA for myself, and an IRA for my wife>>

Even in that case, you probably would not spend much than your annual savings for your kid's college education. So, why do you need to save for college education?

If you make a realistic projection of how much that you are willing to spend on your kid's education, you will come to the same conclusion. It does not make sense to spend a lot more on your kid's education and burden them with your retirement.

KlangFool
I believe we are on the same page. If I am saving for my kid's college savings in my retirement account, and down the road I'm pulling in the big bucks and paying for college out of pocket, then those college savings turn into retirement savings.

If I am not pulling in the big bucks, it is still a priority for me to be able to pay for my kid's college tuition, so I will pay for it with my retirement accounts after what I've come up with out of pocket. Meanwhile, I will have been living within my means to ensure my retirement savings are sufficient for my needs.
You got it.

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KlangFool
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

OP,

In my case, I maxed my Trad. 401K and Roth IRA plus putting the extra money into the taxable account. So, at this moment, even when I am paying my kids' college education out of pocket, I am selling my taxable investment and put them into the 401Ks and Roth IRAs.

You can read about this on the following thread.

viewtopic.php?f=2&t=223179

KlangFool
Topic Author
cal91
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Re: How to use Retirement Funds for College Savings

Post by cal91 »

KlangFool wrote:OP,

In my case, I maxed my Trad. 401K and Roth IRA plus putting the extra money into the taxable account. So, at this moment, even when I am paying my kids' college education out of pocket, I am selling my taxable investment and put them into the 401Ks and Roth IRAs.

You can read about this on the following thread.

viewtopic.php?f=2&t=223179

KlangFool
That sounds like a nice problem to have :) But yeah, my plan is to always prioritize maximizing my retirement accounts, or as close as I can. Thanks for your responses.
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Nate79
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Re: How to use Retirement Funds for College Savings

Post by Nate79 »

Does your state give a tax deduction for 529 plan contributions? If so I would put some in 529 before Roth to get the deduction.
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

Nate79 wrote:Does your state give a tax deduction for 529 plan contributions? If so I would put some in 529 before Roth to get the deduction.
Nate79,

I disagree. In fact, 529 is the wrong answer for most people. It is only the right answer for people in the 28% and above marginal tax rate.

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miamivice
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Re: How to use Retirement Funds for College Savings

Post by miamivice »

The quick answer to the title of the thread is you generally cannot use retirement funds (without having to pay penalties and/or income taxes) to pay for a child's college education, unless you are retired. The one exception is Roth IRA which you can withdraw contributions only at any time for any reason without penalty or tax.

You can withdraw 401k money penalty free but not tax free for certain purposes, depending on your plan administrator. But you have to pay income taxes on the money.

The problem with using a Roth IRA for college is the shear number of dollars you'll have to save in a Roth IRA account to pay for college. College will cost around $200,000 per kid when your kids are college age, and at $11,000 a year, you won't have enough space in your Roth IRA to pay for college using contributions only.

A 529 account is a far better way to save for college, as long as you believe you'll have college expenses to pay for one or more of your children. You take the risk that if you do not have college expenses to pay (child does not go to college or child receives a 100% full ride scholarship covering tuition, books, and room & board for all 4 years) then you may have to pay taxes and/or penalties.

Your choice.
Last edited by miamivice on Wed Jul 12, 2017 3:20 pm, edited 2 times in total.
miamivice
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Re: How to use Retirement Funds for College Savings

Post by miamivice »

KlangFool wrote:
Nate79 wrote:Does your state give a tax deduction for 529 plan contributions? If so I would put some in 529 before Roth to get the deduction.
Nate79,

I disagree. In fact, 529 is the wrong answer for most people. It is only the right answer for people in the 28% and above marginal tax rate.

KlangFool
No, it's not KlangFool. You advocate not saving up for college. I believe saving for college is a good financial strategy, and a 529 account is the best vehicle to save for college. A 529 may not have made sense for your circumstance but it makes sense for a lot of folks.

Reasons why a 529 is a good thing:

1) You can easily see the money that you have saved up for your child's education in a separate account, and know exactly how much you have for each of your children.

2) You pay no taxes on gains. While capital gains taxes right now are low (15%) we don't know how much they will be in the future. If a person saves heavily when their kids are young, that is a lot of tax free gains that they will have.

3) If you do not have income when your children are in college age, but have a fat 529 account, your children can still go to school without going into debt. There are a variety of reasons why a person may not have income (disability, paying for parents, unexpected job loss, etc, etc). Your children will (hopefully) want to still attend college even if the parents are unable to cash flow college at that point.

4) Saving up for college when kids are little frees cash flow when kids are in college. Then the parents can take in international travel, new hobbies, new cars, or other things that they'd like to do as empty nesters.
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cal91
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Re: How to use Retirement Funds for College Savings

Post by cal91 »

miamivice wrote:
KlangFool wrote:
Nate79 wrote:Does your state give a tax deduction for 529 plan contributions? If so I would put some in 529 before Roth to get the deduction.
Nate79,

I disagree. In fact, 529 is the wrong answer for most people. It is only the right answer for people in the 28% and above marginal tax rate.

KlangFool
No, it's not KlangFool. You advocate not saving up for college. I believe saving for college is a good financial strategy, and a 529 account is the best vehicle to save for college. A 529 may not have made sense for your circumstance but it makes sense for a lot of folks.

Reasons why a 529 is a good thing:

1) You can easily see the money that you have saved up for your child's education in a separate account, and know exactly how much you have for each of your children.

2) You pay no taxes on gains. While capital gains taxes right now are low (15%) we don't know how much they will be in the future. If a person saves heavily when their kids are young, that is a lot of tax free gains that they will have.

3) If you do not have income when your children are in college age, but have a fat 529 account, your children can still go to school without going into debt. There are a variety of reasons why a person may not have income (disability, paying for parents, unexpected job loss, etc, etc). Your children will (hopefully) want to still attend college even if the parents are unable to cash flow college at that point.

4) Saving up for college when kids are little frees cash flow when kids are in college. Then the parents can take in international travel, new hobbies, new cars, or other things that they'd like to do as empty nesters.
I don't see why one would need a 529 unless they are already maxing out all retirement accounts AND would not be able to cash flow their college expenses at the same time. If that is the case, a 529 would be useful to build college savings that would be needed on top of your cash flow capacity.

Until you are maxing out retirement accounts, every dollar you put in a 529 is a dollar you could have put in a retirement account instead. I don't see any advantage of that, but am open to hearing any advantages that you know of that I don't. If the Roth contributions withdrawals are not enough, you can still do a 401k loan.
miamivice
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Re: How to use Retirement Funds for College Savings

Post by miamivice »

cal91 wrote:
miamivice wrote:
KlangFool wrote:
Nate79 wrote:Does your state give a tax deduction for 529 plan contributions? If so I would put some in 529 before Roth to get the deduction.
Nate79,

I disagree. In fact, 529 is the wrong answer for most people. It is only the right answer for people in the 28% and above marginal tax rate.

KlangFool
No, it's not KlangFool. You advocate not saving up for college. I believe saving for college is a good financial strategy, and a 529 account is the best vehicle to save for college. A 529 may not have made sense for your circumstance but it makes sense for a lot of folks.

Reasons why a 529 is a good thing:

1) You can easily see the money that you have saved up for your child's education in a separate account, and know exactly how much you have for each of your children.

2) You pay no taxes on gains. While capital gains taxes right now are low (15%) we don't know how much they will be in the future. If a person saves heavily when their kids are young, that is a lot of tax free gains that they will have.

3) If you do not have income when your children are in college age, but have a fat 529 account, your children can still go to school without going into debt. There are a variety of reasons why a person may not have income (disability, paying for parents, unexpected job loss, etc, etc). Your children will (hopefully) want to still attend college even if the parents are unable to cash flow college at that point.

4) Saving up for college when kids are little frees cash flow when kids are in college. Then the parents can take in international travel, new hobbies, new cars, or other things that they'd like to do as empty nesters.
I don't see why one would need a 529 unless they are already maxing out all retirement accounts AND would not be able to cash flow their college expenses at the same time. If that is the case, a 529 would be useful to build college savings that would be needed on top of your cash flow capacity.

Until you are maxing out retirement accounts, every dollar you put in a 529 is a dollar you could have put in a retirement account instead. I don't see any advantage of that, but am open to hearing any advantages that you know of that I don't. If the Roth contributions withdrawals are not enough, you can still do a 401k loan.
Yes, it's true that every dollar you spend on your kid is one less dollar you have to spend on yourself. :D I'm not sure that one who prioritizes spending on themselves over their kids should have had kids in the first place.

Roth contributions will not be enough for a family with multiple children who are age 3 today. That person will need between $400,000 and $600,000 to pay for college, which cannot be saved up using Roth IRA contributions at $11,000 per year.

I am not a fan of "maxing out retirement accounts". There is no rule that a person has to max out retirements accounts in order to have a nice retirement. Lots and lots of people don't max out their retirement accounts and have a nice retirement.

I am a big fan at looking at projecting expenses in retirement, and figuring out how much one needs to have at retirement in order to enjoy that lifestyle. Then figuring out how much one needs to save today to get that amount in retirement. It may less than maxing out accounts, equal to maxing out accounts, or more than maxing out accounts depending on personal lifestyle choices.

I don't think that taking out a 401k loan to pay for college is a good idea at all.
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Nate79
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Re: How to use Retirement Funds for College Savings

Post by Nate79 »

KlangFool wrote:
Nate79 wrote:Does your state give a tax deduction for 529 plan contributions? If so I would put some in 529 before Roth to get the deduction.
Nate79,

I disagree. In fact, 529 is the wrong answer for most people. It is only the right answer for people in the 28% and above marginal tax rate.

KlangFool
If I have made the decision to fund my kids college and my state gives a tax deduction for 529 contribution it is superior to Roth contribution. In this case you get both a immediate tax deduction and tax free growth. It is a gamble of whether or not the funds will be needed for college in the end. However, at least in my state that risk is very low because the tax deduction is limited to a certain max contribution that would be well below the amount of funds required for college. Choosing to cash flow is just as much a gamble that cash flow will be available at the time of college.
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

Nate79 wrote:
KlangFool wrote:
Nate79 wrote:Does your state give a tax deduction for 529 plan contributions? If so I would put some in 529 before Roth to get the deduction.
Nate79,

I disagree. In fact, 529 is the wrong answer for most people. It is only the right answer for people in the 28% and above marginal tax rate.

KlangFool
If I have made the decision to fund my kids college and my state gives a tax deduction for 529 contribution it is superior to Roth contribution. In this case you get both a immediate tax deduction and tax free growth. It is a gamble of whether or not the funds will be needed for college in the end. However, at least in my state that risk is very low because the tax deduction is limited to a certain max contribution that would be well below the amount of funds required for college. Choosing to cash flow is just as much a gamble that cash flow will be available at the time of college.
Nate79,

1) At 25% and below, why won't you max up your Trad. 401K first? You get both Federal and state income tax deduction.

2) After that, why bother with 529? Stick with Roth IRA.

3) If you can do both (1) and (2), you can "cash flow" your kid's college education. Your annual saving is large enough.

Only people at 28% and above, they have the luxury and need for 529. They can do (1) and (2) plus a lot more money. For normal people like us, we have a limit on how much we are willing to pay for our kid's college education.

KlangFool
cherijoh
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Re: How to use Retirement Funds for College Savings

Post by cherijoh »

cal91 wrote: I can always use my retirement accounts to fund college penalty free. Until I max out my retirement accounts I see no reason to fund a specific college savings account.
You seem to be under the mistaken impression that "penalty free" also means you don't need to consider taxes. :oops: While dollars may be fungible, money tied up in a plan for retirement does not mean you'll get the same after-tax return as money tied up in a 529 plan. That's because the tax benefits and penalties are optimized for their different purposes. For a 529 plan, you don't get a federal tax deduction for contributions (although you may get a state one), but you also don't pay taxes on withdrawals for qualified expenses. For parents who are in their peak earning years when their kids are in college this is a benefit. Put money away (without a deduction) when you are not paying that much in taxes, but then pay no taxes when you take it out when you are in a high marginal tax bracket.

On the other hand, a traditional retirement plan gives you the tax break when you are earning money and lets you pay taxes when you withdraw the money in retirement - when presumably you have little other income and are therefore in a lower marginal tax bracket. By the way, taking money out of a retirement account may be impossible if the money is still in an employer's plan.

BTW, not all employers offer 401k loans and those that do limit you to the lessor of 50% of your plan value or $50K. Unless it is a loan to purchase a home, the term will be limited to 5 years IIRC. Not a good set up IMO to pay for college.
KlangFool
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

cherijoh wrote:
cal91 wrote: I can always use my retirement accounts to fund college penalty free. Until I max out my retirement accounts I see no reason to fund a specific college savings account.
You seem to be under the mistaken impression that "penalty free" also means you don't need to consider taxes. :oops:
cherijoh,

It depends. If you withdraw Roth IRA contribution, it will be tax-free too. For folks like me in the 25% and below, Roth IRA contribution across the 10+ year is about the right amount that we may pay for our kids' education. If we save a lot more, we can "cash flow" the college education supplemented by Roth IRA contribution withdrawal.

KlangFool
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Re: How to use Retirement Funds for College Savings

Post by cherijoh »

KlangFool wrote:
cherijoh wrote:
cal91 wrote: I can always use my retirement accounts to fund college penalty free. Until I max out my retirement accounts I see no reason to fund a specific college savings account.
You seem to be under the mistaken impression that "penalty free" also means you don't need to consider taxes. :oops:
cherijoh,

It depends. If you withdraw Roth IRA contribution, it will be tax-free too. For folks like me in the 25% and below, Roth IRA contribution across the 10+ year is about the right amount that we may pay for our kids' education. If we save a lot more, we can "cash flow" the college education supplemented by Roth IRA contribution withdrawal.

KlangFool
True, but then OP is letting desire for a multi-purpose fund dictate his retirement vehicle choice - which points back to taxes. My point wasn't to say that he should only use a 529 plan for college savings - just that having a penalty-free option doesn't mean that he was home free with an "obvious" choice - as his post strongly implied.

By the time the Roth was introduced, I was fortunate enough to be able to max out both my Roth and my 401k. But I think it is an important decision for young investors today - even more so if they have a Roth 401k option. This decision requires considering your current and likely future marginal tax rates. IMO anyone in the 25% marginal tax bracket should seriously consider a traditional option over Roth.

I also consider it "conventional wisdom" to contribute to your 401k up to any company match. Would the OP be leaving matching money on the table in order to max out their Roth accounts?
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teen persuasion
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Re: How to use Retirement Funds for College Savings

Post by teen persuasion »

cal91 wrote:I've looked through a lot of threads and I understand that it is always better to max out 401k and IRA accounts before putting anything in a college savings account such as a 529. Therefore, this is what my wife and I plan to do.

I am a long way off (oldest is 3) before I will have to pay for any college expenses, but I want to plan ahead on how to do so. None of the threads I looked through explained exactly how to use 401k or IRA funds to pay for college.

Could anyone please share their experience with this and state (or give a link to) specific step by step instructions on how to use retirement accounts to pay for college expenses?

Thank you!

Edit: I wasn't clear. I do not make enough to max out a 401k, an IRA for myself and and IRA for my wife. For this reason I am trying to understand the best way to pay for college down the road using these accounts. All discussion should assume that retirement accounts are not yet maxed out.
We put as much as possible in DH's traditional 401k and HSA to get our AGI as low as possible. This maximizes our refundable credits (EITC and CTC) and minimizes state tax (fed tax at zero). It also minimizes our kids' EFC so they receive more fed, state, school grants on top of academic scholarships, work study, and fed loans.

Google "EFC formulas 2017-18" to get the pdf containing the formulas and charts to manually calculate the EFC. Look at how retirement contributions affect the calculation, or retirement withdrawals, or taxable/529 assets. There is a sweet spot where income only (without adding assets) is used, and if AGI is low enough there is an auto EFC=0.

Those refundable credits when you have dependent kids are valuable. My state matches EITC at 30%, and CTC at 33% making them more valuable. I've used the refunds to pay down our mortgage early (high rate = great guaranteed return), and now use it to fund Roth IRAs for both of us. It could also be used to offset living expenses while contributing heavily to traditional 401k, or for college expenses. We have had very small OOP college expenses to date (2 graduated, 2 in college, 1 waiting in the wings).
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Re: How to use Retirement Funds for College Savings

Post by Da5id »

cal91 wrote: I am a long way off (oldest is 3) before I will have to pay for any college expenses, but I want to plan ahead on how to do so. None of the threads I looked through explained exactly how to use 401k or IRA funds to pay for college.
I think that the odds of the landscape being different in 15 years is fairly good for colleges, the current trend of pricing seems unsustainable. And heck, the rules for retirement accounts could be different by then. But hard to say exactly how.

That said, ideally you won't be spending your retirement savings on college. But assuming current rules, money in retirement accounts is awesome for getting financial aid (as in it doesn't count as a parental asset for FA calcuations). And, assuming current rules, money in the kids name is the worst thing for financial aid, so keep that to a minimum.
KlangFool
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

cherijoh wrote:
KlangFool wrote:
cherijoh wrote:
cal91 wrote: I can always use my retirement accounts to fund college penalty free. Until I max out my retirement accounts I see no reason to fund a specific college savings account.
You seem to be under the mistaken impression that "penalty free" also means you don't need to consider taxes. :oops:
cherijoh,

It depends. If you withdraw Roth IRA contribution, it will be tax-free too. For folks like me in the 25% and below, Roth IRA contribution across the 10+ year is about the right amount that we may pay for our kids' education. If we save a lot more, we can "cash flow" the college education supplemented by Roth IRA contribution withdrawal.

KlangFool
True, but then OP is letting desire for a multi-purpose fund dictate his retirement vehicle choice - which points back to taxes. My point wasn't to say that he should only use a 529 plan for college savings - just that having a penalty-free option doesn't mean that he was home free with an "obvious" choice - as his post strongly implied.

By the time the Roth was introduced, I was fortunate enough to be able to max out both my Roth and my 401k. But I think it is an important decision for young investors today - even more so if they have a Roth 401k option. This decision requires considering your current and likely future marginal tax rates. IMO anyone in the 25% marginal tax bracket should seriously consider a traditional option over Roth.

I also consider it "conventional wisdom" to contribute to your 401k up to any company match. Would the OP be leaving matching money on the table in order to max out their Roth accounts?
cherijoh,

My standard advice is a combination of Trad. 401K and Roth IRA. Roth 401K is the wrong answer for most people without a pension.

KlangFool
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CyclingDuo
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Re: How to use Retirement Funds for College Savings

Post by CyclingDuo »

Da5id wrote:
cal91 wrote: I am a long way off (oldest is 3) before I will have to pay for any college expenses, but I want to plan ahead on how to do so. None of the threads I looked through explained exactly how to use 401k or IRA funds to pay for college.
I think that the odds of the landscape being different in 15 years is fairly good for colleges, the current trend of pricing seems unsustainable. And heck, the rules for retirement accounts could be different by then. But hard to say exactly how.

That said, ideally you won't be spending your retirement savings on college. But assuming current rules, money in retirement accounts is awesome for getting financial aid (as in it doesn't count as a parental asset for FA calcuations). And, assuming current rules, money in the kids name is the worst thing for financial aid, so keep that to a minimum.
Depends on one's goals. Our goals were to save enough to cover all costs so that both our children did not qualify for any financial aid.

Happy to say goals were achieved. Neither qualified and they graduated debt free. :sharebeer
"Save like a pessimist, invest like an optimist." - Morgan Housel
Da5id
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Re: How to use Retirement Funds for College Savings

Post by Da5id »

CyclingDuo wrote:
Da5id wrote:
cal91 wrote: I am a long way off (oldest is 3) before I will have to pay for any college expenses, but I want to plan ahead on how to do so. None of the threads I looked through explained exactly how to use 401k or IRA funds to pay for college.
I think that the odds of the landscape being different in 15 years is fairly good for colleges, the current trend of pricing seems unsustainable. And heck, the rules for retirement accounts could be different by then. But hard to say exactly how.

That said, ideally you won't be spending your retirement savings on college. But assuming current rules, money in retirement accounts is awesome for getting financial aid (as in it doesn't count as a parental asset for FA calcuations). And, assuming current rules, money in the kids name is the worst thing for financial aid, so keep that to a minimum.
Depends on one's goals. Our goals were to save enough to cover all costs so that both our children did not qualify for any financial aid.

Happy to say goals were achieved. Neither qualified and they graduated debt free. :sharebeer
That is my goal too. But OP isn't making enough to max out tax advantaged space. I'm inferring that they may thus be in the range of folks who can get financial aid. Standard advice here is that you can't borrow to pay for retirement (reverse mortgages aside), and you should worry about saving for retirement before college.
KlangFool
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Re: How to use Retirement Funds for College Savings

Post by KlangFool »

Da5id wrote:
CyclingDuo wrote:
Da5id wrote:
cal91 wrote: I am a long way off (oldest is 3) before I will have to pay for any college expenses, but I want to plan ahead on how to do so. None of the threads I looked through explained exactly how to use 401k or IRA funds to pay for college.
I think that the odds of the landscape being different in 15 years is fairly good for colleges, the current trend of pricing seems unsustainable. And heck, the rules for retirement accounts could be different by then. But hard to say exactly how.

That said, ideally you won't be spending your retirement savings on college. But assuming current rules, money in retirement accounts is awesome for getting financial aid (as in it doesn't count as a parental asset for FA calcuations). And, assuming current rules, money in the kids name is the worst thing for financial aid, so keep that to a minimum.
Depends on one's goals. Our goals were to save enough to cover all costs so that both our children did not qualify for any financial aid.

Happy to say goals were achieved. Neither qualified and they graduated debt free. :sharebeer
That is my goal too. But OP isn't making enough to max out tax advantaged space. I'm inferring that they may thus be in the range of folks who can get financial aid. Standard advice here is that you can't borrow to pay for retirement (reverse mortgages aside), and you should worry about saving for retirement before college.
Da5id,

Some good reasons for this are

A) This improves OP's chance of receiving financial aid for his children's college education too.

http://www.savingforcollege.com/financi ... avings.php

<< Now let's see how specific types of assets affect the aid formula:
A good type of asset to own when applying for financial aid is a retirement account such as an IRA or 401(k). These qualified retirement accounts, whether owned by you or by your child, are not counted at all in determining EFC for purposes of federal financial aid. Be careful, however, about taking money out of your IRA (or any retirement account) to pay for college. Though the tax law now permits penalty-free withdrawals from a traditional or Roth IRA to pay for qualified college costs, doing so could jeopardize financial aid in the following year. The entire withdrawal, principal and earnings, counts as income on the following year's aid application. >>

B) OP enjoy tax savings now

C) OP may qualify for tax credits by deferring tax now.

KlangFool
wrongfunds
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Re: How to use Retirement Funds for College Savings

Post by wrongfunds »

May be I am missing something here. If one is not in a position to maximize the retirement savings via available tax-advantaged plans, why would he be considering funding the college for offsprings? Frankly, I can't think of a situation where financial situation prevent from maximizing the savings but the account balance is so huge that sufficient money could be withdrawn from the said retirement account to fund the college without significantly impacting the retirement
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cal91
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Re: How to use Retirement Funds for College Savings

Post by cal91 »

miamivice wrote: Yes, it's true that every dollar you spend on your kid is one less dollar you have to spend on yourself. :D I'm not sure that one who prioritizes spending on themselves over their kids should have had kids in the first place.
Wow, really strong assumptions there. Are you seriously implying that I shouldn't have kids? Really?

Just because it's categorized as a "retirement" fund does not mean I'm spending the money on myself. If you've even read my posts you'd understand that. I won't bother re-explaining my plan when it's already written. Go back and read my first post.
miamivice wrote: Roth contributions will not be enough for a family with multiple children who are age 3 today. That person will need between $400,000 and $600,000 to pay for college, which cannot be saved up using Roth IRA contributions at $11,000 per year.
Please, let me know where you see what my college tuition costs in the year 2032. I'd like to know that information. Jesting aside, I don't care to send my child to the most expensive University I can find. There are plenty of great schools that cost less than $10,000 a year. If my Roth contributions don't add up, I can either cash flow additional money or take a 401k loan. See? Even though someone named those dollars "retirement", I can still use them for college!
miamivice wrote: I am not a fan of "maxing out retirement accounts". There is no rule that a person has to max out retirements accounts in order to have a nice retirement. Lots and lots of people don't max out their retirement accounts and have a nice retirement.

I am a big fan at looking at projecting expenses in retirement, and figuring out how much one needs to have at retirement in order to enjoy that lifestyle. Then figuring out how much one needs to save today to get that amount in retirement. It may less than maxing out accounts, equal to maxing out accounts, or more than maxing out accounts depending on personal lifestyle choices.
I never said I wish/need to max out my retirement accounts, either. What I said was that while I can still contribute to retirment accounts, I see no reason to contribute anywhere else. I can use retirement money to pay for college expenses, or whatever else I want, while also getting tax advantages.
miamivice wrote: I don't think that taking out a 401k loan to pay for college is a good idea at all.
If you can support that with some facts then I'm still open to hearing from you.
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CyclingDuo
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Re: How to use Retirement Funds for College Savings

Post by CyclingDuo »

Da5id wrote:
CyclingDuo wrote:
Da5id wrote:
cal91 wrote: I am a long way off (oldest is 3) before I will have to pay for any college expenses, but I want to plan ahead on how to do so. None of the threads I looked through explained exactly how to use 401k or IRA funds to pay for college.
I think that the odds of the landscape being different in 15 years is fairly good for colleges, the current trend of pricing seems unsustainable. And heck, the rules for retirement accounts could be different by then. But hard to say exactly how.

That said, ideally you won't be spending your retirement savings on college. But assuming current rules, money in retirement accounts is awesome for getting financial aid (as in it doesn't count as a parental asset for FA calcuations). And, assuming current rules, money in the kids name is the worst thing for financial aid, so keep that to a minimum.
Depends on one's goals. Our goals were to save enough to cover all costs so that both our children did not qualify for any financial aid.

Happy to say goals were achieved. Neither qualified and they graduated debt free. :sharebeer
That is my goal too. But OP isn't making enough to max out tax advantaged space. I'm inferring that they may thus be in the range of folks who can get financial aid. Standard advice here is that you can't borrow to pay for retirement (reverse mortgages aside), and you should worry about saving for retirement before college.
We didn't max out anything with regard to retirement savings as our salaries were nowhere capable of ever coming close to doing anything like that. We stuck with contributing about 15% of our income into our retirement accounts through thick or thin each and every year no matter what. We didn't have 401K's, 403b's or any pensions in the first 16 years of our careers.

Beyond the 15% that went to our retirement savings, everything else went to the two college funds, or our own taxable accounts, and "living expenses". Education was a crucial goal in our households growing up, and so it was under our own roof as well.

We did it all on our sub $100K household income for most of the college savings years (we only crossed the $100K threshold late in the college savings years as both kids were already in college). If one starts early enough, and contributes to the college savings accounts as soon as you have those SS #'s, the power of time and compounding over the years will catch at least a bull market or two during the two decades of investing for a college education. We caught the big move in the 90's on the front end, and then feel fortunate to have caught the move from 2009 to present to finish up on the back end of the equation. It worked well enough, as we mentioned, to cover all college costs for both children so they both graduated debt free (including grad school), and were both able to be sent off into their own careers with $50K each.

It's obvious there are many different vehicles to finance a college education today. Roth IRA's and 529's were not even around when we started. UTMA/UGMA's were. We front end loaded the college education accounts in the first 5 years with just about everything we could throw at them at the time to take advantage of the power of compounding.

There is a divergence of opinion on these boards, as well as in articles one reads, on who should actually pay for college - parents, or the children? We are firmly on the side of the opinion parents should pay for it along with the kids doing Summer jobs to help contribute, and to tap into their paid internships while in college. Obviously, if our investments over the years, and our income had fallen short of reaching our goals, taking on some debt would have been the choice for our children. That, however, was not a goal when we started saving.

Nice that there are several paths to get there, but we can attest to doing it on income that in no way ever allowed us to contribute anything near the max to our tax advantaged accounts. Now, transitioning to the empty nest and the funding college years in the rearview mirror, we can boost some savings in our peak earning years. We boosted to 28% of our income last year for retirement savings, and are more than doubling that this year. :sharebeer
"Save like a pessimist, invest like an optimist." - Morgan Housel
miamivice
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Re: How to use Retirement Funds for College Savings

Post by miamivice »

cal91 wrote: I never said I wish/need to max out my retirement accounts, either. What I said was that while I can still contribute to retirment accounts, I see no reason to contribute anywhere else. I can use retirement money to pay for college expenses, or whatever else I want, while also getting tax advantages.
I am not sure how you use retirement money to pay for college expenses or whatever else you want while also getting tax advantages? The best option you presented was a 401k loan. But, you have to pay that back or pay significant taxes & penalties, which will negate the tax benefits of putting the money into a 401k.

I suppose you might be referring to Roth IRA contributions? Yes, you can withdraw these for any purpose at any time. Just be aware that at $11,000 per year (assuming you and your wife work) your contributions don't add up fast. And you might get the point where you are no longer allowed to make Roth IRA due to income.
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Re: How to use Retirement Funds for College Savings

Post by JGoneRiding »

miamivice wrote: The problem with using a Roth IRA for college is the shear number of dollars you'll have to save in a Roth IRA account to pay for college. College will cost around $200,000 per kid when your kids are college age, and at $11,000 a year, you won't have enough space in your Roth IRA to pay for college using contributions only.

A 529 account is a far better way to save for college, as long as you believe you'll have college expenses to pay for one or more of your children. You take the risk that if you do not have college expenses to pay (child does not go to college or child receives a 100% full ride scholarship covering tuition, books, and room & board for all 4 years) then you may have to pay taxes and/or penalties.

Your choice.
How do you figure that. Op can put 5.5k x 2 away for the next 15 years. He can then pull 11k out fully penalty free and all the earnings can be left. So really it's perfect he has 15 years to enjoy earnings and could easily take out the 15 years of contributions however he wants over 4 to 8 Years for the kids.

Op there is some exemption to ira for use for education you of course have to pay taxes but not penalty. How exactly I don't know and of course rules might change in 15 years. But I think you have right idea of focus on maxing retirement as you can and only when finished with that save secondary for college and the use yearly savings to cash flow or withdrawal accordingly when you get there.
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Re: How to use Retirement Funds for College Savings

Post by Ron Ronnerson »

Everyone’s situation will be different but we’re saving for college only in retirement accounts. The main reason is flexibility since the funds don’t have to be used only for education. We’re unable to max out the space in our retirement accounts but we’re contributing what we can to them.

We’ve been maxing out our Roth IRAs since 2006 and, in our case, just the contributions should add up to $286,000 by the time our daughter (currently age three) goes to college, assuming the maximum contribution remains $5500 per year for the next 15 years. Hopefully, this amount is sufficient to cover college for one kid in the 2030s.
miamivice
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Re: How to use Retirement Funds for College Savings

Post by miamivice »

JGoneRiding wrote: How do you figure that. Op can put 5.5k x 2 away for the next 15 years. He can then pull 11k out fully penalty free and all the earnings can be left. So really it's perfect he has 15 years to enjoy earnings and could easily take out the 15 years of contributions however he wants over 4 to 8 Years for the kids.
11k x 15 = $165,000, future dollars (at 0% ROI). My estimate is college will cost about $190,000 per child. I don't know how many children the OP has but at least more than one based on his initial post. So figure $200,000 to $600,000 needed for college for 1 - 3 kids. Roth IRA contributions won't be enough.
Last edited by miamivice on Thu Jul 13, 2017 6:53 pm, edited 1 time in total.
miamivice
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Re: How to use Retirement Funds for College Savings

Post by miamivice »

Ron Ronnerson wrote:Everyone’s situation will be different but we’re saving for college only in retirement accounts. The main reason is flexibility since the funds don’t have to be used only for education. We’re unable to max out the space in our retirement accounts but we’re contributing what we can to them.

We’ve been maxing out our Roth IRAs since 2006 and, in our case, just the contributions should add up to $286,000 by the time our daughter (currently age three) goes to college, assuming the maximum contribution remains $5500 per year for the next 15 years. Hopefully, this amount is sufficient to cover college for one kid in the 2030s.
If you've been saving for 24 years for college education for one child, I'm impressed. I thought I was doing well to set aside money while my wife was pregnant with our little ones, but you beat me to it by about 6 years.
MathWizard
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Re: How to use Retirement Funds for College Savings

Post by MathWizard »

I started saving when my oldest was in the 4th grade.

I started contributing to ROTHs with the idea that I could withdraw contributions later for
college without penalty or tax consequences.

IRAs back then maxed at $ 2K per person. I augmented $1,800/yr in a taxable account.
Later, when the IRA max increased, I kept upping the ROTH contribution.

Before the first entered college, we were up to $11 K per year in ROTH contributions, plus about
$6K/yr into taxable.

I was able to then suspend ROTH and taxable contributions, and withdraw enough from taxable
to cash-flow college, and not have to withdraw from the ROTH. I was even able to start some
contributions to ROTHs before my youngest graduated last year.
Ron Ronnerson
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Re: How to use Retirement Funds for College Savings

Post by Ron Ronnerson »

miamivice wrote:
Ron Ronnerson wrote:Everyone’s situation will be different but we’re saving for college only in retirement accounts. The main reason is flexibility since the funds don’t have to be used only for education. We’re unable to max out the space in our retirement accounts but we’re contributing what we can to them.

We’ve been maxing out our Roth IRAs since 2006 and, in our case, just the contributions should add up to $286,000 by the time our daughter (currently age three) goes to college, assuming the maximum contribution remains $5500 per year for the next 15 years. Hopefully, this amount is sufficient to cover college for one kid in the 2030s.
If you've been saving for 24 years for college education for one child, I'm impressed. I thought I was doing well to set aside money while my wife was pregnant with our little ones, but you beat me to it by about 6 years.
Thanks, but to clarify, we haven't been saving for 24 years for college education. My wife and I started maxing out our Roth IRAs twelve years ago (starting in 2006) with the intention that it would be for retirement. We became parents just three years ago and then began to think about how to best save for college.

We decided that, for our circumstances, retirement accounts made sense as a good way to save for college. Our daughter should finish high school in 2032 if all stays on track. If we continue to max Roth IRA contributions, we will have 27 years of doing so under our belt by the time she's ready for college. My wife and I will be 58 years old at that time. So Roth IRA contributions could be accessed at first and then, the following year, we'd be old enough that we don't have to worry about penalties to be able to tap into the growth if needed.

I think people's specific situations have an important impact on where to save for college (or if to save at all). For us, retirement accounts seem to be a good option as I'm expecting a decent pension (it should pretty much cover our retirement expenses), we'll have social security, we're saving in a 457b (maxing this out), a 403b, a SEP-IRA, a traditional IRA, and taxable brokerage accounts. We still have space left in retirement accounts (good problem to have). The fact that we're relatively older parents is a variable in the equation as well. Also, we happen to live in a state that doesn't offer a deduction for 529 contributions.

529s are great in some situations whereas retirement accounts used for college may make sense in others.
miamivice
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Re: How to use Retirement Funds for College Savings

Post by miamivice »

I don't disagree that decisions are made based on one's specific circumstances. It can be hard to predict the future. I'll share what I did and why I believe 529s are a good thing.

My first child was born in 2010 and my second in 2015. During my wife's pregnancy for each of them, I happened to be working a lot and had extra money available to put into a 529. This was above and beyond maxing out Roth IRAs and contributing enough to both his and her 401ks to receive full company match, and after running the calculations to be sure that our retirement savings was on track. So, we dumped a bunch of money into each child's 529 during that child's pregnancy. The amount was what I projected to be enough to cover 75% of their educational costs when each child hits 18.

So, child #1 received $33,000 into a 529, which today is worth $80,000. Child #2 received $18,000 into a 529 which today is worth $38,000. And I dumped $12,000 into a third 529 which is worth about $16,000 today. Along the way I continued to max out Roth IRA and dump a lot into 401k.

Along the way, I lost the opportunity to contribute to Roth IRA due to income, and no longer make Roth IRA contributions. I upped the amount that I dump into our 401ks each year to compensate, but that income is tied up and cannot be used for college without penalities and/or taxes.

Each year I look up the cost of attendance at a variety of 4 year colleges located in our neck of the woods, and see how what percentage our 529 accounts will pay toward college. Right now we are hitting about 90% for Child #1 and about 75% for Child #2. (Clearly, we will pay equal amounts/percentages for both children, but have different amounts right now for planning purposes). Because of how the stock market has performed and nuances in college costs, we've gained ground on what percent of college we'll pay for. I'm projecting that our 529s will pay for 100% of the cost of college when our children are 18.

If I can pay for a $190,000 college education using $33,000 after tax dollars (child #1) and a $220,000 college education for about the same after tax dollars, I have no complaints.
Last edited by miamivice on Thu Jul 13, 2017 10:20 pm, edited 1 time in total.
miamivice
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Re: How to use Retirement Funds for College Savings

Post by miamivice »

Ron Ronnerson wrote: 529s are great in some situations whereas retirement accounts used for college may make sense in others.
But's let's clarify. The only account that you can use for college, prior to retirement, is contributions to a Roth IRA, correct? I don't believe you can use 401k / 403b money for college without penalities, taxes, or a 401k loan, right?
Ron Ronnerson
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Re: How to use Retirement Funds for College Savings

Post by Ron Ronnerson »

miamivice wrote:
Ron Ronnerson wrote: 529s are great in some situations whereas retirement accounts used for college may make sense in others.
But's let's clarify. The only account that you can use for college, prior to retirement, is contributions to a Roth IRA, correct? I don't believe you can use 401k / 403b money for college without penalities, taxes, or a 401k loan, right?
Different accounts have different rules. I'll just give one example since it's one I'm familiar with. We put in $18k/year into a governmental 457b. Once an individual has separated from their employer, he or she can access the funds in this type of account without penalty regardless of age. So if I were to retire tomorrow (at age 42), I could withdraw from this account without penalty. Taxes would still need to be paid (we're currently in the 15% tax bracket). Our plan, though, is to use Roth IRAs to pay for college but who knows what the future holds. This lack of certainty about the future also makes retirement accounts appealing to me in comparison to 529s since retirement accounts don't have to be used for education. I'm really not against 529s, though. I just think there are various factors to take into account and then make a personal decision.
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