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Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 1:15 pm
by Isabelle77
Ok, this probably doesn't make any sense because I've never heard about it anywhere, but I'd love everyone's thoughts.

My husband and I have some little Roths from college summer jobs that now total about 30K. We've had them forever, we don't contribute to them, it's a long story but we didn't even know they existed until we refinanced our mortgage with Wells Fargo and they already had us in their system, a relative started them for us and never told us. I realize that's super sketchy but she's long dead. The point is that these Roths have never been part of our financial planning and are a bizarre gift from the past.

All of our retirement savings are on track and doing really well but we always prioritized them over college savings and we're now in the position of not having enough saved for our kids who are 11 & 13. We are not going to qualify for any kind of aid. Is it possible for us to take these Roths, pay the income tax on the earnings now and then put them into their 529s so they can grow tax-free? Are they still subject to the 10% penalty or does that fall under the education exception? Would it make any sense to do it even with the penalty given the potential for tax-free growth? I realize it's not that much money but we are trying to pile in as much as we can.

We will be right on the edge of the new 24% bracket this year if that is helpful.

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 1:16 pm
by PFInterest
no. leave them alone.
your kids can borrow for college. you cant borrow for retirement.
you can also pass them along to your kids when you die.

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 1:20 pm
by Isabelle77
PFInterest wrote:
Sat Jan 13, 2018 1:16 pm
no. leave them alone.
your kids can borrow for college. you cant borrow for retirement.
you can also pass them along to your kids when you die.
Really? We have around 800K saved for retirement, we're 41. It's just 30K that we didn't know we had.

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 1:39 pm
by livesoft
It doesn't make sense to move them to 529 plans at all. They are already tax-free, so there is no benefit to moving to a 529 plan.

If you are not going to qualify for financial aid, then that means you have enough non-Roth wealth and income to pay for your children's colleges anyways and will not need this money to be in 529 plans anyways.

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 1:52 pm
by masha12
Keep the Roth IRAs. There is no better investment (except for HSAs).

It isn't necessarily the Boglehead way, but if it is important to you to get this retirement money into a 529 plan, reduce your current contributions to retirement plans and put that money into 529 plans for the kids until you have $30k in the 529s. This isn't the best option (which would be to keep the Roths, contribute max to retirement plans, and then fund 529 plans), but it is a better option than incurring taxes and a 10% penalty on a Roth withdrawal.

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 2:05 pm
by The529guy
Since you have $800k saved for retirement, I assume some of that may be in taxable accounts (?). Why not take $30k from a taxable account to contribute to these 529 accounts instead?

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 2:14 pm
by camillus
There may be a small benefit if you have a 529 state income tax deduction and you withdraw contributions only (avoiding paying the penalty & taxes).

Let's say $12k of the $30k are contributions. If you were to withdraw that $12k and contributed it to a 529, and then the next year used that $12k to pay for college, in a state like Michigan you would save a cool $510 on state income taxes (12k * 4.25%).

Best thing would be to roll both Roths to Vanguard, invest in admiral shares of TSM, and forget about them again :happy

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 2:30 pm
by livesoft
We borrowed money from a 401(k) plan and put it in 529 plans. The money came from a bond fund in the 401(k) plan and went into a bond fund in the 529 plans. The interest paid on the loan went into the 401(k) plan and was higher than the yield of the bond fund. The bond fund in the 529 plans had about a 1.8% lower expense ratio than the bond fund in the 401(k) plan. Double win and free money all around.

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 8:50 pm
by kaneohe
Here's one viewpoint: https://www.kiplinger.com/article/retir ... a-529.html

Doesn't sound there's a magic door to move the funds from Roth to 529 plan so given your ages, you'll be taxed and penalized on the earnings(do you even know how much are earnings/contributions given the history). ....so you would take a haircut up front which you would have to account for. Seems better to keep the Roth until it's qualified at 59.5 and then no taxes/penalty on withdrawal. Agree w/ others to fund the 529 plan another way.......taxable funds or divert 401K contribution there instead.

Re: Rolling old Roth IRAs to 529s

Posted: Sat Jan 13, 2018 9:25 pm
by Nate79
Why not roll these old Roths to your current Roth IRA? You can certainly pull out the contributions tac and penalty free and put in a 529. If you get a state tax deduction it might make sense to do so.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 8:58 am
by kaneohe
Nate79 wrote:
Sat Jan 13, 2018 9:25 pm
Why not roll these old Roths to your current Roth IRA? You can certainly pull out the contributions tac and penalty free and put in a 529. If you get a state tax deduction it might make sense to do so.
With a significant time delay, Nete79's post yesterday, reminded me that I had forgotten an important rule. I am not sure it is applicable since I don't believe you ever said you have any other Roths. You kind of suggest that you might since you call these "little" Roths. If you do have "big" Roths, the ordering rules for Roth withdrawals say that all your Roth IRAs are considered one big Roth. When you withdraw Roth funds, they are considered to be contributions first, then conversions, and earnings come out last. If you restrict your withdrawals to your total Roth contributions (original contributions, not conversions), then there will be no tax/penalty. This means if you insist on converting this "little" Roth to a 529 plan , you might be able to do so w/o tax/penalty consequences even w/o rolling these to your "big" Roth. You will need to file
Form 8606 demonstrating that this withdrawal is less than your total contributions.

It still seems better to take less tax-advantaged funds (such as taxable acct) and put those in the 529 .

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 10:09 am
by miamivice
PFInterest wrote:
Sat Jan 13, 2018 1:16 pm
no. leave them alone.
your kids can borrow for college. you cant borrow for retirement.
you can also pass them along to your kids when you die.
I disagree with this advice. It is easily possible to save up too much for your own retirement, and in doing so, saddle your children with college debt which hurts them in the later 20's and early 30's.

It'd be really selfish to save too much for your own retirement, so much that you have no use for the money, but insist that your kids saddle themselves with debt.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 10:23 am
by PFInterest
miamivice wrote:
Sun Jan 14, 2018 10:09 am
PFInterest wrote:
Sat Jan 13, 2018 1:16 pm
no. leave them alone.
your kids can borrow for college. you cant borrow for retirement.
you can also pass them along to your kids when you die.
I disagree with this advice. It is easily possible to save up too much for your own retirement, and in doing so, saddle your children with college debt which hurts them in the later 20's and early 30's.

It'd be really selfish to save too much for your own retirement, so much that you have no use for the money, but insist that your kids saddle themselves with debt.
where did i say the OP couldnt give money to their kids or fund their college? you are inferring a lot of things here.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 10:33 am
by blueman457
Can you just use the Roth IRA for college tuition? If it happens you have enough to pay for college by other means then you haven’t overcomitted to your 529s.

Blue man

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 10:50 am
by kaneohe
blueman457 wrote:
Sun Jan 14, 2018 10:33 am
Can you just use the Roth IRA for college tuition? If it happens you have enough to pay for college by other means then you haven’t overcomitted to your 529s.

Blue man
depends on circumstances.........if this little Roth is their only Roth, the earnings if withdrawn early are subject to both tax and penalty.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 10:51 am
by miamivice
kaneohe wrote:
Sun Jan 14, 2018 10:50 am
blueman457 wrote:
Sun Jan 14, 2018 10:33 am
Can you just use the Roth IRA for college tuition? If it happens you have enough to pay for college by other means then you haven’t overcomitted to your 529s.

Blue man
depends on circumstances.........if this little Roth is their only Roth, the earnings if withdrawn early are subject to both tax and penalty.
If I recall right, both Roth IRA earnings and contributions can be used for qualified education expenses without penalty, but taxes will apply.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 10:54 am
by miamivice
PFInterest wrote:
Sun Jan 14, 2018 10:23 am
miamivice wrote:
Sun Jan 14, 2018 10:09 am
PFInterest wrote:
Sat Jan 13, 2018 1:16 pm
no. leave them alone.
your kids can borrow for college. you cant borrow for retirement.
you can also pass them along to your kids when you die.
I disagree with this advice. It is easily possible to save up too much for your own retirement, and in doing so, saddle your children with college debt which hurts them in the later 20's and early 30's.

It'd be really selfish to save too much for your own retirement, so much that you have no use for the money, but insist that your kids saddle themselves with debt.
where did i say the OP couldnt give money to their kids or fund their college? you are inferring a lot of things here.
Um, the first line you said "no. leave them alone". If I read that sentence correctly, and please tell me if I didn't, your advice was not to fund their college and let the children borrow for college.

The OP stated that they have overstuffed retirement (800k at age 41) and are looking to see how they can use this surprise Roth IRA to help their children with college.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 11:26 am
by kaneohe
miamivice wrote:
Sun Jan 14, 2018 10:51 am
kaneohe wrote:
Sun Jan 14, 2018 10:50 am
blueman457 wrote:
Sun Jan 14, 2018 10:33 am
Can you just use the Roth IRA for college tuition? If it happens you have enough to pay for college by other means then you haven’t overcomitted to your 529s.

Blue man
depends on circumstances.........if this little Roth is their only Roth, the earnings if withdrawn early are subject to both tax and penalty.
If I recall right, both Roth IRA earnings and contributions can be used for qualified education expenses without penalty, but taxes will apply.
yes, you are correct...thanks for reminder.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 11:31 am
by The529guy
miamivice wrote:Um, the first line you said "no. leave them alone". If I read that sentence correctly, and please tell me if I didn't, your advice was not to fund their college and let the children borrow for college.
I don't think the post is saying what you think it's saying.
miamivice wrote:The OP stated that they have overstuffed retirement (800k at age 41) and are looking to see how they can use this surprise Roth IRA to help their children with college.
Exactly, but I think you meant "how they can use THESE surprise Roth IRAs," aka "them." Please see subject title.
Isabelle77 wrote:Is it possible for us to take these Roths, pay the income tax on the earnings now and then put them into their 529s so they can grow tax-free? Are they still subject to the 10% penalty or does that fall under the education exception?
PFInterest wrote:no. leave them [Roth IRAs] alone.
That's how I read this.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 11:53 am
by pshonore
kaneohe wrote:
Sun Jan 14, 2018 11:26 am
miamivice wrote:
Sun Jan 14, 2018 10:51 am
kaneohe wrote:
Sun Jan 14, 2018 10:50 am
blueman457 wrote:
Sun Jan 14, 2018 10:33 am
Can you just use the Roth IRA for college tuition? If it happens you have enough to pay for college by other means then you haven’t overcomitted to your 529s.

Blue man
depends on circumstances.........if this little Roth is their only Roth, the earnings if withdrawn early are subject to both tax and penalty.
If I recall right, both Roth IRA earnings and contributions can be used for qualified education expenses without penalty, but taxes will apply.
yes, you are correct...thanks for reminder.
Why would taxes apply to contributions?

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 12:38 pm
by PFInterest
The529guy wrote:
Sun Jan 14, 2018 11:31 am
miamivice wrote:Um, the first line you said "no. leave them alone". If I read that sentence correctly, and please tell me if I didn't, your advice was not to fund their college and let the children borrow for college.
I don't think the post is saying what you think it's saying.
miamivice wrote:The OP stated that they have overstuffed retirement (800k at age 41) and are looking to see how they can use this surprise Roth IRA to help their children with college.
Exactly, but I think you meant "how they can use THESE surprise Roth IRAs," aka "them." Please see subject title.
Isabelle77 wrote:Is it possible for us to take these Roths, pay the income tax on the earnings now and then put them into their 529s so they can grow tax-free? Are they still subject to the 10% penalty or does that fall under the education exception?
PFInterest wrote:no. leave them [Roth IRAs] alone.
That's how I read this.
529 is correct.
miami, you also need to pay attention to time. the first post made no mention of age, net worth, or plans.

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 12:54 pm
by Isabelle77
Thanks all, appreciate your thoughts.

To answer a few questions. We don’t have much in taxable, we’ve always prioritized retirement savings, my husband has a SEP as well, we have Roth’s, traditional iras, 401k, and HSA. My father is a serious boglehead and stressed 15% to retirement always so even when we were making 25k we were saving as much as possible.

I grew up in Canada and college savings were not a thing, my parents cash flowed my private liberal arts education in the US and I guess I just thought we would do the same. We do have about 50k saved for the older child and 35k saved for the younger. We are putting in $500 per kid per month.

My husband has annual rsu awards that will be between 20k-40k a year, after talking last night I think we’ve decided to contribute those to the 529s at least until we hit 100k per child and then put them in taxable. Any thoughts on that plan? If we need to look at Roth withdrawals despite all that then we will cross that bridge later.

Appreciate your help!

Re: Rolling old Roth IRAs to 529s

Posted: Sun Jan 14, 2018 1:11 pm
by kaneohe
pshonore wrote:
Sun Jan 14, 2018 11:53 am
kaneohe wrote:
Sun Jan 14, 2018 11:26 am
miamivice wrote:
Sun Jan 14, 2018 10:51 am
kaneohe wrote:
Sun Jan 14, 2018 10:50 am
blueman457 wrote:
Sun Jan 14, 2018 10:33 am
Can you just use the Roth IRA for college tuition? If it happens you have enough to pay for college by other means then you haven’t overcomitted to your 529s.

Blue man
depends on circumstances.........if this little Roth is their only Roth, the earnings if withdrawn early are subject to both tax and penalty.
If I recall right, both Roth IRA earnings and contributions can be used for qualified education expenses without penalty, but taxes will apply.
yes, you are correct...thanks for reminder.
Why would taxes apply to contributions?
and you are correct too...sorry,I was focused on the earnings part.