Should we invest in 529 plan or taxable?

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Topic Author
kurious
Posts: 79
Joined: Mon Nov 07, 2016 12:39 am

Should we invest in 529 plan or taxable?

Post by kurious »

Dear Bogleheads,

I need your advice.

Our Tax situation

We are a married couple in our early 30s (Indian citizens). We were scheduled to leave US in mid-May. That event did not happen due to a change in our circumstances. Expecting to leave the country, I maxed out my 401k as well as my Roth IRA for the year. DW maxed out her Roth IRA as well (she does not currently work but had some income from selling vested shares from her previous job).

I have been paying very little federal and state tax as I claimed saver's credit on my W4 (expecting to have limited net income in the 5 months we were supposed to stay). I now need to revise my W4 to increase the tax withholding.

Our Finances

Emergency fund: $15k
His 401k: $70k (Vanguard funds)
Her 401k: $40k (Fidelity Funds)
His Roth IRA: $17k (Vanguard Funds)
Her Roth IRA: $17k (Vanguard Funds)
Taxable investment: None
State of Residence: MA
Filing status: MFJ
His annual income: $120k (likely to increase by 10k - 20k this year)

As I do so, I have the following questions:

1. Should we invest additional savings in a taxable account or open a 529 plan? If latter, should we opt for an MA plan to help reduce our tax burden? We intend to have our first child in the next couple of years. The 529 plan will have one of us as the beneficiary that we will later change. We intend to return to India in the next 5 years.

2. We have only started researching 529 plans. Is there any merit is investing in 529 plans from other states?

3. My employer does not offer an HSA. Are there any other avenues we can explore to reduce our tax bill?

Thank you in advance for your inputs.
wineandplaya
Posts: 94
Joined: Fri Sep 14, 2018 9:42 am

Re: Should we invest in 529 plan or taxable?

Post by wineandplaya »

kurious wrote: Wed May 29, 2019 8:42 pm 3. My employer does not offer an HSA. Are there any other avenues we can explore to reduce our tax bill?
If you are covered under an HDHP you can easily open an HSA yourself, and get the same tax savings (but without employer contribution of course). At Fidelity you can get an HSA without any fee. Maybe other places as well.
codedude
Posts: 69
Joined: Thu Jan 26, 2017 9:15 pm

Re: Should we invest in 529 plan or taxable?

Post by codedude »

kurious,

For your situation, a 529 will be good
- for state tax deduction if any
- in the event you don’t go back to India after 5 years and continue staying in the US till kids go to college, you will save on taxes.

If you go back to India, after a couple of years you will become an ROR (ordinary resident) and the 529 will be taxed like a regular taxable account by India, so no special benefits. You will save on US taxes upon qualified withdrawal, but you would already have paid taxes to India. If you make nonqualified withdrawals you will pay a 10 percent penalty on the growth. I am not sure if non residents if the US get tax free withdrawal from 529 accounts.

When you leave the US in 5 years will you be a US citizen or green card holder - in which case you will always be a tax resident unless you give them up.

Do you have access to a mega backdoor Roth?

I would try to max out tax advantaged accounts like you are doing and save in taxable and skip the 529.
Topic Author
kurious
Posts: 79
Joined: Mon Nov 07, 2016 12:39 am

Re: Should we invest in 529 plan or taxable?

Post by kurious »

Thank you for the responses.
If you are covered under an HDHP you can easily open an HSA yourself
I checked with HR. We are not convered under an HDHP.
When you leave the US in 5 years will you be a US citizen or green card holder
Highly unlikely. I am in very early stages of the process.
Do you have access to a mega backdoor Roth?
I'm working on getting the details. Will update the post once I find out more.
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