529 vs. Vanguard Retirement fund in Roth IRA

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Thevillianinbrown
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529 vs. Vanguard Retirement fund in Roth IRA

Post by Thevillianinbrown »

Hello Bogleheads,

My father gave me a generous gift of $5000. I'm in a good position financially so far due to a great start with low-cost Vanguard investing early in my life. He's fine with giving it to his grandkids ages 6 and 4. My wife and I have started their 529 plans. I was looking at the possibility of putting it in a Retirement index fund that would automatically get more conservative as it gets close to the retirement date, which would be my kids' secondary education years. I would put it in my Roth IRA for them in the future. What are the pros and cons. I read up but I need some feedback from the Boglehead community.

Thanks in advance.

Cheers,
T.V.I.B
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Brianmcg321
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Re: 529 vs. Vanguard Retirement fund in Roth IRA

Post by Brianmcg321 »

I would just open a 529 plan for each kid and add some to it each month. $5k isn't going to grow to much so you would need to keep adding to it.

I would keep your retirement accounts separate.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
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vineviz
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Re: 529 vs. Vanguard Retirement fund in Roth IRA

Post by vineviz »

Brianmcg321 wrote: Fri Apr 30, 2021 8:15 am I would just open a 529 plan for each kid and add some to it each month. $5k isn't going to grow to much so you would need to keep adding to it.

I would keep your retirement accounts separate.
+1 on both counts.

529 for the win.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
humblecoder
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Re: 529 vs. Vanguard Retirement fund in Roth IRA

Post by humblecoder »

If you search this board, you will see it is littered with "should I contribute to a 529 account" threads like yours. I would suggest reading some of those.

Opinions vary from "529's are the best things since sliced bread" to "529's are the devil incarnate". I'm sure this thread will fill up with people with both opinions very soon *grabs popcorn*.

The main pros of a 529 account are that it is purpose built for saving for education (tax free growth if used for education), you should use your limited Roth space for retirement savings, many states provide a tax deduction for contributions, and there are financial aid advantages.

The main cons of a 529 account are that a Roth or taxable account gives you more flexibility with the money (no penalties if you end up not using the money for education), many state's 529 programs either have high fees or poor investment choices or both.

I'm sure other smarter BH's can add to this list.

I am in the pro-529 camp, especially since I can get a deduction on my state income taxes. We make sure to fund at least enough to get the full state tax deduction each year. I am not particularly worried about overfunding it, since I can either roll the excess into my daughter's ABLE account or I can just withdraw the money, pay taxes on the earnings/penalty and still come out ok since I was able to benefit from that tax deferred growth.
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vineviz
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Re: 529 vs. Vanguard Retirement fund in Roth IRA

Post by vineviz »

humblecoder wrote: Fri Apr 30, 2021 9:17 am The main cons of a 529 account are that a Roth or taxable account gives you more flexibility with the money (no penalties if you end up not using the money for education), many state's 529 programs either have high fees or poor investment choices or both.

I'm sure other smarter BH's can add to this list.

I am in the pro-529 camp, especially since I can get a deduction on my state income taxes. We make sure to fund at least enough to get the full state tax deduction each year. I am not particularly worried about overfunding it, since I can either roll the excess into my daughter's ABLE account or I can just withdraw the money, pay taxes on the earnings/penalty and still come out ok since I was able to benefit from that tax deferred growth.
I agree on all counts.

For reference, in a separate thread (Are Two College Savings Plans Better Than One?) I outlined a relatively simple way to further minimize the risk of overfunding by using two separate 529 accounts, one for stocks and the other for bonds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Broken Man 1999
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Re: 529 vs. Vanguard Retirement fund in Roth IRA

Post by Broken Man 1999 »

I struggle to understand why someone who is perfectly willing to spend $X for college via a 529 plan, yet is fearful that all the funds might not be used and they will have to pay taxes on the excess that wasn't needed, and not even on the entire unused amount.

Imagine your beneficiary informing you of great news:

Son/Daughter: "Dad/Mom, great news! I have been awarded a great scholarship that will cut my tuition by $40K over my four years!"

Dad/Mom can have two responses:

1. "Alright, son/daughter, I am so proud of you! I'll give you the remainder of your 529 plan after paying some taxes, maybe you can buy a car!"

OR

2. " @#$%^, son/daughter! That is just great! Now I have to pay taxes as your 529 plan was overfunded!"

If one was willing to pay $X, why be upset if you get the desired goal for less, and have some dollars returned, even though taxed?

Was the goal to pay for a college education, or to pay $X for a college education?

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
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vineviz
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Re: 529 vs. Vanguard Retirement fund in Roth IRA

Post by vineviz »

Broken Man 1999 wrote: Fri Apr 30, 2021 1:11 pm I struggle to understand why someone who is perfectly willing to spend $X for college via a 529 plan, yet is fearful that all the funds might not be used and they will have to pay taxes on the excess that wasn't needed, and not even on the entire unused amount.
Leaving aside the question of emotional response, holding everything else equal my experience is that most people prefer having more money to having less money.

So If I can send my child to college and have $10,000 left, I’d prefer that over sending my child to college and having $5,000 left.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Broken Man 1999
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Re: 529 vs. Vanguard Retirement fund in Roth IRA

Post by Broken Man 1999 »

I believe using a 529 account is a more declarative statement of intent that the owner is funding educational expenses for a beneficiary than a statement about the intent of using Roth money for education.

A 529 plan is an actual financial account specifically designed for education expenses. The uses are limited to and for those expenses. There are no other claims on that money. There are no ambiguous statements or paths of conversation that can be made concerning the use of those funds for the named beneficiary for any other reason.

I don't see those type descriptors in a Roth account.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
cshell2
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Re: 529 vs. Vanguard Retirement fund in Roth IRA

Post by cshell2 »

Broken Man 1999 wrote: Fri Apr 30, 2021 1:11 pm I struggle to understand why someone who is perfectly willing to spend $X for college via a 529 plan, yet is fearful that all the funds might not be used and they will have to pay taxes on the excess that wasn't needed, and not even on the entire unused amount.
I've always wondered that too. If I have money left in the 529s after putting two kids through school I'm going to call it a win and buy myself something to celebrate.
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