High W2 income making a mistake choosing 529 over Mega backdoor?

[hedge_hog88]

So another post about various ways to save for college.

Background: $400k+ single W2 earner, job/income stable, MFJ, 2 kids, 58yo when 1st child is college bound, and no plan to FIRE. I max out all pre-tax retirement 46k/y, and have access to 60k+/y of mega back door Roth (but has yet be close to max it out).

Current 529 (CA, no state deduction):
Kid 1: 88k; Kid 2: 44k

My assumptions:
a. Both kids will go to some kind of college (they will not overlap).
b. Job and income are unlikely to change.
c. I will be working until my 60's, so it's unlikely that we will qualify for any need based aid on income alone.
c. In-state flagship public school costs 160k/4y now, and will cost 250-300k/4y in 10 years (5% inflation). Private will cost 2x that.

My plan/questions:
1a. Should I continue to contribute to 529?
1b. If yes to 1a, should I superfund the 529 to reach the current in-state figure ASAP? Is it reasonable to expect the investment to keep up with the inflation of the college cost?
1c. I think I made a mistake with my projection when I started funding the 529 4 years ago: I expected 7% annual return until age 18. Should I instead be moving the 529s to more conservative investments by age 15, therefore expect a lower return?
2. Should I contribute to MBR instead?
3. A combination of 1 and 2? e.g. Roth to cover the latter years if the kid ends up in private, by then I will be 59.5+
4. Anything else I missed? Given the uncertainty of future LTCG, I don't see advantage of brokerage over Roth.

TY

[vinhodoporto]

Yes it’s a big mistake to put ANY $ in a 529 if you have unused mega backdoor space available.

Tax benefits for 529 are much less than mega backdoor

529 $ is much more restricted than Roth $

You can borrow from retirement accounts to pay for college but you can’t borrow from a 529 to pay for retirement

You don’t know what your college costs will be so there’s a risk of overfunding 529. With your income you can cash flow college expenses so no need to lock in all the inflexibility of a 529 for very little to no benefit

[Grt2bOutdoors]

So another post about various ways to save for college.

Background: $400k+ single W2 earner, job/income stable, MFJ, 2 kids, 58yo when 1st child is college bound, and no plan to FIRE. I max out all pre-tax retirement 46k/y, and have access to 60k+/y of mega back door Roth (but has yet be close to max it out).

Current 529 (CA, no state deduction):
Kid 1: 88k; Kid 2: 44k

My assumptions:
a. Both kids will go to some kind of college (they will not overlap).
b. Job and income are unlikely to change.
c. I will be working until my 60's, so it's unlikely that we will qualify for any need based aid on income alone.
c. In-state flagship public school costs 160k/4y now, and will cost 250-300k/4y in 10 years (5% inflation). Private will cost 2x that.

My plan/questions:
1a. Should I continue to contribute to 529?
1b. If yes to 1a, should I superfund the 529 to reach the current in-state figure ASAP? Is it reasonable to expect the investment to keep up with the inflation of the college cost?
1c. I think I made a mistake with my projection when I started funding the 529 4 years ago: I expected 7% annual return until age 18. Should I instead be moving the 529s to more conservative investments by age 15, therefore expect a lower return?
2. Should I contribute to MBR instead?
3. A combination of 1 and 2? e.g. Roth to cover the latter years if the kid ends up in private, by then I will be 59.5+
4. Anything else I missed? Given the uncertainty of future LTCG, I don't see advantage of brokerage over Roth.

TY

How old are you now?

You have X years till child 1 goes to school. There's little risk in you overfunding the 529 plan.

You state you have access to a Mega Back Door Roth, how much if any are you directing there? If you contribute to MBR, you can always turn off the contributions and redirect it to paying college expenses. At your income level, financial aid will be in the form of loans.

How is your 529 plan currently invested and what does the future investment track look like? If you view the Vanguard 529 Plan age based tracks, you'll see the risk starts being dialed back in the early teenage years. IMO, a 7% annual return is quite optimistic given the valuations in the markets today.

[MoreTaxes]

Yes it’s a big mistake to put ANY $ in a 529 if you have unused mega backdoor space available.

Tax benefits for 529 are much less than mega backdoor

529 $ is much more restricted than Roth $

You can borrow from retirement accounts to pay for college but you can’t borrow from a 529 to pay for retirement

You don’t know what your college costs will be so there’s a risk of overfunding 529. With your income you can cash flow college expenses so no need to lock in all the inflexibility of a 529 for very little to no benefit

+1. If you'll be 59.5 and have the Roth more than 5 years, prioritize putting money in Roth over the 529. Do not get hung up on the labels "retirement" and "college fund." You can withdraw from Roth for any purpose, tax-free.

[HomeStretch]

When utilizing your mega backdoor Roth (MBR), do the Roth funds end up in Roth 401k or Roth IRA? If Roth 401k, will you be able to access funds for college expenses if/when needed?

Aside from the access issue, my preference would be to utilize a MBR fully and cash flow college expenses.

[FiveK]

Background: $400k+ single W2 earner, job/income stable, MFJ, 2 kids, 58yo when 1st child is college bound, and no plan to FIRE. I max out all pre-tax retirement 46k/y, and have access to 60k+/y of mega back door Roth (but has yet be close to max it out).
...
4. Anything else I missed? Given the uncertainty of future LTCG, I don't see advantage of brokerage over Roth.

Trying to read between the lines, based on the excerpts above it appears you aren't contributing to any taxable accounts. Is that correct?

[MBB_Boy]

Yes it’s a big mistake to put ANY $ in a 529 if you have unused mega backdoor space available.

Tax benefits for 529 are much less than mega backdoor

529 $ is much more restricted than Roth $

You can borrow from retirement accounts to pay for college but you can’t borrow from a 529 to pay for retirement

You don’t know what your college costs will be so there’s a risk of overfunding 529. With your income you can cash flow college expenses so no need to lock in all the inflexibility of a 529 for very little to no benefit

+1. If you'll be 59.5 and have the Roth more than 5 years, prioritize putting money in Roth over the 529. Do not get hung up on the labels "retirement" and "college fund." You can withdraw from Roth for any purpose, tax-free.

+2. And age is actually irrelevant in this case because you'll be able to withdraw for education expenses without penalty regardless of age

[TRC]

We have likely overfunded our son's 529 for his undergrad. If he chooses to get an MBA, we can pay for it. If he doesn't, we'll likely change the beneficiary to our future grand children.

[cmr79]

Agree with other posters above...there really isn't any reason to contribute to a 529 in this case unless there is no other tax advantaged space available. The MBR wins in all cases. If you were in a state with a tax incentive for 529 contributions AND were well ahead of where you needed to be in retirement savings, I could see a reasonable argument for favoring the 529 up to the state incentive limits... but not in this case.

[hedge_hog88]

I will be 58 when kid 1 starts college in 10 years. I see consensus here about MBR. I also see "cash flow" mentioned all the time. Pardon my ignorance, does that just mean paying with (taxed) income? Or is it something more exotic?

[vinhodoporto]

I will be 58 when kid 1 starts college in 10 years. I see consensus here about MBR. I also see "cash flow" mentioned all the time. Pardon my ignorance, does that just mean paying with (taxed) income? Or is it something more exotic?

Yes, “cash flowing” college expenses generally means paying for it out of current income. Potentially this could involve cutting back on other savings or investments while you have a college student.

For example, in August my wife went into our bank account and did an ACH to our son’s university to pay fall tuition plus room and board using cash that had been sitting in our high yield savings for this purpose since my March bonus.

[hedge_hog88]

I will be 58 when kid 1 starts college in 10 years. I see consensus here about MBR. I also see "cash flow" mentioned all the time. Pardon my ignorance, does that just mean paying with (taxed) income? Or is it something more exotic?

Yes, “cash flowing” college expenses generally means paying for it out of current income. Potentially this could involve cutting back on other savings or investments while you have a college student.

For example, in August my wife went into our bank account and did an ACH to our son’s university to pay fall tuition plus room and board using cash that had been sitting in our high yield savings for this purpose since my March bonus.

I see. After reading over a dozen threads on 529, I had the epiphany that I am currently paying the equivalent of a university expense for my two kids' childcare/tuition. Assuming my income keeps up with the inflation I can certainly afford it when they start in college even without the 529 or Roth. Wonderful.

[hedge_hog88]

Trying to read between the lines, based on the excerpts above it appears you aren't contributing to any taxable accounts. Is that correct?

I have a fido CMA as one of my emergency funds, and a brokerage for fun stocks. Any reason besides the withdraw rules to favor brokerage over the Roth (if I have unmaxed MBR)?

[FiveK]

Trying to read between the lines, based on the excerpts above it appears you aren't contributing to any taxable accounts. Is that correct?

I have a fido CMA as one of my emergency funds, and a brokerage for fun stocks. Any reason besides the withdraw rules to favor brokerage over the Roth (if I have unmaxed MBR)?

No. With $400K/yr income one might expect all tax-advantaged contributions would be maximized and a significant amount being contributed to index funds in a taxable account.

[JBTX]

I’d max out any Roth space before putting money into a 529.

[Joey Jo Jo Jr]

I just happened to get this UBS investment “waterfall” chart today that put 529 ahead of MBD Roth and I wasn’t sure about that myself: https://secure.ubs.com/public/api/v2/in ... oco1fqKwDk

Although I was thinking 529 might be preferred if you have a 529 state income tax deduction and are absolutely certain to use the 529 for education or Roth rollover (a rather big “if” beyond the rollover amount).