Portfolio Review/How are we doing?

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daheld
Posts: 275
Joined: Wed Sep 13, 2017 8:14 am

Portfolio Review/How are we doing?

Post by daheld » Fri Aug 10, 2018 1:11 pm

Hi all. Been posting here for almost a year; I really appreciate the insight and guidance thus far. My wife and I are expecting our first child this winter; I figured this is a good time to review our assets and plan, as well as ask a few questions. We use Vanguard PAS for our Roths, a rollover IRA and a taxable account. Please resist the urge to tell me to self manage and drop PAS. My wife used a high fee financial advisor previously, and for us, PAS is a great compromise and works really well. I'm not necessarily looking for input as to specific fund choices so much as I'd like answers to the few specific questions I've posed below, as well as a general idea of how we're progressing. Thanks so much for any help. See below:

Emergency funds: Eight months split evenly between PNC savings and Vanguard Money Market fund.
Debt: Mortgage $193,000, 30 year fixed rate 4.25%. Paying ahead to pay off loan in 20 years. $100,000 in equity, purchased home ~ 6 months ago.
Tax Filing Status: MFJ
Tax Rate: 22% Federal, 6% State
State of Residence: MO
Age: 33 and 32
Income: $150,000 combined
Desired Asset allocation: 80% stocks / 20% bonds

Portfolio Worth:
Retirement: $340,000
Taxable: $120,000

Current retirement assets
His TSP
100% L2050
5% company match

Her 401k
I apologize I do not know fund specifics, though it is a lifecycle fund invested at 80/20.
6% company match

His Roth IRA at Vanguard
7% Vanguard Explorer Fund Admiral (VEXRX)
75% Vanguard Total Int'l Stock Index Fund Admiral (VTIAX)
4% Vanguard Int'l Value Fund (VTRIX)
14% Vanguard Total Stock Index Fund Admiral (VTSAX)

Her Roth IRA at Vanguard
3% Vanguard Strategic Equity Fund (VSEQX)
4% Vanguard Int'l Value Fund (VTRIX)
86% Vanguard Total Stock Market Index Fund Admiral (VTSAX)
7% Vanguard Int'l Growth Fund Admiral (VWILX)

His Rollover IRA at Vanguard
22% Vanguard Total Bond Market Index Fund Admiral (VBTLX)
13% Vanguard Intermediate-Term Investment-Grade Fund Admiral (VFIDX)
9% Vanguard Short-Term Investment-Grade Fund Admiral(VFSUX)
19% Vanguard Total International Bond Index Fund Admiral (VTABX)
3% Vanguard Total Stock Market Index Fund Admiral(VTSAX)
16% Vanguard Windsor II Fund Admiral (VWNAX)
18% Vanguard U.S. Growth Fund Admiral (VWUAX)

Taxable
7% Vanguard Total Bond Market Index Fund Admiral (VBTLX)
4% Vanguard Intermediate-Term Investment-Grade Fund Admiral (VFIDX)
3% Vanguard Short-Term Investment-Grade Fund Admiral(VFSUX)
7% Vanguard Total International Bond Index Fund Admiral (VTABX)
30% Vanguard Total Int'l Stock Index Fund Admiral (VTIAX)
50% Vanguard Total Stock Market Index Fund Admiral(VTSAX)

Contributions
New annual Contributions
$18,500 his TSP + 5% match
$18,500 her 401k + 6% match
$5,500 his Roth IRA
$5,500 her Roth IRA
$9,000 taxable
Total with matches: ~$56,00 per year (combined retirement and taxable)

Questions:
1. As I said above, we are expecting our first child this winter. With $120,000 in taxable, does it make sense to front load a 529 with, say, $40,00 over the first few years? We may want one more child after this; we're just not sure. Obviously college costs are hard to predict because of this. Is front loading a 529 and just letting it ride a good move? We expect some grandparent contribution, though obviously not banking on this.

2. I invest all contributions in my TSP in L2050, which I understand is somewhat conservative. I would consider buying specific funds. Any input on this?

3. How are we doing overall? We don't try to pinch every last penny, but we mostly try and avoid buying crap we don't need. Our yearly spend is about $56,000, which is also about how much we're saving yearly between retirement and taxable accounts.

Other info:
If I can stay with the federal government, my pension should pay about $30,000 in today's dollars at a minimum, possibly more.

My wife has a rather serious chronic health condition that could get progressively worse. We maintain separate insurance because her insurance excellent and cheap, but as a federal retiree I can keep my health insurance and cover her as well as long as we're both covered my final five years of federal employment. The plan is to move her to my plan at some point so this is possible. We've got time. In light of this, I'd like for my wife to be able to retire at 55 (if she wants to), and I would follow when I'm 59 (as soon as I'm eligible).

HEDGEFUNDIE
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Joined: Sun Oct 22, 2017 2:06 pm

Re: Portfolio Review/How are we doing?

Post by HEDGEFUNDIE » Fri Aug 10, 2018 1:43 pm

For those who are not familiar with "L2050": https://www.tsp.gov/InvestmentFunds/Fun ... L2050.html

Looks like it is a 2050 target date fund with an 18% bond allocation. That is on the conservative side. A Vanguard 2050 fund will only have 10% in bonds.

I would reallocate into 10% G (Government Bonds), 30% C (S&P 500), 30% S (US Extended Market), and 30% I (International).

ExitStageLeft
Posts: 899
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Re: Portfolio Review/How are we doing?

Post by ExitStageLeft » Fri Aug 10, 2018 2:18 pm

Things are looking wonderfully on track to my amateur eye. Your Vanguard accounts are a little more complicated than I would opt for, but you have PAS to manage things.

If you can sustain anything close to your current savings rate over the next 20 years, you will be more than set for a comfortable retirement. If you can put away $50k per year through 2038, with a 60/40 allocation and looking at historic market returns you would likely have a portfolio of over $3M in real dollars. That alone would be enough to allow a very comfortable retirement. Add in FERS pension and social security and you'll probably be looking for ways to spend in retirement.

You can run these scenarios through https://www.firecalc.com/ or http://www.cfiresim.com/ to see how your current savings are likely to grow.

I'll opine for a bit here, in that the 37% savings rate will be hard to keep up as your child(ren) grows toward adulthood. If you can keep that pace that would be awesome, but give some thought to whether you're working and saving so much that you miss out on some things that make life enjoyable.

I'm not suggesting conspicuous consumerism, but perhaps allow yourselves to splurge a little when you reach major milestones. If you're already able to do that on your budget then more power to you. As long as you and your spouse are on the same page you'll do great.

daheld
Posts: 275
Joined: Wed Sep 13, 2017 8:14 am

Re: Portfolio Review/How are we doing?

Post by daheld » Fri Aug 10, 2018 3:04 pm

ExitStageLeft wrote:
Fri Aug 10, 2018 2:18 pm
Things are looking wonderfully on track to my amateur eye. Your Vanguard accounts are a little more complicated than I would opt for, but you have PAS to manage things.
I absolutely agree, but like I said we've figured out this is a good "middle ground" for us. I honestly don't feel equipped to totally self-manage, and I am happy I have that self awareness. It was a hurdle to convince my wife we should dump her financial advisor, and for 0.3%, to me, it just ain't worth messing with. I can sleep at night knowing I'm not being taken for a ride with Vanguard. It works for us.
ExitStageLeft wrote:
Fri Aug 10, 2018 2:18 pm
I'll opine for a bit here, in that the 37% savings rate will be hard to keep up as your child(ren) grows toward adulthood. If you can keep that pace that would be awesome, but give some thought to whether you're working and saving so much that you miss out on some things that make life enjoyable.

I'm not suggesting conspicuous consumerism, but perhaps allow yourselves to splurge a little when you reach major milestones. If you're already able to do that on your budget then more power to you. As long as you and your spouse are on the same page you'll do great.
Again, completely agree here too. We are both dedicated to saving, but definitely don't avoid having fun or the like. We love to eat and cook great food, and we spend a decent chunk on good, local restaurants. I love craft beer (though I'm taking a hiatus), and I spend more than is probably prudent on really, really good beer. I also want to travel more than we have, but my wife's health limited us a little while we were dating. Hopefully we have a safe and successful baby delivery this winter and can start traveling a little in 2019!

Thanks for your input--it's much appreciated.

megabad
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Re: Portfolio Review/How are we doing?

Post by megabad » Fri Aug 10, 2018 5:34 pm

daheld wrote:
Fri Aug 10, 2018 1:11 pm
1. As I said above, we are expecting our first child this winter. With $120,000 in taxable, does it make sense to front load a 529 with, say, $40,00 over the first few years? We may want one more child after this; we're just not sure. Obviously college costs are hard to predict because of this. Is front loading a 529 and just letting it ride a good move? We expect some grandparent contribution, though obviously not banking on this.
If you can get an annual state tax credit/deduction, than you may want to split contributions across the years (at least enough to get the max deduction). If not then I prefer front loading as you suggest (a modest amount).

2. I invest all contributions in my TSP in L2050, which I understand is somewhat conservative. I would consider buying specific funds. Any input on this?
Sounds good to me. A very low stress approach. Make sure your PAS person know the amount as this will affect your allocations at Vanguard.

3. How are we doing overall? We don't try to pinch every last penny, but we mostly try and avoid buying crap we don't need. Our yearly spend is about $56,000, which is also about how much we're saving yearly between retirement and taxable accounts.
I think you are doing great. Great income. Great savings rate. Great retirement offerings (TSP, VG).

daheld
Posts: 275
Joined: Wed Sep 13, 2017 8:14 am

Re: Portfolio Review/How are we doing?

Post by daheld » Mon Aug 13, 2018 7:20 am

Any feedback is greatly appreciated. Thanks!

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Strayshot
Posts: 391
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Location: New Mexico

Re: Portfolio Review/How are we doing?

Post by Strayshot » Mon Aug 13, 2018 7:56 am

Does your 529 offer a state tax exemption up to a certain amount of yearly contribution? How much of the taxable is ltcg vs stcg? I would probably look at maxing the 529 up to the tax exempt threshold using taxable sales that only have ltcg for a couple of years until it is in the 30-40k range and then just let it ride at 100% domestic index equities. If you get no tax benefit, then yes just lump sum in from taxable with ltcg.

If you worry your target date in the TSP is too conservative, you can easily construct your own 2 or 3 fund portfolio within the TSP. The wiki has info on this (which TSP funds to use for which parts of the 3 fund). With a planned pension I think you can be a bit more aggressive, particularly in these accumulation/growth years.

Given other info in the thread, your financial situation is excellent and really you should focus on making sure insurances (term life, possible disability, etc) and estate documents (will, POA, advanced directive) are all updated and sufficient given spouse health condition and upcoming new addition (congrats!).

daheld
Posts: 275
Joined: Wed Sep 13, 2017 8:14 am

Re: Portfolio Review/How are we doing?

Post by daheld » Mon Aug 13, 2018 12:13 pm

Strayshot wrote:
Mon Aug 13, 2018 7:56 am
Does your 529 offer a state tax exemption up to a certain amount of yearly contribution? How much of the taxable is ltcg vs stcg? I would probably look at maxing the 529 up to the tax exempt threshold using taxable sales that only have ltcg for a couple of years until it is in the 30-40k range and then just let it ride at 100% domestic index equities. If you get no tax benefit, then yes just lump sum in from taxable with ltcg.

If you worry your target date in the TSP is too conservative, you can easily construct your own 2 or 3 fund portfolio within the TSP. The wiki has info on this (which TSP funds to use for which parts of the 3 fund). With a planned pension I think you can be a bit more aggressive, particularly in these accumulation/growth years.

Given other info in the thread, your financial situation is excellent and really you should focus on making sure insurances (term life, possible disability, etc) and estate documents (will, POA, advanced directive) are all updated and sufficient given spouse health condition and upcoming new addition (congrats!).
Yeah, we will likely have to rely on my wife's workplace life insurance for her. It's not great but it's absolutely better than nothing. I just checked in to buying a 20 year term policy for me and we'll do that soon.

We were looking at wills/trusts, etc. I have decided on a lawyer we'll visit to see about having this drawn up. Do people generally wait til a baby is born or is this something we should do now and just have it altered when we have a child?

KlangFool
Posts: 10190
Joined: Sat Oct 11, 2008 12:35 pm

Re: Portfolio Review/How are we doing?

Post by KlangFool » Mon Aug 13, 2018 12:29 pm

OP,

Why would you save for college education and contribute to 529?

A) Your annual savings is high enough to pay for college education. On top of that, you have the taxable account and Roth IRA contribution.

B) You are old enough that when your kids going to college, you are almost retired.

C) At the current rate of savings, you may be early retired before your kid goes to college.

D) At 22% tax bracket, your tax benefits are minimal compared to putting money into the taxable account. And, you are planning for early retirement for your wife at 55 years. Your wife's retirement may even come earlier than that. It is good to have the money in the taxable account.

So, why sacrificing the flexibility of the taxable account for the minimal tax savings of 529?

KlangFool

daheld
Posts: 275
Joined: Wed Sep 13, 2017 8:14 am

Re: Portfolio Review/How are we doing?

Post by daheld » Mon Aug 13, 2018 1:03 pm

KlangFool wrote:
Mon Aug 13, 2018 12:29 pm
OP,

Why would you save for college education and contribute to 529?

A) Your annual savings is high enough to pay for college education. On top of that, you have the taxable account and Roth IRA contribution.

B) You are old enough that when your kids going to college, you are almost retired.

C) At the current rate of savings, you may be early retired before your kid goes to college.

D) At 22% tax bracket, your tax benefits are minimal compared to putting money into the taxable account. And, you are planning for early retirement for your wife at 55 years. Your wife's retirement may even come earlier than that. It is good to have the money in the taxable account.

So, why sacrificing the flexibility of the taxable account for the minimal tax savings of 529?

KlangFool
This thought has also crossed my mind. We will very likely be unable to continue this rate of savings, and our yearly expenses will go up as we plan to do a bit more traveling than we've done recently. The plan is for my wife to retire at 55, which would be about 22 years from now. I absolutely plan to work until age 59, which will be 27 years from now, in order to get my pension.

I guess the tax savings was the main driver of my reasoning for opening a 529. If we were to leave the money in a taxable account, which is currently invested 80/20, any thoughts on how planning to use some of that money for college expenses should impact asset allocation?

KlangFool
Posts: 10190
Joined: Sat Oct 11, 2008 12:35 pm

Re: Portfolio Review/How are we doing?

Post by KlangFool » Mon Aug 13, 2018 1:25 pm

daheld wrote:
Mon Aug 13, 2018 1:03 pm
KlangFool wrote:
Mon Aug 13, 2018 12:29 pm
OP,

Why would you save for college education and contribute to 529?

A) Your annual savings is high enough to pay for college education. On top of that, you have the taxable account and Roth IRA contribution.

B) You are old enough that when your kids going to college, you are almost retired.

C) At the current rate of savings, you may be early retired before your kid goes to college.

D) At 22% tax bracket, your tax benefits are minimal compared to putting money into the taxable account. And, you are planning for early retirement for your wife at 55 years. Your wife's retirement may even come earlier than that. It is good to have the money in the taxable account.

So, why sacrificing the flexibility of the taxable account for the minimal tax savings of 529?

KlangFool
This thought has also crossed my mind. We will very likely be unable to continue this rate of savings, and our yearly expenses will go up as we plan to do a bit more traveling than we've done recently. The plan is for my wife to retire at 55, which would be about 22 years from now. I absolutely plan to work until age 59, which will be 27 years from now, in order to get my pension.

I guess the tax savings was the main driver of my reasoning for opening a 529. If we were to leave the money in a taxable account, which is currently invested 80/20, any thoughts on how planning to use some of that money for college expenses should impact asset allocation?
daheld,

There is no reason at all why you invest your taxable account at 80/20. Aka, separate from one common AA. I keep my taxable account at 100/0 as part of my overall 61/39 portfolio. It improves my tax efficiency.

<<any thoughts on how planning to use some of that money for college expenses should impact asset allocation?>>

There is no impact. You should walk through the steps and clear out your confusion.

KlangFool

nps
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Re: Portfolio Review/How are we doing?

Post by nps » Mon Aug 13, 2018 6:42 pm

KlangFool wrote:
Mon Aug 13, 2018 12:29 pm
At 22% tax bracket, your tax benefits are minimal compared to putting money into the taxable account.
They would save 6 percent state tax right off the bat (up to $16k annual 529 contributions) and eliminate tax on dividends and capital gains compared to taxable if the savings and earnings are used for qualified expenses. That's not minimal to me, but it might be for you.

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Strayshot
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Location: New Mexico

Re: Portfolio Review/How are we doing?

Post by Strayshot » Wed Aug 15, 2018 7:40 am

nps wrote:
Mon Aug 13, 2018 6:42 pm
KlangFool wrote:
Mon Aug 13, 2018 12:29 pm
At 22% tax bracket, your tax benefits are minimal compared to putting money into the taxable account.
They would save 6 percent state tax right off the bat (up to $16k annual 529 contributions) and eliminate tax on dividends and capital gains compared to taxable if the savings and earnings are used for qualified expenses. That's not minimal to me, but it might be for you.
I agree with this. If 6%+ savings right off the bat is minimal I guess I should also stop worrying about if my cash is making nothing vs almost 2%. And heck, why worry about paying a 1% expense ratio vs almost nothing for the same index fund? Oh wait this is bogleheads where we care about costs and savings!

A Roth IRA is the best savings vehicle for higher education (amongst other things like retirement) but since you are already maxing those the 529 is your next best bet to save for college. If you worry about locking away the money, don’t contribute as much. The money will exist and compound tax free in perpetuity so eventually someone in your family (kids, grandkids, great grandkids, etc) will probably attend a qualified education institution and use it. If not, find a year in retirement when you are very low income (Post retirement but pre social security when folks usually do Roth conversions) and just eat the penalty and take out the 529 funds to live on. No big deal!

KlangFool
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Re: Portfolio Review/How are we doing?

Post by KlangFool » Wed Aug 15, 2018 9:34 am

Strayshot wrote:
Wed Aug 15, 2018 7:40 am
nps wrote:
Mon Aug 13, 2018 6:42 pm
KlangFool wrote:
Mon Aug 13, 2018 12:29 pm
At 22% tax bracket, your tax benefits are minimal compared to putting money into the taxable account.
They would save 6 percent state tax right off the bat (up to $16k annual 529 contributions) and eliminate tax on dividends and capital gains compared to taxable if the savings and earnings are used for qualified expenses. That's not minimal to me, but it might be for you.
I agree with this. If 6%+ savings right off the bat is minimal I guess I should also stop worrying about if my cash is making nothing vs almost 2%. And heck, why worry about paying a 1% expense ratio vs almost nothing for the same index fund? Oh wait this is bogleheads where we care about costs and savings!

A Roth IRA is the best savings vehicle for higher education (amongst other things like retirement) but since you are already maxing those the 529 is your next best bet to save for college. If you worry about locking away the money, don’t contribute as much. The money will exist and compound tax free in perpetuity so eventually someone in your family (kids, grandkids, great grandkids, etc) will probably attend a qualified education institution and use it. If not, find a year in retirement when you are very low income (Post retirement but pre social security when folks usually do Roth conversions) and just eat the penalty and take out the 529 funds to live on. No big deal!
Strayshot,

<<I agree with this. If 6%+ savings right off the bat is minimal>>

6% of what? How much do you think OP should contribute to 529?

A) 10K -> $600 savings?

B) 50K -> $3,000 savings?

C) 100K -> $6,000 savings?

Please note that OP's investment is at 460K now. His wife would retire at 55 years old (14 23years from now) before while the kid goes to college. This may drop the income low enough that OP's kid may qualify for financial aid if the 529 does not exist.

<<If not, find a year in retirement when you are very low income (Post retirement but pre social security when folks usually do Roth conversions) and just eat the penalty and take out the 529 funds to live on. >>

If 6% is a big deal, why 10% tax penalty is not a big deal. OP's wife will retire early at 55 years old. OP will retire at 59 years old.

It is very simple.

OP and his wife will retire early before the kid goes to college or during college.

A) The income will drop and may qualify the kid for financial aid if the 529 does not exists.

B) So, 6% savings now may cost 10% tax penalty and loss of financial aid later.

Why bother with 529 at all?

KlangFool

P.S.: Having a large taxable account for early retirement provides a lot of flexibility in tax management.
Last edited by KlangFool on Wed Aug 15, 2018 1:09 pm, edited 1 time in total.

TropikThunder
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Re: Portfolio Review/How are we doing?

Post by TropikThunder » Wed Aug 15, 2018 11:43 am

KlangFool wrote:
Wed Aug 15, 2018 9:34 am
Please note that OP's investment is at 460K now. His wife would retire at 55 years old (14 years from now) before the kid goes to college. This may drop the income low enough that OP's kid may qualify for financial aid if the 529 does not exist.
You need to check your math. OP’s wife is 32, wants to retire at 55. That’s 23 years, not 14.

KlangFool
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Re: Portfolio Review/How are we doing?

Post by KlangFool » Wed Aug 15, 2018 1:08 pm

TropikThunder wrote:
Wed Aug 15, 2018 11:43 am
KlangFool wrote:
Wed Aug 15, 2018 9:34 am
Please note that OP's investment is at 460K now. His wife would retire at 55 years old (14 years from now) before the kid goes to college. This may drop the income low enough that OP's kid may qualify for financial aid if the 529 does not exist.
You need to check your math. OP’s wife is 32, wants to retire at 55. That’s 23 years, not 14.
Thanks for the correction.

KlangFool

ponyboy
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Re: Portfolio Review/How are we doing?

Post by ponyboy » Wed Aug 15, 2018 1:13 pm

Keep doing what you're doing. Your finances are pretty similar to ours when we were that age. You'll have no issue retiring at 55...my goal is to get out between 53-55.

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Strayshot
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Location: New Mexico

Re: Portfolio Review/How are we doing?

Post by Strayshot » Wed Aug 15, 2018 9:10 pm

KlangFool wrote:
Wed Aug 15, 2018 9:34 am
If 6% is a big deal, why 10% tax penalty is not a big deal. OP's wife will retire early at 55 years old. OP will retire at 59 years old.

It is very simple.

OP and his wife will retire early before the kid goes to college or during college.

A) The income will drop and may qualify the kid for financial aid if the 529 does not exists.

B) So, 6% savings now may cost 10% tax penalty and loss of financial aid later.

Why bother with 529 at all?

KlangFool

P.S.: Having a large taxable account for early retirement provides a lot of flexibility in tax management.
You are trading a 6% guaranteed savings now for the small chance of a 10% penalty later (if the funds are never used for education or never planned for use by any generation for education). There is no more or less flexibility in planning when to withdrawal 529 funds with a penalty than there is for planning when to sell taxable funds and get hit with capital gains, so I am missing how a taxable account gives any more or less flexibility in tax management beyond trying to minimize / eliminate capital gains in low income years.

Using a 7% market return:
A 40k 529 contribution would save OP 2400 in present dollars and would be worth 135200 in 18 year future dollars tax free. Those 2400 present dollars would be worth 8100 future dollars on which 5700 would have ltcg taxes owed. Total future value 143300 minus ltcg on 5700 (850 at 15%) = 142450 for education. The penalty if all funds were taken out for non-education would be income tax rate on 95200 plus a 9520 penalty. Assuming OP was still in a 22% bracket the value would be 112000.

A 40k taxable contribution would be worth 135200 and would owe ltcg on any gains sold. Along the way, taxes would be owed on dividends. If the whole amount was sold for tuition, the cost would be 14300 in taxes (15% capital gains) for a future value of 120900.

The trade is 142450 vs 120900 for education or 112000 vs 120900 for non education. Only the OP can make that trade, but in my opinion a very small chance of “losing” 8900 is worth a very large chance of “winning” 21550. Obviously this is all basic math with a lot of assumptions.

Also, 529’s taken with penalty can sometimes use the beneficiary’s income tax rate which could be much lower than the OP effectively “negating” the penalty. By that I mean a 12% bracket with a 10% penalty is equivalent to the OP 22% bracket.

Finally, impact of a 529 on financial aid is a moot point, because all of these things would be considered parental assets anyways.

KlangFool
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Re: Portfolio Review/How are we doing?

Post by KlangFool » Wed Aug 15, 2018 9:29 pm

Strayshot wrote:
Wed Aug 15, 2018 9:10 pm
KlangFool wrote:
Wed Aug 15, 2018 9:34 am
If 6% is a big deal, why 10% tax penalty is not a big deal. OP's wife will retire early at 55 years old. OP will retire at 59 years old.

It is very simple.

OP and his wife will retire early before the kid goes to college or during college.

A) The income will drop and may qualify the kid for financial aid if the 529 does not exists.

B) So, 6% savings now may cost 10% tax penalty and loss of financial aid later.

Why bother with 529 at all?

KlangFool

P.S.: Having a large taxable account for early retirement provides a lot of flexibility in tax management.
You are trading a 6% guaranteed savings now for the small chance of a 10% penalty later (if the funds are never used for education or never planned for use by any generation for education). There is no more or less flexibility in planning when to withdrawal 529 funds with a penalty than there is for planning when to sell taxable funds and get hit with capital gains, so I am missing how a taxable account gives any more or less flexibility in tax management beyond trying to minimize / eliminate capital gains in low income years.

Using a 7% market return:
A 40k 529 contribution would save OP 2400 in present dollars and would be worth 135200 in 18 year future dollars tax free. Those 2400 present dollars would be worth 8100 future dollars on which 5700 would have ltcg taxes owed. Total future value 143300 minus ltcg on 5700 (850 at 15%) = 142450 for education. The penalty if all funds were taken out for non-education would be income tax rate on 95200 plus a 9520 penalty. Assuming OP was still in a 22% bracket the value would be 112000.

A 40k taxable contribution would be worth 135200 and would owe ltcg on any gains sold. Along the way, taxes would be owed on dividends. If the whole amount was sold for tuition, the cost would be 14300 in taxes (15% capital gains) for a future value of 120900.

The trade is 142450 vs 120900 for education or 112000 vs 120900 for non education. Only the OP can make that trade, but in my opinion a very small chance of “losing” 8900 is worth a very large chance of “winning” 21550. Obviously this is all basic math with a lot of assumptions.

Also, 529’s taken with penalty can sometimes use the beneficiary’s income tax rate which could be much lower than the OP effectively “negating” the penalty. By that I mean a 12% bracket with a 10% penalty is equivalent to the OP 22% bracket.

Finally, impact of a 529 on financial aid is a moot point, because all of these things would be considered parental assets anyways.
Strayshot,

You are assuming that OP can afford to pay $140K for the college education in 18 years.

A) If that is true, it means that OP is fully employed over that 18 years. Then, he does not have to sell anything to pay for college education. His annual saving is high enough to pay for college education.

B) Now, if that is not true, OP cannot afford to pay 140K for the college education. It means that OP is either unemployed or under-employed

i) The taxable account will come in very handy in that situation.

ii) 529 money will cause a problem in term of financial aid.

So, are you assuming (A) or (B)? In both cases, 529 does not make sense.

KlangFool

P.S.: My annual savings is 60K per year. My taxable account is about 500K. I do not use 529. I do not have to sell anything to pay for my kid's college education. I am moving my money from the taxable account to Trad. 401K and Roth IRAs while my kids go to college. So, that money will enjoy tax-free and tax-deferred growth from now on.

Over the 10+ years, I only pay tax on the 2% dividend/distribution of my taxable investment. In about 15% tax bracket, my annual cost is 2%X 15% = 0.3%.

nps
Posts: 586
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Re: Portfolio Review/How are we doing?

Post by nps » Thu Aug 16, 2018 6:36 am

KlangFool wrote:
Wed Aug 15, 2018 9:29 pm
Strayshot,

You are assuming that OP can afford to pay $140K for the college education in 18 years.

A) If that is true, it means that OP is fully employed over that 18 years. Then, he does not have to sell anything to pay for college education. His annual saving is high enough to pay for college education.

B) Now, if that is not true, OP cannot afford to pay 140K for the college education. It means that OP is either unemployed or under-employed

i) The taxable account will come in very handy in that situation.

ii) 529 money will cause a problem in term of financial aid.

So, are you assuming (A) or (B)? In both cases, 529 does not make sense.

KlangFool

P.S.: My annual savings is 60K per year. My taxable account is about 500K. I do not use 529. I do not have to sell anything to pay for my kid's college education. I am moving my money from the taxable account to Trad. 401K and Roth IRAs while my kids go to college. So, that money will enjoy tax-free and tax-deferred growth from now on.

Over the 10+ years, I only pay tax on the 2% dividend/distribution of my taxable investment. In about 15% tax bracket, my annual cost is 2%X 15% = 0.3%.
So your argument on (A) is that cash flowing college expenses is somehow better than "selling"? This is simply not mathematically different than withdrawing from a 529 fund and using that same cash flow to invest in like funds elsewhere.

In fact it's much better because using the 529 saves 6 percent state tax and eliminates all taxes on dividends and capital gains. Your opportunity cost to give up that tax break would have been much higher than 0.3 percent.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Portfolio Review/How are we doing?

Post by KlangFool » Thu Aug 16, 2018 6:53 am

nps wrote:
Thu Aug 16, 2018 6:36 am
KlangFool wrote:
Wed Aug 15, 2018 9:29 pm
Strayshot,

You are assuming that OP can afford to pay $140K for the college education in 18 years.

A) If that is true, it means that OP is fully employed over that 18 years. Then, he does not have to sell anything to pay for college education. His annual saving is high enough to pay for college education.

B) Now, if that is not true, OP cannot afford to pay 140K for the college education. It means that OP is either unemployed or under-employed

i) The taxable account will come in very handy in that situation.

ii) 529 money will cause a problem in term of financial aid.

So, are you assuming (A) or (B)? In both cases, 529 does not make sense.

KlangFool

P.S.: My annual savings is 60K per year. My taxable account is about 500K. I do not use 529. I do not have to sell anything to pay for my kid's college education. I am moving my money from the taxable account to Trad. 401K and Roth IRAs while my kids go to college. So, that money will enjoy tax-free and tax-deferred growth from now on.

Over the 10+ years, I only pay tax on the 2% dividend/distribution of my taxable investment. In about 15% tax bracket, my annual cost is 2%X 15% = 0.3%.
So your argument on (A) is that cash flowing college expenses is somehow better than "selling"? This is simply not mathematically different than withdrawing from a 529 fund and using that same cash flow to invest in like funds elsewhere.

In fact it's much better because using the 529 saves 6 percent state tax and eliminates all taxes on dividends and capital gains. Your opportunity cost to give up that tax break would have been much higher than 0.3 percent.
What is the opportunity cost of (B)?

KlangFool

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Strayshot
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Re: Portfolio Review/How are we doing?

Post by Strayshot » Thu Aug 16, 2018 7:51 am

Klangfool, I have to admit I am not sure what point you are trying to make? The point of saving money now is to have a larger amount of money at a future point in time. I guess I don’t get the point about OP’s employment status and the relevance to saving for college. OP has a plan, if for some reason life or catastrophe happens and the 529 has to be raided for funds at a penalty than so be it (but the risk is low).

You seem to believe that the benefits of a 529 are not worth the trade off of penalty risk if the funds are not used for education and I believe the opposite: the benefits of a 529 are worth the trade off of penalty risk. Either perspective is valid, it just depends on how much emphasis you place on the risk of non-eduction use.

I would never advocate putting funds in a 529 before all other tax advantaged space is utilized, but OP is already filling all other available space.

nps
Posts: 586
Joined: Thu Dec 04, 2014 10:18 am

Re: Portfolio Review/How are we doing?

Post by nps » Thu Aug 16, 2018 7:54 am

KlangFool wrote:
Thu Aug 16, 2018 6:53 am
What is the opportunity cost of (B)?

KlangFool
I'm not addressing that. Your stated argument was that a 529 didn't make sense in either (A) or (B). I'm arguing that it's not that straightforward, the OP could easily come out ahead in (A). Therefore, the OP's perception of the risk of (B) would become a main factor in deciding.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Portfolio Review/How are we doing?

Post by KlangFool » Thu Aug 16, 2018 7:59 am

Strayshot wrote:
Thu Aug 16, 2018 7:51 am
Klangfool, I have to admit I am not sure what point you are trying to make? The point of saving money now is to have a larger amount of money at a future point in time. I guess I don’t get the point about OP’s employment status and the relevance to saving for college. OP has a plan, if for some reason life or catastrophe happens and the 529 has to be raided for funds at a penalty than so be it (but the risk is low).

You seem to believe that the benefits of a 529 are not worth the trade off of penalty risk if the funds are not used for education and I believe the opposite: the benefits of a 529 are worth the trade off of penalty risk. Either perspective is valid, it just depends on how much emphasis you place on the risk of non-eduction use.

I would never advocate putting funds in a 529 before all other tax advantaged space is utilized, but OP is already filling all other available space.
Strayshot,

The point is very simple.

A) If everything goes well, the marginal benefit is minimal. For OP to spend 140K on college education, OP will have a net worth of 1 million or more.

B) However, if things are not going well, that 40K is very significant in helping the family finance. It is useful to have that money in the taxable account.

The impact of the decision is asymmetrical. If you bet right on 529, the benefit is minimal. If you bet wrong on 529, the impact is significant.

<<I would never advocate putting funds in a 529 before all other tax advantaged space is utilized, but OP is already filling all other available space.>>

But, OP's wife is going to early retire at 55 years old. So, money in the taxable account is needed.

KlangFool

daheld
Posts: 275
Joined: Wed Sep 13, 2017 8:14 am

Re: Portfolio Review/How are we doing?

Post by daheld » Thu Aug 16, 2018 10:54 am

KlangFool wrote:
Thu Aug 16, 2018 7:59 am
Strayshot,

The point is very simple.

A) If everything goes well, the marginal benefit is minimal. For OP to spend 140K on college education, OP will have a net worth of 1 million or more.

B) However, if things are not going well, that 40K is very significant in helping the family finance. It is useful to have that money in the taxable account.

The impact of the decision is asymmetrical. If you bet right on 529, the benefit is minimal. If you bet wrong on 529, the impact is significant.

<<I would never advocate putting funds in a 529 before all other tax advantaged space is utilized, but OP is already filling all other available space.>>

But, OP's wife is going to early retire at 55 years old. So, money in the taxable account is needed.

KlangFool
I kind of lean toward doing a 529. We will still have money in a taxable account--it's not like it's one or the other. We have $120k in taxable; if we took a chunk of that (say $40k) and contributed it to a 529 over the course of 5 years or so and then just let it ride, we'd still be left with $80k in taxable, and still be able to contribute to the taxable account. My wife does plan to retire in about 22 years. Our mortgage should be paid off by then, and I plan to work for 5 years after that. Obviously nobody can tell the future, but I think if those things hold true, we should have sufficient cash flow.

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