Taxable investment account for college?

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vineviz
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Re: Taxable investment account for college?

Post by vineviz » Wed Oct 09, 2019 8:17 am

mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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angelescrest
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Re: Taxable investment account for college?

Post by angelescrest » Wed Oct 09, 2019 8:24 am

I’m listening here, and this is helpful. I can try to summarize my thinking along with how some of the feedback might apply to our situation.

1. I appreciate and agree with the idea of prioritizing retirement over college. We believe we are on track with our retirement savings, and as income goes up, we will save more. Its less relevant to me as to whether or not I should save more for retirement, but how to strategically save or shift funds now for college as well.
2. I’d always believed, much of it from this forum, that you don’t want to touch your retirement savings for anything if possible. On top of that, Roth moneys are particularly valuable to keep taxes on retirement withdrawals low, and you can’t put money back in if you withdraw.
3. The aforementioned strategy of using Roth contributions for college would mean we would have quite a lot less over our lifetime in a Roth account, though that could be offset by having more in a 401k and possibly saving more on taxes now. But wouldn’t that still mean it’s possible we would have less take home money in retirement since we are paying a bigger percentage of our retirement distributions in taxes then? Or am I miscalculating the value of the additional 401k tax savings now?
4. I also took note of the strategy of withdrawing from a former 401k, which I don’t have yet.
5. The biggest uncertainty to me has always been the EFC and scholarship calculations, but teen persuasion has helped clarify some of that for me.
6. So if I simulated what was suggested from those advocating maximizing retirement savings, it would look something like this(?): liquidate the taxable this year, withhold more income to max out 401k, use part of the liquidated taxable on current expenses. Rinse and repeat over the next several years to maximize retirement accounts. During college years we withdraw Roth contributions for those expenses, but also hope to get a better financial aid package due to reduced EFC—unless we have an older 401k to pull from. If we get more income in the future, and if we are maximizing retirement accounts, then we can contribute to the 529.

miamivice
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Re: Taxable investment account for college?

Post by miamivice » Wed Oct 09, 2019 8:26 am

vineviz wrote:
Wed Oct 09, 2019 8:17 am
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
I concur with vineviz.

There is no arbitrary need to max one's retirement accounts. We have over $70,000 a year in tax advantaged space, we do not max this out nor do we need to. The max is just an arbitrary number and not related to a pleasing retirement or anything like that. Max also means something different for every family depending on their circumstances and employers.

miamivice
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Re: Taxable investment account for college?

Post by miamivice » Wed Oct 09, 2019 8:30 am

angelescrest wrote:
Wed Oct 09, 2019 8:24 am
6. So if I simulated what was suggested from those advocating maximizing retirement savings, it would look something like this(?): liquidate the taxable this year, withhold more income to max out 401k, use part of the liquidated taxable on current expenses. Rinse and repeat over the next several years to maximize retirement accounts. During college years we withdraw Roth contributions for those expenses, but also hope to get a better financial aid package due to reduced EFC—unless we have an older 401k to pull from. If we get more income in the future, and if we are maximizing retirement accounts, then we can contribute to the 529.
Yes, that is the KlangFool strategy, as well as some others.

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Wed Oct 09, 2019 8:36 am

vineviz wrote:
Wed Oct 09, 2019 8:17 am
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
vineviz,

A) <<max out tax advantaged retirement accounts>>

B) <<maximizing retirement savings>>

(A) and (B) are not the same. You could be objecting to (B) but doing (A). Money is fungible.

For example,

1) Pay a 28% tax and contribute to the 529.

Or

2) Contribute to Trad. 401K and defer 28% tax and put the tax savings into the Roth IRAs.

3) When your net worth is high enough, spend your annual savings on college education. Aka, "cash flow" the college education.

So, (2) is maxed up the tax-advantaged accounts in order to save taxes and build up your net worth quickly. But, after your net worth is big enough, what do you do with your annual saving is up to you.

Tax-advantaged accounts are a tax management tool. Money is fungible. After a person saves the tax, what they do with the tax savings is up to them.

KlangFool

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Wed Oct 09, 2019 8:50 am

angelescrest wrote:
Wed Oct 09, 2019 8:24 am
6. So if I simulated what was suggested from those advocating maximizing retirement savings, it would look something like this(?): liquidate the taxable this year, withhold more income to max out 401k, use part of the liquidated taxable on current expenses. Rinse and repeat over the next several years to maximize retirement accounts. During college years we withdraw Roth contributions for those expenses, but also hope to get a better financial aid package due to reduced EFC—unless we have an older 401k to pull from. If we get more income in the future, and if we are maximizing retirement accounts, then we can contribute to the 529.
angelescrest,

Let's focus on your 90K and 12% marginal tax rate.

A) You could contribute 90K to 529.

B) You could contribute that 90K to Trad. 401K over several years and receive 12% = $10,800 of tax savings. You max up your Trad. 401K contribution to 19K. Then, you use your taxable account to cover your living expenses. Essentially, you move your money from the taxable account to the Trad. 401K.

In (A), you have 90K plus the growth of 90K. In (B), you have 90K + tax savings ($10,800) and the growth of $100,800.

Which one lets you have more money in 10 to 13 years? (A) or (B)?

They are tax-advantaged accounts. They are great tax management tool. They are not retirement saving accounts. You could use the money in those accounts for whatever purposes that you choose subject to some limitation.

I was unemployed for more than 1 year a few times. I withdraw my 401K and pay a 10% penalty and 0% income taxes. But, I still save taxes. I contribute to my 401K at 20+% and pay a 10% penalty. I saved 10+%.

KlangFool

miamivice
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Re: Taxable investment account for college?

Post by miamivice » Wed Oct 09, 2019 9:00 am

KlangFool wrote:
Wed Oct 09, 2019 8:50 am
angelescrest wrote:
Wed Oct 09, 2019 8:24 am
6. So if I simulated what was suggested from those advocating maximizing retirement savings, it would look something like this(?): liquidate the taxable this year, withhold more income to max out 401k, use part of the liquidated taxable on current expenses. Rinse and repeat over the next several years to maximize retirement accounts. During college years we withdraw Roth contributions for those expenses, but also hope to get a better financial aid package due to reduced EFC—unless we have an older 401k to pull from. If we get more income in the future, and if we are maximizing retirement accounts, then we can contribute to the 529.
angelescrest,

Let's focus on your 90K and 12% marginal tax rate.

A) You could contribute 90K to 529.

B) You could contribute that 90K to Trad. 401K over several years and receive 12% = $10,800 of tax savings. You max up your Trad. 401K contribution to 19K. Then, you use your taxable account to cover your living expenses. Essentially, you move your money from the taxable account to the Trad. 401K.

In (A), you have 90K plus the growth of 90K. In (B), you have 90K + tax savings ($10,800) and the growth of $100,800.

Which one lets you have more money in 10 to 13 years? (A) or (B)?

They are tax-advantaged accounts. They are great tax management tool. They are not retirement saving accounts. You could use the money in those accounts for whatever purposes that you choose subject to some limitation.

I was unemployed for more than 1 year a few times. I withdraw my 401K and pay a 10% penalty and 0% income taxes. But, I still save taxes. I contribute to my 401K at 20+% and pay a 10% penalty. I saved 10+%.

KlangFool
Withdrawing money from a 401k counts as income, so you can't withdraw $150k or whatever in 1 year and pay 0% taxes.

Again, this is another made up situation that you are presenting to try to justify your incorrect proposition that 401k money can be used to pay for college in a more tax effective manner than a 529.

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Wed Oct 09, 2019 9:10 am

miamivice wrote:
Wed Oct 09, 2019 9:00 am
KlangFool wrote:
Wed Oct 09, 2019 8:50 am
angelescrest wrote:
Wed Oct 09, 2019 8:24 am
6. So if I simulated what was suggested from those advocating maximizing retirement savings, it would look something like this(?): liquidate the taxable this year, withhold more income to max out 401k, use part of the liquidated taxable on current expenses. Rinse and repeat over the next several years to maximize retirement accounts. During college years we withdraw Roth contributions for those expenses, but also hope to get a better financial aid package due to reduced EFC—unless we have an older 401k to pull from. If we get more income in the future, and if we are maximizing retirement accounts, then we can contribute to the 529.
angelescrest,

Let's focus on your 90K and 12% marginal tax rate.

A) You could contribute 90K to 529.

B) You could contribute that 90K to Trad. 401K over several years and receive 12% = $10,800 of tax savings. You max up your Trad. 401K contribution to 19K. Then, you use your taxable account to cover your living expenses. Essentially, you move your money from the taxable account to the Trad. 401K.

In (A), you have 90K plus the growth of 90K. In (B), you have 90K + tax savings ($10,800) and the growth of $100,800.

Which one lets you have more money in 10 to 13 years? (A) or (B)?

They are tax-advantaged accounts. They are great tax management tool. They are not retirement saving accounts. You could use the money in those accounts for whatever purposes that you choose subject to some limitation.

I was unemployed for more than 1 year a few times. I withdraw my 401K and pay a 10% penalty and 0% income taxes. But, I still save taxes. I contribute to my 401K at 20+% and pay a 10% penalty. I saved 10+%.

KlangFool
Withdrawing money from a 401k counts as income, so you can't withdraw $150k or whatever in 1 year and pay 0% taxes.

Again, this is another made up situation that you are presenting to try to justify your incorrect proposition that 401k money can be used to pay for college in a more tax effective manner than a 529.
miamivice,

Please explain why OP needs to withdraw 150K of 401K in order to pay for the college education?

A) OP has at least 120K (12K X 10 years) of Roth IRA's contribution in 10 years.

B) OP's annual saving is about 20K per year.

C) So, OP has about 120K + 160K (20K x 8 years while kids in college) = 280K to pay for college education before 401K comes into play.

D) For normal people like us, this is much more than we can afford to pay for our kids' college education.

E) If OP's income went up in 10 years, then, the annual savings would be much more. The likelihood of needing to use 401K is even less.

KlangFool

miamivice
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Re: Taxable investment account for college?

Post by miamivice » Wed Oct 09, 2019 9:20 am

KlangFool wrote:
Wed Oct 09, 2019 9:10 am
miamivice wrote:
Wed Oct 09, 2019 9:00 am
KlangFool wrote:
Wed Oct 09, 2019 8:50 am
angelescrest wrote:
Wed Oct 09, 2019 8:24 am
6. So if I simulated what was suggested from those advocating maximizing retirement savings, it would look something like this(?): liquidate the taxable this year, withhold more income to max out 401k, use part of the liquidated taxable on current expenses. Rinse and repeat over the next several years to maximize retirement accounts. During college years we withdraw Roth contributions for those expenses, but also hope to get a better financial aid package due to reduced EFC—unless we have an older 401k to pull from. If we get more income in the future, and if we are maximizing retirement accounts, then we can contribute to the 529.
angelescrest,

Let's focus on your 90K and 12% marginal tax rate.

A) You could contribute 90K to 529.

B) You could contribute that 90K to Trad. 401K over several years and receive 12% = $10,800 of tax savings. You max up your Trad. 401K contribution to 19K. Then, you use your taxable account to cover your living expenses. Essentially, you move your money from the taxable account to the Trad. 401K.

In (A), you have 90K plus the growth of 90K. In (B), you have 90K + tax savings ($10,800) and the growth of $100,800.

Which one lets you have more money in 10 to 13 years? (A) or (B)?

They are tax-advantaged accounts. They are great tax management tool. They are not retirement saving accounts. You could use the money in those accounts for whatever purposes that you choose subject to some limitation.

I was unemployed for more than 1 year a few times. I withdraw my 401K and pay a 10% penalty and 0% income taxes. But, I still save taxes. I contribute to my 401K at 20+% and pay a 10% penalty. I saved 10+%.

KlangFool
Withdrawing money from a 401k counts as income, so you can't withdraw $150k or whatever in 1 year and pay 0% taxes.

Again, this is another made up situation that you are presenting to try to justify your incorrect proposition that 401k money can be used to pay for college in a more tax effective manner than a 529.
miamivice,

Please explain why OP needs to withdraw 150K of 401K in order to pay for the college education?

A) OP has at least 120K (12K X 10 years) of Roth IRA's contribution in 10 years.

B) OP's annual saving is about 20K per year.

C) So, OP has about 120K + 160K (20K x 8 years while kids in college) = 280K to pay for college education before 401K comes into play.

D) For normal people like us, this is much more than we can afford to pay for our kids' college education.

E) If OP's income went up in 10 years, then, the annual savings would be much more. The likelihood of needing to use 401K is even less.

KlangFool
I honestly can't follow your explanations....they're more complicated than they need to be and don't make sense to me.

Broken Man 1999
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Re: Taxable investment account for college?

Post by Broken Man 1999 » Wed Oct 09, 2019 9:23 am

vineviz wrote:
Wed Oct 09, 2019 8:17 am
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
This!

Somehow many of us reach a comfortable retirement after spending money for mortgages on nice homes, driving something other than POS econo-box vehicles, paying for the college education of children.... the list goes on and on.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Wed Oct 09, 2019 9:33 am

Broken Man 1999 wrote:
Wed Oct 09, 2019 9:23 am
vineviz wrote:
Wed Oct 09, 2019 8:17 am
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
This!

Somehow many of us reach a comfortable retirement after spending money for mortgages on nice homes, driving something other than POS econo-box vehicles, paying for the college education of children.... the list goes on and on.

Broken Man 1999
Survivorship Bias.

Those that cannot reach a comfortable retirement after spending the money would not be posting in this forum. They would be too busy trying to make a living and paying their bills.

KlangFool

smitcat
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Re: Taxable investment account for college?

Post by smitcat » Wed Oct 09, 2019 9:45 am

KlangFool wrote:
Wed Oct 09, 2019 9:33 am
Broken Man 1999 wrote:
Wed Oct 09, 2019 9:23 am
vineviz wrote:
Wed Oct 09, 2019 8:17 am
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
This!

Somehow many of us reach a comfortable retirement after spending money for mortgages on nice homes, driving something other than POS econo-box vehicles, paying for the college education of children.... the list goes on and on.

Broken Man 1999
Survivorship Bias.

Those that cannot reach a comfortable retirement after spending the money would not be posting in this forum. They would be too busy trying to make a living and paying their bills.

KlangFool
"Those that cannot reach a comfortable retirement after spending the money would not be posting in this forum. They would be too busy trying to make a living and paying their bills."
People post here almost very day that are behind in savings and/or in a financial bind.
Pretty easy to read those posts as well.

mmmodem
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Re: Taxable investment account for college?

Post by mmmodem » Wed Oct 09, 2019 9:47 am

miamivice wrote:
Wed Oct 09, 2019 8:30 am
angelescrest wrote:
Wed Oct 09, 2019 8:24 am
6. So if I simulated what was suggested from those advocating maximizing retirement savings, it would look something like this(?): liquidate the taxable this year, withhold more income to max out 401k, use part of the liquidated taxable on current expenses. Rinse and repeat over the next several years to maximize retirement accounts. During college years we withdraw Roth contributions for those expenses, but also hope to get a better financial aid package due to reduced EFC—unless we have an older 401k to pull from. If we get more income in the future, and if we are maximizing retirement accounts, then we can contribute to the 529.
Yes, that is the KlangFool strategy, as well as some others.
No, not like that. If that was the strategy, agreed. I'd invest in a 529 instead.

See Klangfool's response above this. Liquidate only up to what is needed to max out 401k and Roth IRA for the year. During college years cash flow first. Then look at available loans. if interests rates are low or if some of them are subsidized, then take the loan instead of taking out from 401/Roth IRA. Pay back the loan by cash flowing. Only as a last resort would you take out from retirement. Either way, children will get the full $90k plus growth plus whatever was saved previously to pay for college education whether you use a 529 or Roth IRA/401k.

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UpsetRaptor
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Re: Taxable investment account for college?

Post by UpsetRaptor » Wed Oct 09, 2019 9:58 am

For most people who will incur Qualified Educational Expenses in their future, leveraging a 529 has a definitive, tangible, calculate-able tax efficiency over using a taxable account and/or cash-flowing those college expenses.

The tradeoff is a 529 fund is designed for educational expenses and thus has less long-term flexibility over using taxable / cash-flow, if the funds end up being needed for something else like an emergency, divorce, or forced retirement. The tax savings to give up that flexibility is worth it to some here (me, vinevez) and not worth it to others (Klangfool). Thus these threads always end with a back-and-forth of the pros/cons of each approach.

It's really up to each individual to decide for themselves. Important questions: How stable is your income/career? Is retirement savings roughly on a good path? How likely are you to incur QEE in the future, and how much? What's your personal criticality level of funding your kids' education? Do you get an extra state tax cherry for leveraging a 529? Then you can decide for yourself whether to utilize a 529, and if so to what degree.

I'm personally big in the Pro-529 camp, but that's because I have a very stable career, marriage, income, retirement savings are on a decent path, and funding kids' college is hugely important to me. If I had a less stable career or marriage, or felt way behind on retirement savings, or hated working so much that I MUST FIRE ASAP even if that burdens my kids with loans, that would change things.

mmmodem
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Re: Taxable investment account for college?

Post by mmmodem » Wed Oct 09, 2019 7:07 pm

UpsetRaptor wrote:
Wed Oct 09, 2019 9:58 am
The tradeoff is a 529 fund is designed for educational expenses and thus has less long-term flexibility over using taxable / cash-flow, if the funds end up being needed for something else like an emergency, divorce, or forced retirement. The tax savings to give up that flexibility is worth it to some here (me, vinevez) and not worth it to others (Klangfool). Thus these threads always end with a back-and-forth of the pros/cons of each approach.
Actually, what I am considering is that there is no trade-off. You get the flexibility and the tax savings. The tax savings will be achieved in the form of tax advantaged retirement accounts instead. Win-win in other words. I think this is the part that people do not agree with.

This isn't arbitrary advice to always max out your retirement accounts. The analogy would be to max out a Roth IRA before contributing to a 401k beyond company match. It's not a blanket statement that everyone should max out their Roth IRA. It's that if they intend on contributing more to a 401k beyond company match, it's more advantageous to use a Roth IRA first. Similarly, I'm not advocating maxing out retirement. I'm advocating that if you want to use a 529, you can achieve the same thing by maxing out retirement, first. That way you get the flexibility and the tax savings. If you are fortunate to have leftover to fund a 529, by all means do it. Also money in retirement accounts minimizes EFC while maximizing financial aid. Win-win- and win again.

Personally, I am pro 529 as well. I do not work in a stable career. I have over 25 years before full retirement age. I have already achieved lean FIRE. I have no need to add a penny more to retirement. I feel it is my responsibility to pay as much as I possibly can to my children's college education. However, I make a modest income and cannot hope to fully pay the whole thing. And thus, I do the best I can. I do not use a 529. I would love to if I made enough money. I do not. I save for their college in retirement accounts. This maximizes the amount of financial aid if any they will receive. I will cash flow the remainder. I do not hope. I know this will not be enough. Then I will consider loans and whether I want to take out from retirement accounts.

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teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Wed Oct 09, 2019 7:42 pm

vineviz wrote:
Wed Oct 09, 2019 8:17 am
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
I think there's more than one meaning to "max retirement accounts". There's contribute to the legally allowed max levels, and there's maximize your retirement (i.e., contribute the amount that is your desired maximum level based on your HHI and desired spending/saving ratio). Confusing things is the fact that legally allowed max levels may be overkill for low income families, or woefully inadequate for high income families (who must supplement with taxable savings to reach desired maximum retirement balances).

At least personally, I'm using "save the maximum" in the sense of personally desired retirement savings rate (in whatever account type is available/accessible). I have no clue what actual number that is, or what accounts OP has at their disposal. I do know my own family's total retirement account space has shifted over the years - from one 401k plus 2 Roth IRAs to one 401k plus catch up plus one SIMPLE IRA plus catch up plus 2 Roth IRAs plus 2 catch ups. The lower amount we eventually filled; the new higher one we can't, but we selectively fill buckets that are more advantageous, and partially fill to our desired maximum (to maximize tax credits and college financial aid). It IS a balancing act.

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vineviz
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Re: Taxable investment account for college?

Post by vineviz » Wed Oct 09, 2019 8:14 pm

teen persuasion wrote:
Wed Oct 09, 2019 7:42 pm
At least personally, I'm using "save the maximum" in the sense of personally desired retirement savings rate (in whatever account type is available/accessible).
That would be the reasonable interpretation, but I'm quite sure that's not what the "529 is the devil" vocal minority mean when they say "max out tax advantaged retirement accounts".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Wed Oct 09, 2019 9:55 pm

vineviz wrote:
Wed Oct 09, 2019 8:14 pm
teen persuasion wrote:
Wed Oct 09, 2019 7:42 pm
At least personally, I'm using "save the maximum" in the sense of personally desired retirement savings rate (in whatever account type is available/accessible).
That would be the reasonable interpretation, but I'm quite sure that's not what the "529 is the devil" vocal minority mean when they say "max out tax advantaged retirement accounts".
You have to know if 529 will hold any advantage for YOU. I was excited about the state tax deduction, but crunching the numbers for our situation it was clear contributing to a 529 would be a costly mistake for us. There's no tax savings on growth for us (LTCG are 0 for us). Having a 529 balance could increase our EFC as Available Assets (vs balances in retirement accounts). And we need to still pay at least $4k in tuition OOP to claim the AOTC (529 withdrawals can't be used to claim AOTC). We're already claiming portions of scholarships as taxable income just to be able to claim AOTC. And any $ contributed to 529 can't be contributed to 401k, driving our refundable tax credits down, further depressing our retirement savings to Roth IRAs. The one way I considered possibly using a 529 that might be beneficial for us was to run excess college expenses thru a 529 short term, just to capture the state tax credit, at the point of college bills. Kid #4 is in his 4th year of college, and I've yet to reach the point of annual OOP college expenses in excess of the $4k for claiming AOTC where I'd benefit from the 529 state tax credit. Has never happened - for us. So I view 529s as pretty pointless, even evil, for people like me.

But not everyone is like me. The people who might benefit from using 529 accounts are families who expect to have to pay full freight for college, and thus plan to save for it in advance to take advantage of compound growth over time, and who are not in the LTCG zero bracket, and who have exhausted their other tax advantaged buckets while still needing to save more. Maybe not on Bogleheads, but in general more people are like me (income-wise) than not, though.

The trick in this thread is figuring out which end of the continuum you fall on. And you might travel from one end to the other by the time your kids get to college. Maxing out your retirement accounts is something of a barometer for this continuum - if you can't save enough to fill up all retirement buckets, you might not benefit from a 529. If your savings exceed retirement bucket limits, you might benefit from saving to 529 accounts.

smitcat
Posts: 4174
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Re: Taxable investment account for college?

Post by smitcat » Thu Oct 10, 2019 9:48 am

teen persuasion wrote:
Wed Oct 09, 2019 9:55 pm
vineviz wrote:
Wed Oct 09, 2019 8:14 pm
teen persuasion wrote:
Wed Oct 09, 2019 7:42 pm
At least personally, I'm using "save the maximum" in the sense of personally desired retirement savings rate (in whatever account type is available/accessible).
That would be the reasonable interpretation, but I'm quite sure that's not what the "529 is the devil" vocal minority mean when they say "max out tax advantaged retirement accounts".
You have to know if 529 will hold any advantage for YOU. I was excited about the state tax deduction, but crunching the numbers for our situation it was clear contributing to a 529 would be a costly mistake for us. There's no tax savings on growth for us (LTCG are 0 for us). Having a 529 balance could increase our EFC as Available Assets (vs balances in retirement accounts). And we need to still pay at least $4k in tuition OOP to claim the AOTC (529 withdrawals can't be used to claim AOTC). We're already claiming portions of scholarships as taxable income just to be able to claim AOTC. And any $ contributed to 529 can't be contributed to 401k, driving our refundable tax credits down, further depressing our retirement savings to Roth IRAs. The one way I considered possibly using a 529 that might be beneficial for us was to run excess college expenses thru a 529 short term, just to capture the state tax credit, at the point of college bills. Kid #4 is in his 4th year of college, and I've yet to reach the point of annual OOP college expenses in excess of the $4k for claiming AOTC where I'd benefit from the 529 state tax credit. Has never happened - for us. So I view 529s as pretty pointless, even evil, for people like me.

But not everyone is like me. The people who might benefit from using 529 accounts are families who expect to have to pay full freight for college, and thus plan to save for it in advance to take advantage of compound growth over time, and who are not in the LTCG zero bracket, and who have exhausted their other tax advantaged buckets while still needing to save more. Maybe not on Bogleheads, but in general more people are like me (income-wise) than not, though.

The trick in this thread is figuring out which end of the continuum you fall on. And you might travel from one end to the other by the time your kids get to college. Maxing out your retirement accounts is something of a barometer for this continuum - if you can't save enough to fill up all retirement buckets, you might not benefit from a 529. If your savings exceed retirement bucket limits, you might benefit from saving to 529 accounts.
A very clear and detailed post on the topic - excellent.

winterfan
Posts: 129
Joined: Mon Jan 05, 2015 11:06 am

Re: Taxable investment account for college?

Post by winterfan » Thu Oct 10, 2019 11:23 am

teen persuasion wrote:
Wed Oct 09, 2019 9:55 pm


You have to know if 529 will hold any advantage for YOU. I was excited about the state tax deduction, but crunching the numbers for our situation it was clear contributing to a 529 would be a costly mistake for us. There's no tax savings on growth for us (LTCG are 0 for us). Having a 529 balance could increase our EFC as Available Assets (vs balances in retirement accounts). And we need to still pay at least $4k in tuition OOP to claim the AOTC (529 withdrawals can't be used to claim AOTC). We're already claiming portions of scholarships as taxable income just to be able to claim AOTC.
Thank you for your detailed posts. They have been very helpful! I was unaware that you couldn't claim the AOTC with 529 withdrawals. I too was excited about our state's new 529 tax credit, so upped our contributions to get the max credit, but I think we have enough in our child's account for a state school, or are at least pretty close. I've changed this now and will use the extra money for my husband's Roth catch-up contributions.

HereToLearn
Posts: 535
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Re: Taxable investment account for college?

Post by HereToLearn » Thu Oct 10, 2019 5:45 pm

winterfan wrote:
Thu Oct 10, 2019 11:23 am
teen persuasion wrote:
Wed Oct 09, 2019 9:55 pm


You have to know if 529 will hold any advantage for YOU. I was excited about the state tax deduction, but crunching the numbers for our situation it was clear contributing to a 529 would be a costly mistake for us. There's no tax savings on growth for us (LTCG are 0 for us). Having a 529 balance could increase our EFC as Available Assets (vs balances in retirement accounts). And we need to still pay at least $4k in tuition OOP to claim the AOTC (529 withdrawals can't be used to claim AOTC). We're already claiming portions of scholarships as taxable income just to be able to claim AOTC.
Thank you for your detailed posts. They have been very helpful! I was unaware that you couldn't claim the AOTC with 529 withdrawals. I too was excited about our state's new 529 tax credit, so upped our contributions to get the max credit, but I think we have enough in our child's account for a state school, or are at least pretty close. I've changed this now and will use the extra money for my husband's Roth catch-up contributions.
Clarifying that you can work around the AOTC by using your own non-AOTC funds to pay $4000 to the college in order to claim the full tax credit, and then reimburse yourself from the 529 plan, however, you will have to declare the earnings portion of that $4000 disbursement as taxable income. The 10% penalty is waived in this situation, the same way it is waived if 529 funds are disbursed to cover the amount paid by a scholarship.

This is not a tax-effective, forward-looking strategy, but I wanted to mention the workaround in case someone presently found themselves in that situation.

Topic Author
angelescrest
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Location: Texas

Re: Taxable investment account for college?

Post by angelescrest » Thu Oct 10, 2019 11:43 pm

teen persuasion wrote:
Wed Oct 09, 2019 7:42 pm
vineviz wrote:
Wed Oct 09, 2019 8:17 am
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
I think there's more than one meaning to "max retirement accounts". There's contribute to the legally allowed max levels, and there's maximize your retirement (i.e., contribute the amount that is your desired maximum level based on your HHI and desired spending/saving ratio). Confusing things is the fact that legally allowed max levels may be overkill for low income families, or woefully inadequate for high income families (who must supplement with taxable savings to reach desired maximum retirement balances).

At least personally, I'm using "save the maximum" in the sense of personally desired retirement savings rate (in whatever account type is available/accessible). I have no clue what actual number that is, or what accounts OP has at their disposal. I do know my own family's total retirement account space has shifted over the years - from one 401k plus 2 Roth IRAs to one 401k plus catch up plus one SIMPLE IRA plus catch up plus 2 Roth IRAs plus 2 catch ups. The lower amount we eventually filled; the new higher one we can't, but we selectively fill buckets that are more advantageous, and partially fill to our desired maximum (to maximize tax credits and college financial aid). It IS a balancing act.
You brought up a few specifics on current tactics you use to maximize credits and college financial aid. They are like future unknowns to me. Given your strategy and approach to maximizing retirement accounts, not using 529 and minimizing EFC, can you describe more as to how you actually paid the tuition? When the time came what was your strategy in withdrawing and transferring funds to make the payments? How did your plan affect the kinds of scholarships and aid packages you received?

We have a 401k, spouse had one but it was transferred to a Trad IRA, two Roths, and then a solo 401k that gets deposits in some years.

smitcat
Posts: 4174
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Re: Taxable investment account for college?

Post by smitcat » Fri Oct 11, 2019 8:27 am

angelescrest wrote:
Thu Oct 10, 2019 11:43 pm
teen persuasion wrote:
Wed Oct 09, 2019 7:42 pm
vineviz wrote:
Wed Oct 09, 2019 8:17 am
mmmodem wrote:
Tue Oct 08, 2019 7:54 pm
The majority opinion here on BH is to max out tax advantaged retirement accounts first before funding a 529.
I don't agree that this is the "majority opinion", and I'd be worried if it was.

There may be a subset of folks who think that maximizing retirement savings is a legitimate goal in and of itself, but I suspect that most people would take the more balanced approach of advocating that investors adequately save for their retirement.

Every sane investor has multiple financial goals and must work to balance them as best they can. A single-minded focus on one financial metric to the complete exclusion of all others isn't very rational.
I think there's more than one meaning to "max retirement accounts". There's contribute to the legally allowed max levels, and there's maximize your retirement (i.e., contribute the amount that is your desired maximum level based on your HHI and desired spending/saving ratio). Confusing things is the fact that legally allowed max levels may be overkill for low income families, or woefully inadequate for high income families (who must supplement with taxable savings to reach desired maximum retirement balances).

At least personally, I'm using "save the maximum" in the sense of personally desired retirement savings rate (in whatever account type is available/accessible). I have no clue what actual number that is, or what accounts OP has at their disposal. I do know my own family's total retirement account space has shifted over the years - from one 401k plus 2 Roth IRAs to one 401k plus catch up plus one SIMPLE IRA plus catch up plus 2 Roth IRAs plus 2 catch ups. The lower amount we eventually filled; the new higher one we can't, but we selectively fill buckets that are more advantageous, and partially fill to our desired maximum (to maximize tax credits and college financial aid). It IS a balancing act.
You brought up a few specifics on current tactics you use to maximize credits and college financial aid. They are like future unknowns to me. Given your strategy and approach to maximizing retirement accounts, not using 529 and minimizing EFC, can you describe more as to how you actually paid the tuition? When the time came what was your strategy in withdrawing and transferring funds to make the payments? How did your plan affect the kinds of scholarships and aid packages you received?

We have a 401k, spouse had one but it was transferred to a Trad IRA, two Roths, and then a solo 401k that gets deposits in some years.
"You brought up a few specifics on current tactics you use to maximize credits and college financial aid. They are like future unknowns to me. "
All of this is very income specific and changes each year - to get any detailed responses of value you will need to identify your incomes as best you can.

cusetownusa
Posts: 392
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Re: Taxable investment account for college?

Post by cusetownusa » Fri Oct 11, 2019 9:30 am

teen persuasion wrote:
Wed Oct 09, 2019 9:55 pm
vineviz wrote:
Wed Oct 09, 2019 8:14 pm
teen persuasion wrote:
Wed Oct 09, 2019 7:42 pm
At least personally, I'm using "save the maximum" in the sense of personally desired retirement savings rate (in whatever account type is available/accessible).
That would be the reasonable interpretation, but I'm quite sure that's not what the "529 is the devil" vocal minority mean when they say "max out tax advantaged retirement accounts".
You have to know if 529 will hold any advantage for YOU. I was excited about the state tax deduction, but crunching the numbers for our situation it was clear contributing to a 529 would be a costly mistake for us. There's no tax savings on growth for us (LTCG are 0 for us). Having a 529 balance could increase our EFC as Available Assets (vs balances in retirement accounts). And we need to still pay at least $4k in tuition OOP to claim the AOTC (529 withdrawals can't be used to claim AOTC). We're already claiming portions of scholarships as taxable income just to be able to claim AOTC. And any $ contributed to 529 can't be contributed to 401k, driving our refundable tax credits down, further depressing our retirement savings to Roth IRAs. The one way I considered possibly using a 529 that might be beneficial for us was to run excess college expenses thru a 529 short term, just to capture the state tax credit, at the point of college bills. Kid #4 is in his 4th year of college, and I've yet to reach the point of annual OOP college expenses in excess of the $4k for claiming AOTC where I'd benefit from the 529 state tax credit. Has never happened - for us. So I view 529s as pretty pointless, even evil, for people like me.

But not everyone is like me. The people who might benefit from using 529 accounts are families who expect to have to pay full freight for college, and thus plan to save for it in advance to take advantage of compound growth over time, and who are not in the LTCG zero bracket, and who have exhausted their other tax advantaged buckets while still needing to save more. Maybe not on Bogleheads, but in general more people are like me (income-wise) than not, though.

The trick in this thread is figuring out which end of the continuum you fall on. And you might travel from one end to the other by the time your kids get to college. Maxing out your retirement accounts is something of a barometer for this continuum - if you can't save enough to fill up all retirement buckets, you might not benefit from a 529. If your savings exceed retirement bucket limits, you might benefit from saving to 529 accounts.
Great post...this also jives with what Klangfool is trying to explain as well.

The tax-advantage benefits of a 401k, Roth, etc. are greater than a 529. Until you can max everything else out and still have money left over, I wouldn't even consider a 529. Especially if you are in a state where you won't get a State tax deduction for contributing to a 529.

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teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Fri Oct 11, 2019 9:38 am

Every year is different. When DD1 applied for college, we were a family of 7, single income low enough we qualified for free lunches. Easy to get auto EFC = 0, so full PELL, nearly full TAP, SEOG, subsidized loans, there was some new federal grant, SMART?, that added a few $k (it rapidly disappeared, only lasted 2 years maybe) and the rest was merit scholarships. Her first choice school did not meet her full need, they gapped her an amount = 50% of our HHI. She appealed, but they suggested only parent loans, or that she'd be happier elsewhere. She was happy at her second choice school, and we loved that it was closer to home. First lesson learned - staying in state is cheaper, if only because of transportation costs and state grants for residents. Second lesson - have multiple options, every school is different in how aid/scholarships are distributed.

DS2 had been awarded a partial scholarship to a different college as a HS junior (not even applied or accepted to the college). He did later apply there (and elsewhere), and that's when we learned how these types of scholarships work - they are basically like a % off coupon from a store trying to get you to shop there, handed out somewhat indiscriminately, most are never used. When DS2 actually got a financial aid package, he was awarded merit scholarships that were better than the Jr year scholarship, and they didn't combine - you just chose the best one, obviously the higher $ value. He got a slightly better FA package at another good school, but he'd have preferred the first, so he contacted the first school to let them know that money might just make the tipping point for him despite his desire to attend school #1 - could they match the deal from school #2? They asked to see the offer, he faxed it, and they quickly responded with a BETTER offer. Lesson #3 - you can sometimes negotiate successfully, if the school really wants you.

Living on campus is expensive. Eventually each kid figured out some different way of reducing the costs. For some, it was moving to cheaper dorms or school apartments, or entirely off campus. Every school is different - sometimes all room charges are the same, regardless of how nice/convenient or crappy/distant the dorm is. Some have a variety of different options and prices. Just moving out of a box room into a suite (with kitchen) with friends can be a saving, if you can drop meal plan and cook. They also preferred apartments so they could stay year round, and work summer jobs (few jobs in our rural area) on or off campus.

At some point while each was in college, once they moved out year round and earned enough money, they became independent of us for tax purposes. But colleges continue to view them as our dependents (until they turn 24, get married, have their own dependent, join the military, or go to grad school), so you always have to view the "independent" question from who is asking. This affects things on the FAFSA for younger kids - I didn't realize immediately how it affects the family size question. When doing the FAFSA for DD3, I didn't think to include DD1 or DS2 in the family size, because they were completely independent of us by then (supporting themselves, living away from home). But the FAFSA details walk you thru essentially the "are you a dependent" gauntlet for them. We could include them as family dependents, by FAFSA dependent definitions. That allows for a larger Income Protection Allowance which reduces your EFC. By this point, the auto EFC = 0 AGI limit had dropped from $32k to $23k, so no auto EFC = 0 for us now, but we could get to a calculated EFC = 0 for a while.

DD3 and DS4 have both chosen state schools over the private schools the older 2 chose. The cost is probably half, but the shift is all in tuition. Room and board is actually more than tuition and fees at the state schools. Then there's the breakdown between tuition and fees. Actual tuition is under $9k/yr. Fees are another $6 and rising. When the state restricts schools on raising tuition, fees go up instead. Fees are a gray area - they may not count for things like AOTC.

Part of our strategy with the FAFSA revolved around getting either auto EFC = 0, or SNT to avoid reporting assets. We can get our AGI in range by contributing to retirement accounts (which we planned to do for other reasons, anyway), but there is another condition you must meet as well. For us, the free/reduced lunches met the other condition. Qualifying to file either 1040A or EZ is another common way to qualify, but we have an HSA, which requires the 1040. So long as our income to family size ratio was in range, we qualified, but as the family shrunk and my part-time income increased, we eventually no longer did. The last year we qualified was when DS4 was a HS Sr, 2015-16. This carried over for the first 3 years of college for him (FAFSA asks if anyone qualified in year x or x+1, so the first year asked if either 2014 or 15, then 15 or 16, then 16 or 17). His last FAFSA was the first time we had to be concerned about reporting assets, and the asset protection amount has been shrinking dramatically over the years (it's tied to parent's ages, higher for older parents). When we first did the FAFSA for DD1 (in our 40s) the asset protection amount for us was enough to shield a decent EF, $40k-ish. Last year it was $13.5k. I just saw the new chart for this year, it's $6k-ish. That's crazy. Anyway, I got creative when filing the FAFSA - assets are reported as of the day you file, so I timed it, and I paid every bill owed early, and I contributed to our Roth IRAs earlier than intended, to get our number low enough. We have no taxable investments to speak of, everything is in retirement or HSA (which we haven't been reimbursing ourselves from, so it can act as an invisible EF). With the tax changes, no more A or EZ forms, there was question on how this test condition would now work. They've developed some set of conditions based on schedules filed/not filed, and certain lines are ignored. It's clumsy, but we'd be able to qualify again for DS5, yay! Until the next changes.

We haven't had to make any withdrawals, any payments we've made have been cash flowed. Scholarships, grants, the kids' earnings and the kids' loans have mostly covered things. So far, the loans haven't been an undue burden. DD1 paid her loans off in a few years. DS2 is taking a slower route, but he recently did a year at Americorps which gives him a chunk of $ to put towards either more education or towards his loans. We talked thru the details and it sounds like paying down the loans is the best course.

There's one more perk to being eligible for free/reduced lunches: you can get waivers for the fees to take the SAT. You have to ask the HS guidance office for the waivers before ever registering for the SAT (learned the hard way with DD1). Having that waiver also makes you eligible for college application fees waivers frequently (not every school, but many). This reduces the cost of applying to multiple schools in hopes of receiving better FA packages or scholarships.

Scholarships are the key. You kids have to be not only good academically, but well rounded: active in clubs, sports, music, community. Start young to get them curious and involved.

smitcat
Posts: 4174
Joined: Mon Nov 07, 2016 10:51 am

Re: Taxable investment account for college?

Post by smitcat » Fri Oct 11, 2019 9:49 am

teen persuasion wrote:
Fri Oct 11, 2019 9:38 am
Every year is different. When DD1 applied for college, we were a family of 7, single income low enough we qualified for free lunches. Easy to get auto EFC = 0, so full PELL, nearly full TAP, SEOG, subsidized loans, there was some new federal grant, SMART?, that added a few $k (it rapidly disappeared, only lasted 2 years maybe) and the rest was merit scholarships. Her first choice school did not meet her full need, they gapped her an amount = 50% of our HHI. She appealed, but they suggested only parent loans, or that she'd be happier elsewhere. She was happy at her second choice school, and we loved that it was closer to home. First lesson learned - staying in state is cheaper, if only because of transportation costs and state grants for residents. Second lesson - have multiple options, every school is different in how aid/scholarships are distributed.

DS2 had been awarded a partial scholarship to a different college as a HS junior (not even applied or accepted to the college). He did later apply there (and elsewhere), and that's when we learned how these types of scholarships work - they are basically like a % off coupon from a store trying to get you to shop there, handed out somewhat indiscriminately, most are never used. When DS2 actually got a financial aid package, he was awarded merit scholarships that were better than the Jr year scholarship, and they didn't combine - you just chose the best one, obviously the higher $ value. He got a slightly better FA package at another good school, but he'd have preferred the first, so he contacted the first school to let them know that money might just make the tipping point for him despite his desire to attend school #1 - could they match the deal from school #2? They asked to see the offer, he faxed it, and they quickly responded with a BETTER offer. Lesson #3 - you can sometimes negotiate successfully, if the school really wants you.

Living on campus is expensive. Eventually each kid figured out some different way of reducing the costs. For some, it was moving to cheaper dorms or school apartments, or entirely off campus. Every school is different - sometimes all room charges are the same, regardless of how nice/convenient or crappy/distant the dorm is. Some have a variety of different options and prices. Just moving out of a box room into a suite (with kitchen) with friends can be a saving, if you can drop meal plan and cook. They also preferred apartments so they could stay year round, and work summer jobs (few jobs in our rural area) on or off campus.

At some point while each was in college, once they moved out year round and earned enough money, they became independent of us for tax purposes. But colleges continue to view them as our dependents (until they turn 24, get married, have their own dependent, join the military, or go to grad school), so you always have to view the "independent" question from who is asking. This affects things on the FAFSA for younger kids - I didn't realize immediately how it affects the family size question. When doing the FAFSA for DD3, I didn't think to include DD1 or DS2 in the family size, because they were completely independent of us by then (supporting themselves, living away from home). But the FAFSA details walk you thru essentially the "are you a dependent" gauntlet for them. We could include them as family dependents, by FAFSA dependent definitions. That allows for a larger Income Protection Allowance which reduces your EFC. By this point, the auto EFC = 0 AGI limit had dropped from $32k to $23k, so no auto EFC = 0 for us now, but we could get to a calculated EFC = 0 for a while.

DD3 and DS4 have both chosen state schools over the private schools the older 2 chose. The cost is probably half, but the shift is all in tuition. Room and board is actually more than tuition and fees at the state schools. Then there's the breakdown between tuition and fees. Actual tuition is under $9k/yr. Fees are another $6 and rising. When the state restricts schools on raising tuition, fees go up instead. Fees are a gray area - they may not count for things like AOTC.

Part of our strategy with the FAFSA revolved around getting either auto EFC = 0, or SNT to avoid reporting assets. We can get our AGI in range by contributing to retirement accounts (which we planned to do for other reasons, anyway), but there is another condition you must meet as well. For us, the free/reduced lunches met the other condition. Qualifying to file either 1040A or EZ is another common way to qualify, but we have an HSA, which requires the 1040. So long as our income to family size ratio was in range, we qualified, but as the family shrunk and my part-time income increased, we eventually no longer did. The last year we qualified was when DS4 was a HS Sr, 2015-16. This carried over for the first 3 years of college for him (FAFSA asks if anyone qualified in year x or x+1, so the first year asked if either 2014 or 15, then 15 or 16, then 16 or 17). His last FAFSA was the first time we had to be concerned about reporting assets, and the asset protection amount has been shrinking dramatically over the years (it's tied to parent's ages, higher for older parents). When we first did the FAFSA for DD1 (in our 40s) the asset protection amount for us was enough to shield a decent EF, $40k-ish. Last year it was $13.5k. I just saw the new chart for this year, it's $6k-ish. That's crazy. Anyway, I got creative when filing the FAFSA - assets are reported as of the day you file, so I timed it, and I paid every bill owed early, and I contributed to our Roth IRAs earlier than intended, to get our number low enough. We have no taxable investments to speak of, everything is in retirement or HSA (which we haven't been reimbursing ourselves from, so it can act as an invisible EF). With the tax changes, no more A or EZ forms, there was question on how this test condition would now work. They've developed some set of conditions based on schedules filed/not filed, and certain lines are ignored. It's clumsy, but we'd be able to qualify again for DS5, yay! Until the next changes.

We haven't had to make any withdrawals, any payments we've made have been cash flowed. Scholarships, grants, the kids' earnings and the kids' loans have mostly covered things. So far, the loans haven't been an undue burden. DD1 paid her loans off in a few years. DS2 is taking a slower route, but he recently did a year at Americorps which gives him a chunk of $ to put towards either more education or towards his loans. We talked thru the details and it sounds like paying down the loans is the best course.

There's one more perk to being eligible for free/reduced lunches: you can get waivers for the fees to take the SAT. You have to ask the HS guidance office for the waivers before ever registering for the SAT (learned the hard way with DD1). Having that waiver also makes you eligible for college application fees waivers frequently (not every school, but many). This reduces the cost of applying to multiple schools in hopes of receiving better FA packages or scholarships.

Scholarships are the key. You kids have to be not only good academically, but well rounded: active in clubs, sports, music, community. Start young to get them curious and involved.

Seeing as the title of this thread is "Taxable investment accounts for college" I believe this statement is more clearly the key message....
"We have no taxable investments to speak of, everything is in retirement or HSA (which we haven't been reimbursing ourselves from, so it can act as an invisible EF)"
When you do have taxable investments it is likely to greatly affect all of these techniques.

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teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Fri Oct 11, 2019 10:15 am

smitcat wrote:
Fri Oct 11, 2019 9:49 am

Seeing as the title of this thread is "Taxable investment accounts for college" I believe this statement is more clearly the key message....
"We have no taxable investments to speak of, everything is in retirement or HSA (which we haven't been reimbursing ourselves from, so it can act as an invisible EF)"
When you do have taxable investments it is likely to greatly affect all of these techniques.
Wasn't exactly by design, initially. Low income leaves little extra for taxable investments. But it was the EITC rule that excess taxable investment income makes you entirely ineligible that kept us out of taxable accounts. Then FAFSA formulas confirmed it was a good choice.

If we'd had no access to other options (DH has had a 401k, but I've *just* gotten access to a SIMPLE IRA after 10 years!) things would be completely different. If no retirement accounts except IRAs, my EITC strategy stops dead, and I can't lower AGI for FAFSA. Any savings (much lower due to tax costs) we put in the HSA and 401k would have to go in taxable, further driving up EFC. Yikes!

The title question might be better phrased and answered as Where is it best to place investments? Retirement accounts, HSA accounts, and 529 accounts each have some special aspects that make them preferable to use FIRST. Taxable should often be your last choice, because you have filled/exhausted all other better choices. But the devil is in the details - there's pros and cons to each, and many depend on YOUR unique circumstances.

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Re: Taxable investment account for college?

Post by Jack FFR1846 » Fri Oct 11, 2019 10:32 am

Please consider doing this useful exercise for homework:

Find a PDF of the FAFSA form, print it on paper and fill the whole thing out. They're out there with all the tables. Even if you have to do a 2017 one, that's fine. I did this when my first son was maybe in 10th grade. It really helps you understand some things. As the older parent gets older, the tables favor you more. More kids in college at the same time....EFC is a total for all kids.

If your school system holds college funding seminars or talks, attend them. I started when my son was 8. Yes, 8. It took me that long to let things sink into my thick head. Some really good take aways I got from these seminars: 1) The income level to get grants is the government poverty line. If you're not below it, you're likely not getting grants. 2) Public colleges are easy to get lower EFC but they have no money for aid. Private colleges with CSS, idot and their own forms look at everything....including asking if grandparents or unrelated people have 529's targeted to pay and what cars do you own and what's your house worth. They have lots of money for grants and you can potentially get them.

529s are parent assets. If you get no state tax benefits, they are worthless. There, I said it.

Do NOT get sucked into a Whole Life scam by salesmen who will put big aid numbers in front of you. My gut didn't like what my salesman was telling me and I went searching, found Bogleheads, asked the question, had my face punched really badly and cancelled my appointment to sign the papers to turn $300k over to the salesman.

It has been said.....AID for most people here means Stafford unsubsidized loans. These are 1.04% front loaded loans with interest starting from day one at a relatively high rate. Work study is for people at the poverty line. Grants are for people at the poverty line. This isn't pre-Reagan times when some of us could get grants.
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Re: Taxable investment account for college?

Post by goodenyou » Fri Oct 11, 2019 10:40 am

If you get no state tax benefits, they are worthless. There, I said it.
Huh? No advantage to tax-free capital gains on several hundred thousand of gains for someone with an EFC > $99,000+/year in the highest marginal bracket and 23.8% capital gains tax? 529 Plans seem to be very valuable to us in Texas with no state tax benefit.
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Re: Taxable investment account for college?

Post by EddyB » Fri Oct 11, 2019 11:19 am

Jack FFR1846 wrote:
Fri Oct 11, 2019 10:32 am
Please consider doing this useful exercise for homework:

Find a PDF of the FAFSA form, print it on paper and fill the whole thing out. They're out there with all the tables. Even if you have to do a 2017 one, that's fine. I did this when my first son was maybe in 10th grade. It really helps you understand some things. As the older parent gets older, the tables favor you more. More kids in college at the same time....EFC is a total for all kids.

If your school system holds college funding seminars or talks, attend them. I started when my son was 8. Yes, 8. It took me that long to let things sink into my thick head. Some really good take aways I got from these seminars: 1) The income level to get grants is the government poverty line. If you're not below it, you're likely not getting grants. 2) Public colleges are easy to get lower EFC but they have no money for aid. Private colleges with CSS, idot and their own forms look at everything....including asking if grandparents or unrelated people have 529's targeted to pay and what cars do you own and what's your house worth. They have lots of money for grants and you can potentially get them.

529s are parent assets. If you get no state tax benefits, they are worthless. There, I said it.

Do NOT get sucked into a Whole Life scam by salesmen who will put big aid numbers in front of you. My gut didn't like what my salesman was telling me and I went searching, found Bogleheads, asked the question, had my face punched really badly and cancelled my appointment to sign the papers to turn $300k over to the salesman.

It has been said.....AID for most people here means Stafford unsubsidized loans. These are 1.04% front loaded loans with interest starting from day one at a relatively high rate. Work study is for people at the poverty line. Grants are for people at the poverty line. This isn't pre-Reagan times when some of us could get grants.
Agreed re whole life insurance, but with a decade to go for the OP, who knows that a current FAFSA means anything. And doing that without doing CSS may just give the OP a false impression. Obviously completely wrong about 529s the way you've phrased it (they are a clear benefit for people who are already maxing out available space in preferential retirement accounts), although it could have been true for you. Also, different state schools seem to have very different approaches to aid, especially with aid that is allocated by merit but only available to those with need.

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Re: Taxable investment account for college?

Post by miamivice » Fri Oct 11, 2019 11:36 am

I think teen's post about her specific situation really shines a light on why 529s don't make sense for her situation. I would concur that for a family of 7 that is on free/reduced meals, a 529 is way, way down the priority list and it's safe to say that a 529 shouldn't be a big consideration. Also the fact that ltcg is zero percent for teen's has a big impact to.

I do think it's safe to say that 529s are most beneficial for the wealthy. It doesn't sound right in print to say that a 529 is a tax break for the wealthy, but I believe it is and was intended to be so. Our family will not qualify for need based aid, so we will have to pay full freight for college. We will not qualify for the AOTC, so we don't have to worry about losing access to that.

We were also able to superfund the 529 by setting aside the full amount while my wife was pregnant for each of our kids, so we will receive around 20 years of tax free growth, and are also able to invest aggressively during much of the time that the money is in the 529. I project that our initial investment of $73,000 will grow into $400,000 by the time that our kids in college. I recognize that families such as teen's can't benefit from a 529 in the same way.

----

I do disagree with the above posters in one way. It is not necessary to fill the maximum retirement space before investing in a 529. Retirement accounts are completely separate from 529 accounts and one should fill each bucket as appropriate for that family. I do agree that retirement should be on track, but don't agree that not one penny should be invested in a 529 until 100% of available retirement space has been filled. Retirement money generally cannot be used for college, with the exception of Roth IRA contributions. We would never be able to withdraw $400,000 in Roth IRA contributions, so we need a different vehicle to save for college. That vehicle is the 529.

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Re: Taxable investment account for college?

Post by angelescrest » Fri Oct 11, 2019 2:23 pm

teen persuasion wrote:
Fri Oct 11, 2019 9:38 am
We haven't had to make any withdrawals, any payments we've made have been cash flowed. Scholarships, grants, the kids' earnings and the kids' loans have mostly covered things. So far, the loans haven't been an undue burden. DD1 paid her loans off in a few years. DS2 is taking a slower route, but he recently did a year at Americorps which gives him a chunk of $ to put towards either more education or towards his loans. We talked thru the details and it sounds like paying down the loans is the best course.

Scholarships are the key. You kids have to be not only good academically, but well rounded: active in clubs, sports, music, community. Start young to get them curious and involved.
teen persuasion, thanks for sharing the details.

Let's say your children did not get much as far as scholarships and grants go. Would you and your children have relied more heavily on loans? Is there a point at which you would have taken money out of your retirement accounts to pay for college?

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Re: Taxable investment account for college?

Post by angelescrest » Fri Oct 11, 2019 2:25 pm

Jack FFR1846 wrote:
Fri Oct 11, 2019 10:32 am
Please consider doing this useful exercise for homework:

Find a PDF of the FAFSA form, print it on paper and fill the whole thing out.

Some really good take aways I got from these seminars: 1) The income level to get grants is the government poverty line. If you're not below it, you're likely not getting grants. 2) Public colleges are easy to get lower EFC but they have no money for aid. Private colleges with CSS, idot and their own forms look at everything....including asking if grandparents or unrelated people have 529's targeted to pay and what cars do you own and what's your house worth. They have lots of money for grants and you can potentially get them.
Thank you.

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Re: Taxable investment account for college?

Post by KlangFool » Fri Oct 11, 2019 2:40 pm

angelescrest wrote:
Fri Oct 11, 2019 2:23 pm
teen persuasion wrote:
Fri Oct 11, 2019 9:38 am
We haven't had to make any withdrawals, any payments we've made have been cash flowed. Scholarships, grants, the kids' earnings and the kids' loans have mostly covered things. So far, the loans haven't been an undue burden. DD1 paid her loans off in a few years. DS2 is taking a slower route, but he recently did a year at Americorps which gives him a chunk of $ to put towards either more education or towards his loans. We talked thru the details and it sounds like paying down the loans is the best course.

Scholarships are the key. You kids have to be not only good academically, but well rounded: active in clubs, sports, music, community. Start young to get them curious and involved.
teen persuasion, thanks for sharing the details.

Let's say your children did not get much as far as scholarships and grants go. Would you and your children have relied more heavily on loans? Is there a point at which you would have taken money out of your retirement accounts to pay for college?
angelescrest,

The kids could borrow for a college education. The parents could not borrow for retirement.

1) Would you take money out of your retirement accounts and pay for your kids' college education? Then, counting on your kids to support you on your retirement?

2) The answer to that question would have to be on how well is the parent's retirement being funded at that time.

3) I was unemployed for more than 1 year while my kids go to college. I paid for a college education because I have 1 million. I know that even if I never find a new job, I will be fine. I will not be a burden to my kids.

KlangFool

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Re: Taxable investment account for college?

Post by miamivice » Fri Oct 11, 2019 2:50 pm

KlangFool wrote:
Fri Oct 11, 2019 2:40 pm
angelescrest wrote:
Fri Oct 11, 2019 2:23 pm
teen persuasion wrote:
Fri Oct 11, 2019 9:38 am
We haven't had to make any withdrawals, any payments we've made have been cash flowed. Scholarships, grants, the kids' earnings and the kids' loans have mostly covered things. So far, the loans haven't been an undue burden. DD1 paid her loans off in a few years. DS2 is taking a slower route, but he recently did a year at Americorps which gives him a chunk of $ to put towards either more education or towards his loans. We talked thru the details and it sounds like paying down the loans is the best course.

Scholarships are the key. You kids have to be not only good academically, but well rounded: active in clubs, sports, music, community. Start young to get them curious and involved.
teen persuasion, thanks for sharing the details.

Let's say your children did not get much as far as scholarships and grants go. Would you and your children have relied more heavily on loans? Is there a point at which you would have taken money out of your retirement accounts to pay for college?
angelescrest,

The kids could borrow for a college education. The parents could not borrow for retirement.

1) Would you take money out of your retirement accounts and pay for your kids' college education? Then, counting on your kids to support you on your retirement?

2) The answer to that question would have to be on how well is the parent's retirement being funded at that time.

3) I was unemployed for more than 1 year while my kids go to college. I paid for a college education because I have 1 million. I know that even if I never find a new job, I will be fine. I will not be a burden to my kids.

KlangFool
KlangFool, just to remind you, you frequently encourage people to take money out of retirement accounts to pay for college. After all, "Money is fungible" is one of your favorite expressions.

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Re: Taxable investment account for college?

Post by KlangFool » Fri Oct 11, 2019 2:55 pm

miamivice wrote:
Fri Oct 11, 2019 2:50 pm
KlangFool wrote:
Fri Oct 11, 2019 2:40 pm
angelescrest wrote:
Fri Oct 11, 2019 2:23 pm
teen persuasion wrote:
Fri Oct 11, 2019 9:38 am
We haven't had to make any withdrawals, any payments we've made have been cash flowed. Scholarships, grants, the kids' earnings and the kids' loans have mostly covered things. So far, the loans haven't been an undue burden. DD1 paid her loans off in a few years. DS2 is taking a slower route, but he recently did a year at Americorps which gives him a chunk of $ to put towards either more education or towards his loans. We talked thru the details and it sounds like paying down the loans is the best course.

Scholarships are the key. You kids have to be not only good academically, but well rounded: active in clubs, sports, music, community. Start young to get them curious and involved.
teen persuasion, thanks for sharing the details.

Let's say your children did not get much as far as scholarships and grants go. Would you and your children have relied more heavily on loans? Is there a point at which you would have taken money out of your retirement accounts to pay for college?
angelescrest,

The kids could borrow for a college education. The parents could not borrow for retirement.

1) Would you take money out of your retirement accounts and pay for your kids' college education? Then, counting on your kids to support you on your retirement?

2) The answer to that question would have to be on how well is the parent's retirement being funded at that time.

3) I was unemployed for more than 1 year while my kids go to college. I paid for a college education because I have 1 million. I know that even if I never find a new job, I will be fine. I will not be a burden to my kids.

KlangFool
KlangFool, just to remind you, you frequently encourage people to take money out of retirement tax-advantaged accounts to pay for college. After all, "Money is fungible" is one of your favorite expressions.
miamivice,

I corrected your post.

KlangFool

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Re: Taxable investment account for college?

Post by miamivice » Fri Oct 11, 2019 3:11 pm

KlangFool wrote:
Fri Oct 11, 2019 2:55 pm
miamivice wrote:
Fri Oct 11, 2019 2:50 pm

KlangFool, just to remind you, you frequently encourage people to take money out of retirement tax-advantaged accounts to pay for college. After all, "Money is fungible" is one of your favorite expressions.
miamivice,

I corrected your post.

KlangFool
My question stands. You have argued in favor of people pulling money out of retirement accounts to pay for college. Why are you arguing that the OP should not do that?

Regarding quoting, please do not ever quote me but change what I wrote when doing so. It is rude, confuses other people, and not inappropriate.

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Re: Taxable investment account for college?

Post by teen persuasion » Fri Oct 11, 2019 3:14 pm

angelescrest wrote:
Fri Oct 11, 2019 2:23 pm
teen persuasion wrote:
Fri Oct 11, 2019 9:38 am
We haven't had to make any withdrawals, any payments we've made have been cash flowed. Scholarships, grants, the kids' earnings and the kids' loans have mostly covered things. So far, the loans haven't been an undue burden. DD1 paid her loans off in a few years. DS2 is taking a slower route, but he recently did a year at Americorps which gives him a chunk of $ to put towards either more education or towards his loans. We talked thru the details and it sounds like paying down the loans is the best course.

Scholarships are the key. You kids have to be not only good academically, but well rounded: active in clubs, sports, music, community. Start young to get them curious and involved.
teen persuasion, thanks for sharing the details.

Let's say your children did not get much as far as scholarships and grants go. Would you and your children have relied more heavily on loans? Is there a point at which you would have taken money out of your retirement accounts to pay for college?
We would have explored other ways to make college affordable. Room and board are a huge expense, around $15k /yr now. That's outrageous, compared to our costs for housing/feeding our other family members (and it's not like housing one less person at home saves much of anything, other than a bit on groceries). So that's on the chopping block first. Community college for a few years, then transfer to state U, paying lower tuition than private schools. Consider ROTC - DD1 joined the Navy after college, and talked up ROTC to DS2. He looked into it, but unfortunately it conflicted with his major class times. Take a gap to work and earn some money for school. More and more I'm convinced kids need to work BEFORE college, to help them learn whether the career they think they want is really a good fit. Most kids are blindly picking majors, with little real idea of what they lead to in the work world. DD1 has an engineering degree, but is now a Chinese linguist. :oops:

We would not have taken on more loans. Our retirement accounts are just beginning to get to a reasonable size for us, because of our low HHI when the kids were young (low savings rate and $ amount, until just about 10 years ago), so raiding them isn't a great idea for us, but someone who has funded them heavily early on (and perhaps waited longer to have kids) might have more than enough in retirement accounts to consider using them. Especially if they subscribe to Klangfool's mantra that those accounts are simply tax advantaged accounts, to be used wisely. We'd be much more likely at this point to cash flow by cutting back a bit on our retirement savings rate, but we'd have to assess how that would impact the EFC! Right now we are stuffing everything extra we can in retirement, to get there faster (and to stave off disaster if a job loss in our 50s derailed any more savings), but we likely COULD cut the savings back for a few years now, as our base of retirement savings is reaching critical mass and will continue growing with lower contributions. We also paid off our mortgage early, just after DD1 started college, which reduced our fixed expenses going forward.

One thing that all this rumination on the nuances of income vs assets on the FAFSA has just brought to mind: if you choose to save for college in taxable or in 529 accounts, there is another distinction. Taxable accounts will throw off income, which will affect your AGI even if you're in the zero LTCG bracket. That higher AGI in turn increases the Available Income on the FAFSA, driving a higher EFC. The same amount in 529 accounts won't drive up your AGI. In years when you tap the taxable account to pay for college, more LTCG income gets added to your AGI. So taxable savings are inferior to 529 accounts, if you are hoping for any EFC based aid (double whammy - increased AGI and included in assets, vs just included in assets). If you expect your EFC to exceed the cost of college, and pay all expenses OOP, this can be ignored. Then again, at incomes that high, you are probably not paying zero LTCG tax, so 529 accounts are superior for the tax advantage over taxable.

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Re: Taxable investment account for college?

Post by scubadiver » Fri Oct 11, 2019 3:16 pm

OP,

Though I haven’t read through all the comments, it looks like you have received a lot of good advice. I will share with you what my own family is doing, which may have some relevance for your situation.

Currently my wife is a stay-at-home mom though she may return to the workforce in the next couple of years. Should this happen, it will obviously aid our bottom line, but none of my current planning assumes this. Our prioritization for savings is maxing my 401k and Roth IRAs for my wife and me. Additional savings beyond that is split across mortgage overpayment, taxable investments and 529 plans.

When our children enter college, our first funding line for college will be to stop the mortgage overpayment, taxable investing and 529 contributions and redirect those funds towards college tuition, room and board. If that is insufficient (it will be), we then begin to use 529 savings and taxable investments. If that is insufficient (it may be), we will then temporarily scale back our yearly 401k and Roth IRA contributions. Lastly, if that is insufficient (probably not likely to happen), we can begin withdrawing principal from our Roth IRAs. Our intention is to fully fund our children’s college education. We believe we can do this without putting our retirement at risk, even if we had the very unlikely scenario of withdrawing principal from our Roth IRAs.

Our planning is really based around a series of tiered actions, both on the savings side and on the draw-down side. An important thing to keep in mind is that money is fungible and just because an account has the word “retirement” in it, that doesn’t mean it can’t be used for other purposes. In fact, congress wrote a fair amount of flexibility into the relevant tax law to accommodate just that. (Shout out to KlangFool).

A similar strategy may work for you. Think about it. One thing I wouldn’t do though is leave 90K in taxable when I still have headroom in my 401k and Roth IRA.

Good luck.

Scubadiver

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Re: Taxable investment account for college?

Post by KlangFool » Fri Oct 11, 2019 3:25 pm

teen persuasion wrote:
Fri Oct 11, 2019 3:14 pm
angelescrest wrote:
Fri Oct 11, 2019 2:23 pm
teen persuasion wrote:
Fri Oct 11, 2019 9:38 am
We haven't had to make any withdrawals, any payments we've made have been cash flowed. Scholarships, grants, the kids' earnings and the kids' loans have mostly covered things. So far, the loans haven't been an undue burden. DD1 paid her loans off in a few years. DS2 is taking a slower route, but he recently did a year at Americorps which gives him a chunk of $ to put towards either more education or towards his loans. We talked thru the details and it sounds like paying down the loans is the best course.

Scholarships are the key. You kids have to be not only good academically, but well rounded: active in clubs, sports, music, community. Start young to get them curious and involved.
teen persuasion, thanks for sharing the details.

Let's say your children did not get much as far as scholarships and grants go. Would you and your children have relied more heavily on loans? Is there a point at which you would have taken money out of your retirement accounts to pay for college?
We would have explored other ways to make college affordable. Room and board are a huge expense, around $15k /yr now. That's outrageous, compared to our costs for housing/feeding our other family members (and it's not like housing one less person at home saves much of anything, other than a bit on groceries). So that's on the chopping block first. Community college for a few years, then transfer to state U, paying lower tuition than private schools. Consider ROTC - DD1 joined the Navy after college, and talked up ROTC to DS2. He looked into it, but unfortunately it conflicted with his major class times. Take a gap to work and earn some money for school. More and more I'm convinced kids need to work BEFORE college, to help them learn whether the career they think they want is really a good fit. Most kids are blindly picking majors, with little real idea of what they lead to in the work world. DD1 has an engineering degree, but is now a Chinese linguist. :oops:

We would not have taken on more loans. Our retirement accounts are just beginning to get to a reasonable size for us, because of our low HHI when the kids were young (low savings rate and $ amount, until just about 10 years ago), so raiding them isn't a great idea for us, but someone who has funded them heavily early on (and perhaps waited longer to have kids) might have more than enough in retirement accounts to consider using them. Especially if they subscribe to Klangfool's mantra that those accounts are simply tax advantaged accounts, to be used wisely. We'd be much more likely at this point to cash flow by cutting back a bit on our retirement savings rate, but we'd have to assess how that would impact the EFC! Right now we are stuffing everything extra we can in retirement, to get there faster (and to stave off disaster if a job loss in our 50s derailed any more savings), but we likely COULD cut the savings back for a few years now, as our base of retirement savings is reaching critical mass and will continue growing with lower contributions. We also paid off our mortgage early, just after DD1 started college, which reduced our fixed expenses going forward.

One thing that all this rumination on the nuances of income vs assets on the FAFSA has just brought to mind: if you choose to save for college in taxable or in 529 accounts, there is another distinction. Taxable accounts will throw off income, which will affect your AGI even if you're in the zero LTCG bracket. That higher AGI in turn increases the Available Income on the FAFSA, driving a higher EFC. The same amount in 529 accounts won't drive up your AGI. In years when you tap the taxable account to pay for college, more LTCG income gets added to your AGI. So taxable savings are inferior to 529 accounts, if you are hoping for any EFC based aid (double whammy - increased AGI and included in assets, vs just included in assets). If you expect your EFC to exceed the cost of college, and pay all expenses OOP, this can be ignored. Then again, at incomes that high, you are probably not paying zero LTCG tax, so 529 accounts are superior for the tax advantage over taxable.
teen persuasion,

One minor correction/improvement to your post.

Someone could use the taxable account to pay off or pre-pay the mortgage a few years before the kid goes to college. Especially for folks with 0% LTCG. Then, there will be no money in the taxable account. That possibility does not exist with the 529.

Money is fungible.

KlangFool

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Re: Taxable investment account for college?

Post by teen persuasion » Fri Oct 11, 2019 3:31 pm

miamivice wrote:
Fri Oct 11, 2019 2:50 pm
KlangFool wrote:
Fri Oct 11, 2019 2:40 pm
angelescrest wrote:
Fri Oct 11, 2019 2:23 pm

teen persuasion, thanks for sharing the details.

Let's say your children did not get much as far as scholarships and grants go. Would you and your children have relied more heavily on loans? Is there a point at which you would have taken money out of your retirement accounts to pay for college?
angelescrest,

The kids could borrow for a college education. The parents could not borrow for retirement.

1) Would you take money out of your retirement accounts and pay for your kids' college education? Then, counting on your kids to support you on your retirement?

2) The answer to that question would have to be on how well is the parent's retirement being funded at that time.

3) I was unemployed for more than 1 year while my kids go to college. I paid for a college education because I have 1 million. I know that even if I never find a new job, I will be fine. I will not be a burden to my kids.

KlangFool
KlangFool, just to remind you, you frequently encourage people to take money out of retirement accounts to pay for college. After all, "Money is fungible" is one of your favorite expressions.
I read KlangFool's reply to say that it depends - if you don't have enough, don't withdraw. If you do have enough (like him) you can.

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Re: Taxable investment account for college?

Post by angelescrest » Fri Oct 11, 2019 3:42 pm

teen persuasion wrote:
Fri Oct 11, 2019 3:14 pm
Take a gap to work and earn some money for school. More and more I'm convinced kids need to work BEFORE college, to help them learn whether the career they think they want is really a good fit. Most kids are blindly picking majors, with little real idea of what they lead to in the work world. DD1 has an engineering degree, but is now a Chinese linguist. :oops:
I also like the idea of them doing a gap year for life experience and maturation. I’ve always wondered whether or not it affects their ability to get into certain schools or also if it affects financial aid.

I’m kind of a fan of your DD1! :sharebeer

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teen persuasion
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Re: Taxable investment account for college?

Post by teen persuasion » Fri Oct 11, 2019 3:49 pm

angelescrest wrote:
Fri Oct 11, 2019 3:42 pm

I also like the idea of them doing a gap year for life experience and maturation. I’ve always wondered whether or not it affects their ability to get into a decent school or also financial aid considerations.

I’m kind of a fan of your DD1! :sharebeer
Scholarships is a valid concern after a gap year - so far all my kids have gone on directly to college. I have no experience with how admission and scholarships might be altered by a gap. Much of the process seems to involve HS guidance counselors.

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Re: Taxable investment account for college?

Post by angelescrest » Fri Oct 11, 2019 3:53 pm

scubadiver wrote:
Fri Oct 11, 2019 3:16 pm
When our children enter college, our first funding line for college will be to stop the mortgage overpayment, taxable investing and 529 contributions and redirect those funds towards college tuition, room and board. If that is insufficient (it will be), we then begin to use 529 savings and taxable investments. If that is insufficient (it may be), we will then temporarily scale back our yearly 401k and Roth IRA contributions. Lastly, if that is insufficient (probably not likely to happen), we can begin withdrawing principal from our Roth IRAs. Our intention is to fully fund our children’s college education. We believe we can do this without putting our retirement at risk, even if we had the very unlikely scenario of withdrawing principal from our Roth IRAs.

Our planning is really based around a series of tiered actions, both on the savings side and on the draw-down side.
Thanks for sharing. Knowing how others approach it is enlightening. Your second action step in where we’d likely be starting, though if I were to take some suggestions here we’d start out with your step 3.

It strikes me that nobody has yet claimed that they have actually pulled money out of their retirement accounts to pay for college, though I trust your intent to do so with your Roth if you needed to. I am of the same mind that we are committed to fully funding college.

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Re: Taxable investment account for college?

Post by miamivice » Fri Oct 11, 2019 4:01 pm

angelescrest wrote:
Fri Oct 11, 2019 3:53 pm
It strikes me that nobody has yet claimed that they have actually pulled money out of their retirement accounts to pay for college, though I trust your intent to do so with your Roth if you needed to. I am of the same mind that we are committed to fully funding college.
I'm pretty sure nobody on Bogleheads pulls Roth IRA contributions for college, because if they did, we'd see posts with people trying to figure out how much in contributions they have made and how to justify that to the IRS. I honestly have no idea if Vanguard keeps track of our Roth IRA contributions, nor do I know what kind of documentation we would need to show that we are pulling contributions rather than earnings.

I honestly think there are three sources of money people use to pay for college

1) Cash flow - pay out paycheck earnings (most popular)
2) 529 - special tax advantaged account intended for education
3) Taxable

This is folks own money. Separate of that, there is loans, scholarships, grants, kids money, kids income, etc.

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scubadiver
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Re: Taxable investment account for college?

Post by scubadiver » Fri Oct 11, 2019 4:31 pm

angelescrest wrote:
Fri Oct 11, 2019 3:53 pm
It strikes me that nobody has yet claimed that they have actually pulled money out of their retirement accounts to pay for college, though I trust your intent to do so with your Roth if you needed to. I am of the same mind that we are committed to fully funding college.
Ha, ha. Wouldn't that be funny if it turned out that this is the all-time biggest boglehead bluff.

I think the reason it never gets mentioned is that if you look at the steps that I prioritized ahead of that, it turns out those actions pay for a ton of college tuition, room and board. Just pausing on annual Roth IRA contributions for a couple frees up $12K per yer. If I were to scale back my 401k contributions to just the employer matching level, that would free up another $9k after tax. That's $21K from my third tier. There's a state school not 25 miles from me where tuition, room and board is under $24K per year.

Point being, we rarely hear that mentioned, because most bogleheads never get to the point where that's an issue. The second reason you probably don't hear about it is that for those whom it is a concern, they're probably putting their own retirement at risk and, upon having their bluff called, tell junior to take out student loans. Honestly, that is not the end of the world. Both my spouse and I had loans and we turned out fine (financially).

I think miamivice did make a good point in questioning how one would actually effect the Roth IRA withdraws in compliance with your institutions rules and options and IRS rules. Vanguard allows me to review all transactions back to when I first opened my account with them. In my case, I believe it's simply a matter of properly (honestly) reporting whether or not the Roth sale that I made was above or below my net lifetime contributions and if above, paying the tax accordingly. If one transfers accounts across institutions, I believe the record keeping becomes more complicated. Ultimately, the onus is on the investor, from what I understand.

Broken Man 1999
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Re: Taxable investment account for college?

Post by Broken Man 1999 » Fri Oct 11, 2019 4:48 pm

scubadiver wrote:
Fri Oct 11, 2019 4:31 pm
angelescrest wrote:
Fri Oct 11, 2019 3:53 pm
It strikes me that nobody has yet claimed that they have actually pulled money out of their retirement accounts to pay for college, though I trust your intent to do so with your Roth if you needed to. I am of the same mind that we are committed to fully funding college.
Ha, ha. Wouldn't that be funny if it turned out that this is the all-time biggest boglehead bluff.

I think the reason it never gets mentioned is that if you look at the steps that I prioritized ahead of that, it turns out those actions pay for a ton of college tuition, room and board. Just pausing on annual Roth IRA contributions for a couple frees up $12K per yer. If I were to scale back my 401k contributions to just the employer matching level, that would free up another $9k after tax. That's $21K from my third tier. There's a state school not 25 miles from me where tuition, room and board is under $24K per year.

Point being, we rarely hear that mentioned, because most bogleheads never get to the point where that's an issue. The second reason you probably don't hear about it is that for those whom it is a concern, they're probably putting their own retirement at risk and, upon having their bluff called, tell junior to take out student loans. Honestly, that is not the end of the world. Both my spouse and I had loans and we turned out fine (financially).

I think miamivice did make a good point in questioning how one would actually effect the Roth IRA withdraws in compliance with your institutions rules and options and IRS rules. THIS is a good question to run to ground. Any takers? (I did do this once many years ago, but need to refresh my understanding on the rules.)
Yep. Junior is being told the parents have it covered, then the parents don't come through. That is precisely the reason I think the 529 plans offer a better committment. If one makes a commitment to their children, it should be followed through. Obviously even a 529 plan can be raided, at a cost. Dang shame that will happen to some young people, but such is life.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

KlangFool
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Re: Taxable investment account for college?

Post by KlangFool » Fri Oct 11, 2019 5:12 pm

Broken Man 1999 wrote:
Fri Oct 11, 2019 4:48 pm

Yep. Junior is being told the parents have it covered, then the parents don't come through. That is precisely the reason I think the 529 plans offer a better committment. If one makes a commitment to their children, it should be followed through. Obviously even a 529 plan can be raided, at a cost. Dang shame that will happen to some young people, but such is life.

Broken Man 1999
Broken Man 1999,

<<Yep. Junior is being told the parents have it covered, >>

I live in a very affluent neighborhood with an annual median household income of 150K. The majority of the parents do not fully pay for their kids' college education. Most of my kids' high school classmates have student loans. So, if this is not happening in my neighborhood, I seriously doubt that this is a common occurrence.

KlangFool

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scubadiver
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Re: Taxable investment account for college?

Post by scubadiver » Fri Oct 11, 2019 8:13 pm

Broken Man 1999 wrote:
Fri Oct 11, 2019 4:48 pm
Yep. Junior is being told the parents have it covered, then the parents don't come through. That is precisely the reason I think the 529 plans offer a better committment. If one makes a commitment to their children, it should be followed through. Obviously even a 529 plan can be raided, at a cost. Dang shame that will happen to some young people, but such is life.

Broken Man 1999
Though my wife and I do plan to fully fund our children's college education, we're not actually promising them that we'll do that. 8-)

Our oldest just entered middle school so we have some time. As we get closer I expect that we will have a series of discussions with our kids concerning family expectations for college. This will include everything from candidate schools and programs of study to financing. It's difficult to imagine a scenario where we wouldn't pay for their college in full, but there's also a lengthy thread on this forum about dealing with job loss in your 50s. Life happens and sometimes you just gotta roll with that. I don't think having to take out loans is the end of the world. As I said, both I and my wife had loans.

In any event, I don't think I would recommend to anyone that they should put money in a 529 plan as opposed to saving in say a Roth IRA as a means to hold their feet to the fire. There may be a compelling reason for funding a 529 before a Roth, I'm still a bit of a skeptic on that, but for sure this isn't it.

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Re: Taxable investment account for college?

Post by miamivice » Fri Oct 11, 2019 9:06 pm

We have a lot of people trying to outsmart the tax code. I will state again my view:

a) 401k money - cannot be used for college without sacrificing tax advantages of 401k.
b) Roth IRA money - contributions can be withdrawn but no tax advantages for college savings. Contributions are limited to 12k per year (except for backdoor roth), not enough for multiple kids to go to college
c) 529 money - in nearly unlimited quantities, growth is 100% tax free when used

The 529 account wins if a parent wants to save for their child's education. Hands down, no questions asked.

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