How to use Retirement Funds for College Savings

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onourway
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Joined: Thu Dec 08, 2016 3:39 pm

Re: How to use Retirement Funds for College Savings

Post by onourway »

miamivice wrote:
Ron Ronnerson wrote: 529s are great in some situations whereas retirement accounts used for college may make sense in others.
But's let's clarify. The only account that you can use for college, prior to retirement, is contributions to a Roth IRA, correct? I don't believe you can use 401k / 403b money for college without penalities, taxes, or a 401k loan, right?
That's generally the case, but don't forget that many people will change employers at least once during the college savings period giving them the opportunity to convert their 401k into an IRA.
keystone
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Re: How to use Retirement Funds for College Savings

Post by keystone »

cal91 wrote: I never said I wish/need to max out my retirement accounts, either. What I said was that while I can still contribute to retirment accounts, I see no reason to contribute anywhere else. I can use retirement money to pay for college expenses, or whatever else I want, while also getting tax advantages.
I think you and I are in total agreement on this. I simply see no reason to contribute to a 529 plan if space is still available in retirement accounts. This is how I prioritize things:

1) 401K up to company match
2) HSA
3) 401K to the limit
4) Roth IRA
5) Taxable account
6) 529 Plan

In my mind 5 and 6 are interchangeable depending on your savings goals and priorities, e.g. you may want to build up taxable first to cover emergencies and/or big purchase needs but my main point is that the 529 plan is a low priority.

By the way, I pay for out of pocket medical expenses from my taxable account and have been saving receipts along the way. I don't see any reason why I shouldn't consider making an HSA withdrawal when the time comes to pay for college tuition. I will be in my late 50's/early 60's at the time and it's not ideal to keep an HSA untouched until death. It's just one more avenue that can be used to pay for tuition.
Ron Ronnerson
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Location: Bay Area

Re: How to use Retirement Funds for College Savings

Post by Ron Ronnerson »

keystone wrote:
cal91 wrote: I never said I wish/need to max out my retirement accounts, either. What I said was that while I can still contribute to retirment accounts, I see no reason to contribute anywhere else. I can use retirement money to pay for college expenses, or whatever else I want, while also getting tax advantages.
I think you and I are in total agreement on this. I simply see no reason to contribute to a 529 plan if space is still available in retirement accounts. This is how I prioritize things:

1) 401K up to company match
2) HSA
3) 401K to the limit
4) Roth IRA
5) Taxable account
6) 529 Plan

In my mind 5 and 6 are interchangeable depending on your savings goals and priorities, e.g. you may want to build up taxable first to cover emergencies and/or big purchase needs but my main point is that the 529 plan is a low priority.

By the way, I pay for out of pocket medical expenses from my taxable account and have been saving receipts along the way. I don't see any reason why I shouldn't consider making an HSA withdrawal when the time comes to pay for college tuition. I will be in my late 50's/early 60's at the time and it's not ideal to keep an HSA untouched until death. It's just one more avenue that can be used to pay for tuition.
I agree with prioritizing retirement over contributions to a 529 as well and since we can't fill up our retirement space, we've skipped the 529. The prioritization list will vary from person to person, of course. Here’s my order (after mandatory pension contributions):
1) Roth IRA
2) 457b
3) 403b
4) Taxable account
5) 529

We don’t have a 401k or HSA available. There is no match for any of our retirement contributions. My wife’s employer covers our family’s health insurance and contributes 15% of her salary to a SEP-IRA for her (she doesn’t contribute anything herself). We do annual conversions of the SEP-IRA to a Roth IRA up to filling up the 15% tax bracket. The rest is converted to a traditional IRA. We expect there to be a decent chance that we're in a higher tax bracket in the future due to a pension so the Roth IRAs are great to have in our situation. Contributions to #2 and #3 allow us to stay in the 15% tax bracket at this time. We only contribute to #4 if we can get a bonus for doing so since we still have space left in #3. Since we’re unable to fill up #3, we don’t worry about #5 (no state tax deduction for us either). #0 (the pension) may be enough to cover our retirement expenses so college can be paid for by the various retirement accounts we have along with cash flow in the future. We’ll be over 59.5 for most of the time our kid is college-age.

My main point in this thread has been that individual circumstances can vary greatly and these particulars need to be taken into consideration. One size does not fit all.
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CyclingDuo
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Re: How to use Retirement Funds for College Savings

Post by CyclingDuo »

keystone wrote:I simply see no reason to contribute to a 529 plan if space is still available in retirement accounts. This is how I prioritize things:

1) 401K up to company match
2) HSA
3) 401K to the limit
4) Roth IRA
5) Taxable account
6) 529 Plan
We, having been there and done that which included paying for all college costs, both kids graduated debt free, and had $50K each leftover would re-order the priorities thusly as parents...


1) 401K up to company match so your total equals at least 15% of your annual salary
6) 529 Plan/UTMA
4) Roth IRA
5) Taxable account
# insert) life
3) 401K to the limit
2) HSA
"Save like a pessimist, invest like an optimist." - Morgan Housel
DCChak
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Re: How to use Retirement Funds for College Savings

Post by DCChak »

Interesting thread.

To date, my priority has been:

1) TSP max (including 5% match) (His and Hers)
2) 529 to state max
3) Taxable account

Haven't been able to talk the Mrs. into HSA, as she likes the security of a FFS or Open HMO HP. To date, have not been funding Roth IRAs for either self or Mrs.

Have 529s for >2 years of DS17's, and ~2 years of DD14's, college costs for in-state flagship. Their mother is responsible for the other 50%. Starting to fund a 529 for DDalmost2. Getting VA state tax deduction for 529 contributions. Right now, $325/mo for DDalmost2, $300/mo for DD14. Over 85% stock allocation in all 529 funds, given other potential funding sources.

I'm 51, the Mrs. is 36. Both Feds ... fully vested 1/1.1 x HIgh3 x years served pension.

Until now, hadn't really thought of the strong likelihood that, as an older parent, I likely will be in retirement (at least from the Feds) during all of the college years for DDalmost2. Does this make Roth IRA contributions even wiser for Mrs and myself, relative to 529 contributions? Does it matter whether I pull out contributions only without retiring for DDalmost2, or whether I hold on to Roth funds as long as possible (inheritability) and start doing Mega Backdoor Roth conversions, either soon or once I retire?

Need to sort all this out ... but also need to turn back to real work for a bit.
SimonJester
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Re: How to use Retirement Funds for College Savings

Post by SimonJester »

Also college in 15 years is going to look drastically different then it does today. Heck the next 6 months to a year are going to see massive changes to higher education.

Work on maxing out your retirement accounts... If little Timmy doesnt get to goto an Ivy league well too bad. Community college is VERY affordable and you get the same online learning experience...
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin
Turk_February
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Re: How to use Retirement Funds for College Savings

Post by Turk_February »

My employer matches up to $200/year into a 529 account. In addition, contributions are exempt from state tax, and earning are free from state and federal tax when used for college.

In this scenario, would it make sense that the measly $100/month we contribute is better served in the 529 than upping my t401(k) contributions by $1,200/year?
cshell2
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Re: How to use Retirement Funds for College Savings

Post by cshell2 »

CyclingDuo wrote: Fri Jul 14, 2017 8:59 pm
keystone wrote:I simply see no reason to contribute to a 529 plan if space is still available in retirement accounts. This is how I prioritize things:

1) 401K up to company match
2) HSA
3) 401K to the limit
4) Roth IRA
5) Taxable account
6) 529 Plan
We, having been there and done that which included paying for all college costs, both kids graduated debt free, and had $50K each leftover would re-order the priorities thusly as parents...


1) 401K up to company match so your total equals at least 15% of your annual salary
6) 529 Plan/UTMA
4) Roth IRA
5) Taxable account
# insert) life
3) 401K to the limit
2) HSA
I'm curious as to the why behind your order, specifically why you would put HSA on the bottom? I was always under the impression that HSA space was more precious than 401K. (I'm not specifically thinking about college funding with this question)
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: How to use Retirement Funds for College Savings

Post by KlangFool »

Turk_February wrote: Mon Oct 12, 2020 12:40 pm My employer matches up to $200/year into a 529 account. In addition, contributions are exempt from state tax, and earning are free from state and federal tax when used for college.

In this scenario, would it make sense that the measly $100/month we contribute is better served in the 529 than upping my t401(k) contributions by $1,200/year?
Turk_February,

A) Then, contribute up to the match. Aka $200 per year. You get a 100% return for that $200.


B) As for the remaining $1,000 per year, why do you choose to pay 20+% Federal Income Taxes plus State Income Taxes and do after-tax contribution to 529?

KlangFool
User avatar
CyclingDuo
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Joined: Fri Jan 06, 2017 9:07 am

Re: How to use Retirement Funds for College Savings

Post by CyclingDuo »

cshell2 wrote: Mon Oct 12, 2020 12:49 pm
CyclingDuo wrote: Fri Jul 14, 2017 8:59 pm
keystone wrote:I simply see no reason to contribute to a 529 plan if space is still available in retirement accounts. This is how I prioritize things:

1) 401K up to company match
2) HSA
3) 401K to the limit
4) Roth IRA
5) Taxable account
6) 529 Plan
We, having been there and done that which included paying for all college costs, both kids graduated debt free, and had $50K each leftover would re-order the priorities thusly as parents...


1) 401K up to company match so your total equals at least 15% of your annual salary
6) 529 Plan/UTMA
4) Roth IRA
5) Taxable account
# insert) life
3) 401K to the limit
2) HSA
I'm curious as to the why behind your order, specifically why you would put HSA on the bottom? I was always under the impression that HSA space was more precious than 401K. (I'm not specifically thinking about college funding with this question)
I was thinking solely about college funding which is why it dropped to the bottom. If we were going with what you said in blue and there was no college funding, then it climbs way back up to where it needs to for those who have an HSA.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
Turk_February
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Joined: Sat Jul 04, 2020 11:06 am

Re: How to use Retirement Funds for College Savings

Post by Turk_February »

KlangFool wrote: Mon Oct 12, 2020 4:10 pm
Turk_February wrote: Mon Oct 12, 2020 12:40 pm My employer matches up to $200/year into a 529 account. In addition, contributions are exempt from state tax, and earning are free from state and federal tax when used for college.

In this scenario, would it make sense that the measly $100/month we contribute is better served in the 529 than upping my t401(k) contributions by $1,200/year?
Turk_February,

A) Then, contribute up to the match. Aka $200 per year. You get a 100% return for that $200.


B) As for the remaining $1,000 per year, why do you choose to pay 20+% Federal Income Taxes plus State Income Taxes and do after-tax contribution to 529?

KlangFool
12% federal and contributions are exempt from state tax here. What's the alternative, putting the $1,000 into my t401(k) where I would have to pay taxes on the earnings when I withdrawal? Seems like a wash to me.
KlangFool
Posts: 17683
Joined: Sat Oct 11, 2008 12:35 pm

Re: How to use Retirement Funds for College Savings

Post by KlangFool »

Turk_February wrote: Sat Oct 17, 2020 11:04 am
KlangFool wrote: Mon Oct 12, 2020 4:10 pm
Turk_February wrote: Mon Oct 12, 2020 12:40 pm My employer matches up to $200/year into a 529 account. In addition, contributions are exempt from state tax, and earning are free from state and federal tax when used for college.

In this scenario, would it make sense that the measly $100/month we contribute is better served in the 529 than upping my t401(k) contributions by $1,200/year?
Turk_February,

A) Then, contribute up to the match. Aka $200 per year. You get a 100% return for that $200.


B) As for the remaining $1,000 per year, why do you choose to pay 20+% Federal Income Taxes plus State Income Taxes and do after-tax contribution to 529?

KlangFool
12% federal and contributions are exempt from state tax here. What's the alternative, putting the $1,000 into my t401(k) where I would have to pay taxes on the earnings when I withdrawal? Seems like a wash to me.
Turk_February,


How about putting $1,000 into your T401(K) and pay less than 12% Federal Income Tax when you withdraw?


<<Seems like a wash to me.>>


Why would this be a wash? Paying 12% taxes versus paying 0% or less.


What is the size of your tax-deferred account? In order to pay 12% when you withdraw, your tax-deferred account needs to be (20K + 24K) X 25 = 1.1 million.

Your tax-deferred account needs to be more than (24K x 25 =) 600K before you pay any taxes.

KlangFool

P.S.: Less than 10% of the US household has 1 million or more net worth. So, not many households have 1 million in the tax-deferred account.
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