Should I have a taxable account if I'm not maxing retirement accounts?

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wander
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by wander »

jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
I think you miss the point. You don't have to contribute to 529 plan in order to save money for your kids' education, but can always use money from your retirement to do that (especially, Roth IRA can be used for emergency fund).
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by grabiner »

KlangFool wrote: Sat Oct 17, 2020 9:30 pm
jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
2) It is simple math. Please explain how paying 20+% taxes towards your college saving in the 529 versus other tax-advantaged account makes any sense.
The math doesn't give a 20% benefit. Investing for retirement in a Roth IRA and investing for college in a 529 give exactly the same tax-free growth. Investing for retirement in a traditional IRA or 401(k) does give an additional benefit from the tax deduction on the contribution, but you don't get full value unless you withdraw in a 0% tax bracket.

If you contribute to a 401(k) in a 22% bracket and withdraw in a 22% bracket, or a 22.2% marginal tax rate because of the phase-in of Social Security taxation, you break even compared to a tax-free investment such as a Roth or 529. If you contribute to a 401(k) in a 22% bracket and withdraw in a 12% bracket, your net benefit is 11%.

And this must be weighed against the benefit of avoiding college loans. Investing in a 529 rather than a retirement account, and then paying cash for college rather than taking loans, saves you the difference between the loan interest and the return on low-risk investments in the retirement accounts.
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Miriam2
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Miriam2 »

grabiner wrote: Sat Oct 17, 2020 10:36 pm
KlangFool wrote: Sat Oct 17, 2020 9:30 pm
jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
2) It is simple math. Please explain how paying 20+% taxes towards your college saving in the 529 versus other tax-advantaged account makes any sense.
The math doesn't give a 20% benefit. Investing for retirement in a Roth IRA and investing for college in a 529 give exactly the same tax-free growth. Investing for retirement in a traditional IRA or 401(k) does give an additional benefit from the tax deduction on the contribution, but you don't get full value unless you withdraw in a 0% tax bracket.

If you contribute to a 401(k) in a 22% bracket and withdraw in a 22% bracket, or a 22.2% marginal tax rate because of the phase-in of Social Security taxation, you break even compared to a tax-free investment such as a Roth or 529. If you contribute to a 401(k) in a 22% bracket and withdraw in a 12% bracket, your net benefit is 11%.

And this must be weighed against the benefit of avoiding college loans. Investing in a 529 rather than a retirement account, and then paying cash for college rather than taking loans, saves you the difference between the loan interest and the return on low-risk investments in the retirement accounts.
Nice, easy to understand summary, Grabiner, thank you 8-)
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Bryzzo2016 »

Isn't there a psychological advantage to after tax accounts too? 59.5 years old seems an eternity away when young. After tax gives a lot of flexibility (I know, I know, ROTH...)

Personally, ~25% of savings is in taxable accounts, for no particular reason. Definitely not a high earner.
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UpsetRaptor
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by UpsetRaptor »

OP,

Some posters here are pro-529, and some are anti-529, but if you have decided to prioritize children's educations, you have education expenses ahead of you, and your own retirement is on a solid track, they're an excellent tax-advantaged savings vehicle. You are certainly not alone in prioritizing kids' education.

Off-topic 529 opinions aside, in answer to your original question, a taxable account is fine, to a degree. They provide liquidity and have a lot of flexibility. However, if you're passing on tax-advantaged space, there's a cost to that flexibility. Whether that cost is worth it depends on how much you value that liquidity/flexibility.

What's your current retirement situation look like? Specifically, the value of your wife's pension and your current retirement savings. This affects things. If the pension + 4% of current savings will already cover expected expenses, you can do whatever you want. If those values are both small, that's different.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by BernardShakey »

jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
No you are not alone. 529s aren't the best deal for lower and middle income folks but they are exceptional for those that are already funding tax-advantaged retirement accounts and make too much to contribute to Roth (and may have TIRA which makes Backdoor Roth impractical).

Some will say to save for college in taxable or Roth but I argue that the money can then be spent on other "wants" --- think new car, vacation, home improvements, etc. Putting in a 529 locks it up for college (and to some that is a bad thing) ---- for me it ensured the money would be there for college when needed.

Ideally, yes, you want to max pre-tax first. I was able to do that, but I can see how one might want to max out the Roths, do enough pre-tax to get the company match and maybe a little more, and put the rest in 529 for a while. I would probably cap at funding 4-year state school for both kids and then stop 529 contributions and get back to maxing out the pre-tax.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by KlangFool »

grabiner wrote: Sat Oct 17, 2020 10:36 pm
KlangFool wrote: Sat Oct 17, 2020 9:30 pm
jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
2) It is simple math. Please explain how paying 20+% taxes towards your college saving in the 529 versus other tax-advantaged account makes any sense.
The math doesn't give a 20% benefit. Investing for retirement in a Roth IRA and investing for college in a 529 give exactly the same tax-free growth. Investing for retirement in a traditional IRA or 401(k) does give an additional benefit from the tax deduction on the contribution, but you don't get full value unless you withdraw in a 0% tax bracket.

If you contribute to a 401(k) in a 22% bracket and withdraw in a 22% bracket, or a 22.2% marginal tax rate because of the phase-in of Social Security taxation, you break even compared to a tax-free investment such as a Roth or 529. If you contribute to a 401(k) in a 22% bracket and withdraw in a 12% bracket, your net benefit is 11%.

And this must be weighed against the benefit of avoiding college loans. Investing in a 529 rather than a retirement account, and then paying cash for college rather than taking loans, saves you the difference between the loan interest and the return on low-risk investments in the retirement accounts.
OP had maxed up the Roth IRAs. He is choosing between 401K and 529.

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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by dziuniek »

Has anyone ever seen data on 529 plans? You know how Fidelity does that average + median 401k balance. Has anyone seen anything like this for the 529 plan?

Just wonder how bad of a deal it is for regular folks, not bogleheads.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by anon_investor »

OP just to emphasizing two key point others have made on why 529 plans can be worse than maxing pretax 401k:
(1) with a pretax 401k contribution, you are lowering your taxes paid and you can invest your upfront tax savings, even in a 529 if you wish. So for example if you contributed an extra $10k to pretax 401k, let's say you save 20% in taxes, you now have an extra $2k you put to after tax or 529. Whereas if you put $10k to 529, you lose that benefit.
(2) 401k balance is usually not counted in financial aid calculation, while 529 is. Since you cannot max all your accounts, it sounds like you have low enough income to get some financial aid, so you are hurting yourself.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

UpsetRaptor wrote: Sat Oct 17, 2020 11:45 pm Some posters here are pro-529, and some are anti-529, but if you have decided to prioritize children's educations, you have education expenses ahead of you, and your own retirement is on a solid track, they're an excellent tax-advantaged savings vehicle. You are certainly not alone in prioritizing kids' education.
The "anti-529" are not necessarily "not prioritizing kids' education". They are just not prioritizing the 529s after carefully weighing all pros and cons.

We actually had some funds in 529s because we read in the early 2000s they were such a must, but luckily realized early enough they aren't for us - and our family income is higher than OP's.

Had we been continuing to contribute to 529s before maxing out the Roths and the 401k-type accounts over the years, our MIT bill would be a lot higher right now.

So I am not speaking from a theoretical standpoint here, but YMMV.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by UpsetRaptor »

Vulcan wrote: Sun Oct 18, 2020 8:34 am
UpsetRaptor wrote: Sat Oct 17, 2020 11:45 pm Some posters here are pro-529, and some are anti-529, but if you have decided to prioritize children's educations, you have education expenses ahead of you, and your own retirement is on a solid track, they're an excellent tax-advantaged savings vehicle. You are certainly not alone in prioritizing kids' education.
The "anti-529" are not necessarily "not prioritizing kids' education". They are just not prioritizing the 529s after carefully weighing all pros and cons.

We actually had some funds in 529s because we read in the early 2000s they were such a must, but luckily realized early enough they aren't for us - and our family income is higher than OP's.

Had we been continuing to contribute to 529s before maxing out the Roths and the 401k-type accounts over the years, our MIT bill would be a lot higher right now.

So I am not speaking from a theoretical standpoint here, but YMMV.
I'm glad it worked out well for you, and congratulations on having a kid at MIT.

For most people, however, especially at schools beyond the top elites, "financial aid" generally means loans. So trying to play the FAFSA game more often than not results in a bunch of Meh.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by digit8 »

UpsetRaptor wrote: Sat Oct 17, 2020 11:45 pm OP,
Off-topic 529 opinions aside, in answer to your original question, a taxable account is fine, to a degree. They provide liquidity and have a lot of flexibility. However, if you're passing on tax-advantaged space, there's a cost to that flexibility. Whether that cost is worth it depends on how much you value that liquidity/flexibility.
This. It's often my feeling that one of the downsides of a message board as widely educated as this one is, there is often confusion between an optimal scenario and a "good enough" one. A taxable S&P 500 account at the expense of maxed tax-advantages has had plusses and minuses over the years for me, but no regrets overall.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Admiral »

My two cents:

A taxable account is fine for specific near-term needs. But maxing retirement space BEFORE putting money into a 529 is a better alternative.

You can take loans (including home equity loans) for your kids' education. You cannot get loans for your retirement. In addition you can use retirement accounts for education penalty-free (though not tax free). You cannot use 529 money for your retirement.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by teen persuasion »

jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
It's not that you have to max all your retirement accounts before contributing to college, it's that 529 plans are less advantageous than other tax advantaged plans commonly referred to as retirement accounts. Until you run out of space in the more advantageous plans, it doesn't make sense to drop down to using taxable/529 contributions.

Going back to your original question, WHY do you want to save to taxable instead of the more advantageous tax advantaged retirement accounts? The tax cost of doing so hurts when you aren't saving as much as you want to. And then the annual tax drag on your taxable account costs you again (since you are not in the zero LTCG bracket) vs tax free growth within retirement accounts.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by kimura king »

In addition to a cash emergency fund, I do keep a small taxable account for several reasons. I like having money around for peace of mind that won't get penalized if I need it before 59.5 or 63. It will grow I can use it to pay for my kids weddings, house repairs, cars, job loss, whatever other expensive/unexpected costs I will incur over the next 20 plus years.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by grabiner »

kimura king wrote: Sun Oct 18, 2020 5:03 pm In addition to a cash emergency fund, I do keep a small taxable account for several reasons. I like having money around for peace of mind that won't get penalized if I need it before 59.5 or 63. It will grow I can use it to pay for my kids weddings, house repairs, cars, job loss, whatever other expensive/unexpected costs I will incur over the next 20 plus years.
Note that if you aren't maxing out your Roth IRA, you can use it instead for this savings; contributions to a Roth IRA can be withdrawn tax-free and penalty free for any purpose, and conversions can be withdrawn tax-free and penalty-free after five years. You cannot do this with an employer plan, until you have left the employer (and rolled a Roth 401(k) to a Roth IRA, or converted a traditional 401(k) to a Roth IRA if appropriate).
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by BernardShakey »

Vulcan wrote: Sun Oct 18, 2020 8:34 am
UpsetRaptor wrote: Sat Oct 17, 2020 11:45 pm Some posters here are pro-529, and some are anti-529, but if you have decided to prioritize children's educations, you have education expenses ahead of you, and your own retirement is on a solid track, they're an excellent tax-advantaged savings vehicle. You are certainly not alone in prioritizing kids' education.
The "anti-529" are not necessarily "not prioritizing kids' education". They are just not prioritizing the 529s after carefully weighing all pros and cons.

We actually had some funds in 529s because we read in the early 2000s they were such a must, but luckily realized early enough they aren't for us - and our family income is higher than OP's.

Had we been continuing to contribute to 529s before maxing out the Roths and the 401k-type accounts over the years, our MIT bill would be a lot higher right now.

So I am not speaking from a theoretical standpoint here, but YMMV.
Once you maxed 401k and Roth, did you then contribute to 529 ? Or even at that point, you chose some other vehicle ?
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

BernardShakey wrote: Sun Oct 18, 2020 5:24 pm Once you maxed 401k and Roth, did you then contribute to 529 ? Or even at that point, you chose some other vehicle ?
We are lucky have a lot of tax advantaged space available (over 65K between several employers plans and two Roth), so lion's share of savings went there.

We paid off our modest house in a LCOLA with most of the rest (home equity doesn't count against us at MIT) and left the remainder in taxable. Now that we are cash flowing college there are no savings excesses to place outside of retirement accounts, and we will consume most taxable funds to supplement cash flow over the next several years.

Funding 529 instead of taxable didn't seem like the right move because he could have ended up at our state flagship on a full merit ride if the admissions gods didn't smile on him. We simply didn't have any idea how much money we'd end up paying for his college - zero or 50K/yr.

He has a 4 years younger brother (bad planning from financial aid standpoint:) who is similarly strong academically.

If he goes to a similarly expensive place we will reduce retirement contributions during his college years (or get more aid if our income gets smaller). If he goes to state flagship, he already got that covered by merit as well. So again, no idea what the total bill will be.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Lee_WSP »

jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
Probably. The 529 is a very inflexible plan with very limited tax benefit.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by BernardShakey »

Lee_WSP wrote: Sun Oct 18, 2020 9:13 pm
jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
Probably. The 529 is a very inflexible plan with very limited tax benefit.
This is not true.....once you've maxed out pre-tax and Roths (directly or backdoor), and HSA, it's a good deal if you know your kids are going to college. State tax break for some and tax free earnings for 18+ years. And if they get scholarships, you can pull it out without penalty. Some may even want to pay off mortgage before using, but after that how is it not a good deal ? You can shop around and go with plans with very low ER's too. The lack of flexibility is now reduced as you can use for primary education, trade school, grad school, professional school. I don't get the haters.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Lee_WSP »

BernardShakey wrote: Sun Oct 18, 2020 9:47 pm
Lee_WSP wrote: Sun Oct 18, 2020 9:13 pm
jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
Probably. The 529 is a very inflexible plan with very limited tax benefit.
This is not true.....once you've maxed out pre-tax and Roths (directly or backdoor), and HSA, it's a good deal if you know your kids are going to college. State tax break for some and tax free earnings for 18+ years. And if they get scholarships, you can pull it out without penalty. Some may even want to pay off mortgage before using, but after that how is it not a good deal ? You can shop around and go with plans with very low ER's too. The lack of flexibility is now reduced as you can use for primary education, trade school, grad school, professional school. I don't get the haters.
Uh...You just agreed with me and everyone else....
once you've maxed out pre-tax and Roths (directly or backdoor), and HSA, it's a good deal
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by BernardShakey »

Vulcan wrote: Sun Oct 18, 2020 9:09 pm
BernardShakey wrote: Sun Oct 18, 2020 5:24 pm Once you maxed 401k and Roth, did you then contribute to 529 ? Or even at that point, you chose some other vehicle ?
We are lucky have a lot of tax advantaged space available (over 65K between several employers plans and two Roth), so lion's share of savings went there.

We paid off our modest house in a LCOLA with most of the rest (home equity doesn't count against us at MIT) and left the remainder in taxable. Now that we are cash flowing college there are no savings excesses to place outside of retirement accounts, and we will consume most taxable funds to supplement cash flow over the next several years.

Funding 529 instead of taxable didn't seem like the right move because he could have ended up at our state flagship on a full merit ride if the admissions gods didn't smile on him. We simply didn't have any idea how much money we'd end up paying for his college - zero or 50K/yr.

He has a 4 years younger brother (bad planning from financial aid standpoint:) who is similarly strong academically.

If he goes to a similarly expensive place we will reduce retirement contributions during his college years (or get more aid if our income gets smaller). If he goes to state flagship, he already got that covered by merit as well. So again, no idea what the total bill will be.
If they get scholarships, you can pull the money out without penalty. I do agree, it's best to fill up pre-tax and Roth first, but I've also saved tens of thousands in taxes with 529s. And some can't contribute to Roth due to income limitations and TIRA precludes backdoor.

Biggest concern would be what happens if you're laid off. If easy re-employable, then OK. I like having that pot sitting there. If I got laid off tomorrow I could probably retire and their college plans would not be impacted. If I saved in taxable, I would not have as much. Seems to be maybe you took a bit of a gamble that they would get substantial aid. Glad it's working out though.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by BernardShakey »

Lee_WSP wrote: Sun Oct 18, 2020 9:51 pm
BernardShakey wrote: Sun Oct 18, 2020 9:47 pm
Lee_WSP wrote: Sun Oct 18, 2020 9:13 pm
jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
Probably. The 529 is a very inflexible plan with very limited tax benefit.
This is not true.....once you've maxed out pre-tax and Roths (directly or backdoor), and HSA, it's a good deal if you know your kids are going to college. State tax break for some and tax free earnings for 18+ years. And if they get scholarships, you can pull it out without penalty. Some may even want to pay off mortgage before using, but after that how is it not a good deal ? You can shop around and go with plans with very low ER's too. The lack of flexibility is now reduced as you can use for primary education, trade school, grad school, professional school. I don't get the haters.
Uh...You just agreed with me and everyone else....
once you've maxed out pre-tax and Roths (directly or backdoor), and HSA, it's a good deal
Yeah, I know. I just don't think OP is crazy for putting some college money away while he saves for retirement.

Some will say to save for college in taxable or Roth but that money is easily spent on other "wants" if you're not disciplined. Socking it away in a 529 locks it up for college (and to some that is a bad thing) ---- for me it ensured the money would be there for college when needed.

I can see how one might want to max out the Roths, do enough pre-tax to get the company match and maybe a little more, and put the rest in 529 for a while. His kids are only a few years from college start, so he would only do this for a short period.

I get it, but life is not as black and white as folks on here seem to believe and we all have different priorities.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Lee_WSP »

BernardShakey wrote: Sun Oct 18, 2020 10:06 pm
jb3 wrote: Sat Oct 17, 2020 9:23 pm seems extreme and dogmatic to me.
Yeah, I know. I just don't think OP is crazy for putting some college money away while he saves for retirement.
When you put it that way, I do not disagree. This forum can definitely be an echo chamber.

OP, you're not the only one. It is a little extreme and dogmatic to insist everyone *has* to or *really really should* max the other tax advantaged accounts first. But, that said, it is the "best practice".
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by anon_investor »

BernardShakey wrote: Sun Oct 18, 2020 9:47 pm
Lee_WSP wrote: Sun Oct 18, 2020 9:13 pm
jb3 wrote: Sat Oct 17, 2020 9:23 pm The idea that everyone has to max all their retirement accounts before contributing to college seems extreme and dogmatic to me.

Am I alone?
Probably. The 529 is a very inflexible plan with very limited tax benefit.
This is not true.....once you've maxed out pre-tax and Roths (directly or backdoor), and HSA, it's a good deal if you know your kids are going to college. State tax break for some and tax free earnings for 18+ years. And if they get scholarships, you can pull it out without penalty. Some may even want to pay off mortgage before using, but after that how is it not a good deal ? You can shop around and go with plans with very low ER's too. The lack of flexibility is now reduced as you can use for primary education, trade school, grad school, professional school. I don't get the haters.
For some high income people 529 plans are a steal. But these are folks who can max out all their tax advantaged accounts and have plenty of extra money for a taxable account and 529 plans.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

BernardShakey wrote: Sun Oct 18, 2020 9:58 pm I do agree, it's best to fill up pre-tax and Roth first
:sharebeer
BernardShakey wrote: Sun Oct 18, 2020 9:58 pm Biggest concern would be what happens if you're laid off.
Free college :twisted:
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Admiral »

One point not mentioned is the relative tax savings of a 529.

Aside from tax free growth, the only real advantage is the tax savings at the state level. Some states have no state income tax, others have moderate (say 3%) while others tax heavily. Depending on your income and state tax liability, the immediate tax savings may be significant or, well, zero.

The tax drag on a taxable account with, say, some CDs and a MM acct and some TSM thrown in is pretty low, unless we're talking multiple six figure balances.
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Re: Should I have a taxable account if I'm not maxing retirement accounts?

Post by Vulcan »

BernardShakey wrote: Sun Oct 18, 2020 9:47 pm
Lee_WSP wrote: Sun Oct 18, 2020 9:13 pm Probably. The 529 is a very inflexible plan with very limited tax benefit.
This is not true.....once you've maxed out pre-tax and Roths (directly or backdoor), and HSA, it's a good deal if you know your kids are going to college. State tax break for some and tax free earnings for 18+ years. And if they get scholarships, you can pull it out without penalty.
Yes, but earnings get taxed as ordinary income.

Not a great deal in that situation.
BernardShakey wrote: Sun Oct 18, 2020 9:47 pm Some may even want to pay off mortgage before using, but after that how is it not a good deal ? You can shop around and go with plans with very low ER's too. The lack of flexibility is now reduced as you can use for primary education, trade school, grad school, professional school. I don't get the haters.
After you've maxed out retirement and HSA space, paid off the house and have enough in taxable EF, yes, 529s may be worthwhile (end even then be careful not to overfund, which may be hard to know depending on individual plans and opportunities).

Not the situation most people (including OP) are in.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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