Why max 401k before 529?

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vineviz
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Re: Why max 401k before 529?

Post by vineviz »

Soon2BXProgrammer wrote: Tue Jan 12, 2021 10:54 am
vineviz wrote: Tue Jan 12, 2021 10:51 am
But the argument being made above was that these households should be heavily funding the 401k plans BEFORE the child starts college (ideally with a household savings rate of 20%) and SLASHING the 401k contribution during the college years. My argument is that the household will come out ahead by prudently contributing to a 529 all along so that they can avoid triggering a spike reportable income during the college years by reducing retirement contributions THEN.
retirement savings is added back to income to calculate reportable income, but taxes are deducted.
This is true for FAFSA. However traditional 401k contribution will impact both AGI and MAGI, and therefore several of the federal and state tax credits that teen persuasion was discussing (EITC, AOTC, LLC, etc.).
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willthrill81
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Re: Why max 401k before 529?

Post by willthrill81 »

H-Town wrote: Tue Jan 12, 2021 10:45 am
KlangFool wrote: Sun Jan 10, 2021 3:33 pm
mrsmitt wrote: Sun Jan 10, 2021 3:10 pm
I am not sure I am following. So you accumulated 500K in your taxable savings account to pay for your kids college? Why didn’t you use 529 plan to grow your money tax free and possibly reduce your state taxes?

mrsmitt,

1) I do not know whether I can afford to pay for a college education until my kid about to start college education.


2) I was unemployed for more than 1 year while my kid started a college education. I can only afford to pay because my portfolio had reached 1 million.


<<Why didn’t you use 529 plan to grow your money tax free and possibly reduce your state taxes?>>


3) I am at a 0% long-term capital gain tax rate. So, I was growing my taxable account tax-free.


4) While my kids go to college, I move 240K of my taxable account into the tax-advantaged accounts.


5) If you believe that growing tax-free for 10 to 18 year via 529, then, growing tax-free in the taxable account, and then growing tax-free in the tax-advantaged accounts is an even better idea. This gives you 20 to 40 years of tax-free growth.

6) The amount of state tax deduction is not good enough to compensate for the RISK of 529.

KlangFool
1) This is why you plan. When a child is born, this is the right time to ask the right questions and evaluate your plan. There is no one solution fits all. Know your personal circumstances and make an inform decision.

2) if you are given 18 years of compounding interest, tax free growth, it doesn’t take much contribution to get there. Assuming you max out tax advantaged accounts, and the decision is to split between 529 and taxable, one should consider putting contribution to 529 early when the kid is born.

3) There are not a lot of people have 0% LTCG. And you probably can’t get 0% LTCG if you were not facing layoffs like you did this year. And you can’t escape tax on dividends and capital gain distribution. Your Wellington fund in taxable income definitely cost you some income taxes since.

4) I don’t get what it has anything to do with 529/taxable. But I would recommend evaluate 529 in a holistic approach. You need to consider every aspect of your personal situations.

5) it’s only applicable if you pick between 401k and 529. So 401k should win in majority of the cases.

6) the risk isn’t that much. 10% penalty on the growth plus taxes in the worst case scenario. If not, one can always do tax planning to avoid 10% penalty on the gain.
1. Yes, this is a highly individualized decision. Many parents choose to prioritize retirement savings early in accumulation to ensure that they won't become a financial burden to their children later on. Others want to do everything that they can to ensure that their kids are not saddled with lots of debt.

2. Again, the specifics of the situation matter a lot. Given that many parents are in their 30s (or even 40s) when they have kids, many will be retired when their kids start college (we hope to), making it easier for them to pay 0% LTCG. And if they live in one of the 14 states that doesn't allow 529 contributions to be deducted, the advantage of a 529 over taxable under optimal conditions may be tiny.

3. Given that median household income is about $65k, most American taxpayers, at least married couples, are in the 12% bracket or below (i.e., 0% LTCG).

4. I don't understand KF's point here either.

5. Assuming that the parent is paying for the college expenses, the 529 account is often the most tax-efficient account type to accomplish that. In one of the 36 states allowing 529 contributions to be deductible, that means that the 529 completely avoids state income tax. Now if the investor is able to take advantage of enough tax-arbitrage between the time of contribution and withdrawal to overcome the state income tax (e.g., early retirement), then the 401(k) can come out ahead.

6. I think that the risk may be more than many think. I've often recounted the fact that of my four nephews and nieces, all of whom went to college, only one ever graduated, and he doesn't use his degree in his USPS job whatsoever. I also have two cousins whose father had participated in a pre-paid college tuition plan, but neither attended college at all. That's purely anecdotal, but the data we have (discussed further upthread) indicates that a substantial portion of those who start college never finish, and lack of funding is not the only reason for it. Even though I'm a professor myself, I will definitely not push my daughter into college.
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KlangFool
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Re: Why max 401k before 529?

Post by KlangFool »

H-Town wrote: Tue Jan 12, 2021 10:45 am
KlangFool wrote: Sun Jan 10, 2021 3:33 pm
mrsmitt wrote: Sun Jan 10, 2021 3:10 pm
I am not sure I am following. So you accumulated 500K in your taxable savings account to pay for your kids college? Why didn’t you use 529 plan to grow your money tax free and possibly reduce your state taxes?

mrsmitt,

1) I do not know whether I can afford to pay for a college education until my kid about to start college education.


2) I was unemployed for more than 1 year while my kid started a college education. I can only afford to pay because my portfolio had reached 1 million.


<<Why didn’t you use 529 plan to grow your money tax free and possibly reduce your state taxes?>>


3) I am at a 0% long-term capital gain tax rate. So, I was growing my taxable account tax-free.


4) While my kids go to college, I move 240K of my taxable account into the tax-advantaged accounts.


5) If you believe that growing tax-free for 10 to 18 year via 529, then, growing tax-free in the taxable account, and then growing tax-free in the tax-advantaged accounts is an even better idea. This gives you 20 to 40 years of tax-free growth.

6) The amount of state tax deduction is not good enough to compensate for the RISK of 529.

KlangFool
1) This is why you plan. When a child is born, this is the right time to ask the right questions and evaluate your plan. There is no one solution fits all. Know your personal circumstances and make an inform decision.

2) if you are given 18 years of compounding interest, tax free growth, it doesn’t take much contribution to get there. Assuming you max out tax advantaged accounts, and the decision is to split between 529 and taxable, one should consider putting contribution to 529 early when the kid is born.

3) There are not a lot of people have 0% LTCG. And you probably can’t get 0% LTCG if you were not facing layoffs like you did this year. And you can’t escape tax on dividends and capital gain distribution. Your Wellington fund in taxable income definitely cost you some income taxes since.

4) I don’t get what it has anything to do with 529/taxable. But I would recommend evaluate 529 in a holistic approach. You need to consider every aspect of your personal situations.

5) it’s only applicable if you pick between 401k and 529. So 401k should win in majority of the cases.

6) the risk isn’t that much. 10% penalty on the growth plus taxes in the worst case scenario. If not, one can always do tax planning to avoid 10% penalty on the gain.
H-Town,

1) Correct.

2) I had been unemployed for more than 1 year a few times. So, if you are that lucky and you can count on being fully-employed for 18 years, good for you.

I was in Asia during the Asian Currency Crisis. My kids were born around the Asian Currency Crisis.

<<And you probably can’t get 0% LTCG if you were not facing layoffs like you did this year.>>

3) And, why should I care about other people? See (1). I should plan based on my own circumstances. In my circumstance, I am 0% LTCG in my taxable account.


I have been facing annual and quarterly laid off for the last 10+ years.

4) If you like tax-free growth for 18 years, why would you choose 529 when you can get tax-free growth via the taxable and tax-advantaged accounts for 20 to 40 years? It is very simple,. A longer period of tax-free growth is better.


5) See (1) again. It is dependent on personal circumstances. Who cares about the majority? It is not a popularity contest.


6) Accept a possible 10% penalty with no tax-free growth advantage against the taxable account, why bother? The 5% state income tax advantage is too small to matter.

The RISK isn't too much! You are not me. My portfolio reached 1 million. Then, I was laid off a few months later. I was unemployed when my son started college. Then, my daughter started college next year. I was unemployed for more than 1 year. I paid 240K for my kids' college education when my portfolio was 1 million.


I was laid off right before my daughter graduated college last year. I reached my FI number with the severance pay a few months later. I am unemployed now. If I cannot find a new job, I am retired. I barely make it by saving 1 year of expenses every year when I am employed.

You are not me. You may be a lot luckier than I am. But, I have to make do with what I have.

KlangFool
Last edited by KlangFool on Tue Jan 12, 2021 11:16 am, edited 1 time in total.
H-Town
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Re: Why max 401k before 529?

Post by H-Town »

willthrill81 wrote: Tue Jan 12, 2021 11:07 am
6. I think that the risk may be more than many think. I've often recounted the fact that of my four nephews and nieces, all of whom went to college, only one ever graduated, and he doesn't use his degree in his USPS job whatsoever. I also have two cousins whose father had participated in a pre-paid college tuition plan, but neither attended college at all. That's purely anecdotal, but the data we have (discussed further upthread) indicates that a substantial portion of those who start college never finish, and lack of funding is not the only reason for it. Even though I'm a professor myself, I will definitely not push my daughter into college.
That’s great point. I didn’t think of those risks since I haven’t seen it personally.

It shows that issues in life are often complicated. But I hope bogleheads already took care of financial planning. That would give them the focus on other parts of the equation.
H-Town
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Re: Why max 401k before 529?

Post by H-Town »

KlangFool wrote: Tue Jan 12, 2021 11:14 am
H-Town wrote: Tue Jan 12, 2021 10:45 am 1) This is why you plan. When a child is born, this is the right time to ask the right questions and evaluate your plan. There is no one solution fits all. Know your personal circumstances and make an inform decision.

2) if you are given 18 years of compounding interest, tax free growth, it doesn’t take much contribution to get there. Assuming you max out tax advantaged accounts, and the decision is to split between 529 and taxable, one should consider putting contribution to 529 early when the kid is born.

3) There are not a lot of people have 0% LTCG. And you probably can’t get 0% LTCG if you were not facing layoffs like you did this year. And you can’t escape tax on dividends and capital gain distribution. Your Wellington fund in taxable income definitely cost you some income taxes since.

4) I don’t get what it has anything to do with 529/taxable. But I would recommend evaluate 529 in a holistic approach. You need to consider every aspect of your personal situations.

5) it’s only applicable if you pick between 401k and 529. So 401k should win in majority of the cases.

6) the risk isn’t that much. 10% penalty on the growth plus taxes in the worst case scenario. If not, one can always do tax planning to avoid 10% penalty on the gain.
H-Town,

1) Correct.

2) I had been unemployed for more than 1 year a few times. So, if you are that lucky and you can count on being fully-employed for 18 years, good for you.

I was in Asia during the Asian Currency Crisis. My kids were born around the Asian Currency Crisis.

<<And you probably can’t get 0% LTCG if you were not facing layoffs like you did this year.>>

3) And, why should I care about other people? See (1). I should plan based on my own circumstances. In my circumstance, I am 0% LTCG in my taxable account.


I have been facing annual and quarterly laid off for the last 10+ years.

4) If you like tax-free growth for 18 years, why would you choose 529 when you can get tax-free growth via the taxable and tax-advantaged accounts for 20 to 40 years? It is very simple,. A longer period of tax-free growth is better.


5) See (1) again. It is dependent on personal circumstances. Who cares about the majority? It is not a popularity contest.


6) Accept a possible 10% penalty with no tax-free growth advantage against the taxable account, why bother? The 5% state income tax advantage is too small to matter.

The RISK isn't too much! You are not me. My portfolio reached 1 million. Then, I was laid off a few months later. I was unemployed when my son started college. Then, my daughter started college next year. I was unemployed for more than 1 year. I paid 240K for my kids' college education when my portfolio was 1 million.


I was laid off right before my daughter graduated college last year. I reached my FI number with the severance pay a few months later. I am unemployed now. If I cannot find a new job, I am retired. I barely make it by saving 1 year of expenses every year when I am employed.

You are not me. You may be a lot luckier than I am. But, I have to make do with what I have.

KlangFool
I think you have done a great job! Not many Americans could achieve what you did. I can’t speak for other posters here, but I do look up to your principles: 1) Don’t be house poor, 2) Pay yourself first, and save at least 100% of your annual expense every year. Doesn’t matter if one is lucky, they just need to follow your principles and they will have a good chance to become millionaire.

With that being said, making decision on 529 isn’t a clear cut choice. It’s highly individualized. So I think if we share all of data points and comments, maybe others can have enough data to evaluate their own personal situations.

In your case, the 240k cost of college could benefit from tax sheltering from a 529 plan. The taxes that you could have saved from taxable investing could be invested as well. It may be washed out at the end. It may not. Maybe someone could run the numbers to prove it out.
KlangFool
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Re: Why max 401k before 529?

Post by KlangFool »

H-Town wrote: Tue Jan 12, 2021 11:29 am
KlangFool wrote: Tue Jan 12, 2021 11:14 am
H-Town wrote: Tue Jan 12, 2021 10:45 am 1) This is why you plan. When a child is born, this is the right time to ask the right questions and evaluate your plan. There is no one solution fits all. Know your personal circumstances and make an inform decision.

2) if you are given 18 years of compounding interest, tax free growth, it doesn’t take much contribution to get there. Assuming you max out tax advantaged accounts, and the decision is to split between 529 and taxable, one should consider putting contribution to 529 early when the kid is born.

3) There are not a lot of people have 0% LTCG. And you probably can’t get 0% LTCG if you were not facing layoffs like you did this year. And you can’t escape tax on dividends and capital gain distribution. Your Wellington fund in taxable income definitely cost you some income taxes since.

4) I don’t get what it has anything to do with 529/taxable. But I would recommend evaluate 529 in a holistic approach. You need to consider every aspect of your personal situations.

5) it’s only applicable if you pick between 401k and 529. So 401k should win in majority of the cases.

6) the risk isn’t that much. 10% penalty on the growth plus taxes in the worst case scenario. If not, one can always do tax planning to avoid 10% penalty on the gain.
H-Town,

1) Correct.

2) I had been unemployed for more than 1 year a few times. So, if you are that lucky and you can count on being fully-employed for 18 years, good for you.

I was in Asia during the Asian Currency Crisis. My kids were born around the Asian Currency Crisis.

<<And you probably can’t get 0% LTCG if you were not facing layoffs like you did this year.>>

3) And, why should I care about other people? See (1). I should plan based on my own circumstances. In my circumstance, I am 0% LTCG in my taxable account.


I have been facing annual and quarterly laid off for the last 10+ years.

4) If you like tax-free growth for 18 years, why would you choose 529 when you can get tax-free growth via the taxable and tax-advantaged accounts for 20 to 40 years? It is very simple,. A longer period of tax-free growth is better.


5) See (1) again. It is dependent on personal circumstances. Who cares about the majority? It is not a popularity contest.


6) Accept a possible 10% penalty with no tax-free growth advantage against the taxable account, why bother? The 5% state income tax advantage is too small to matter.

The RISK isn't too much! You are not me. My portfolio reached 1 million. Then, I was laid off a few months later. I was unemployed when my son started college. Then, my daughter started college next year. I was unemployed for more than 1 year. I paid 240K for my kids' college education when my portfolio was 1 million.


I was laid off right before my daughter graduated college last year. I reached my FI number with the severance pay a few months later. I am unemployed now. If I cannot find a new job, I am retired. I barely make it by saving 1 year of expenses every year when I am employed.

You are not me. You may be a lot luckier than I am. But, I have to make do with what I have.

KlangFool
I think you have done a great job! Not many Americans could achieve what you did. I can’t speak for other posters here, but I do look up to your principles: 1) Don’t be house poor, 2) Pay yourself first, and save at least 100% of your annual expense every year. Doesn’t matter if one is lucky, they just need to follow your principles and they will have a good chance to become millionaire.

With that being said, making decision on 529 isn’t a clear cut choice. It’s highly individualized. So I think if we share all of data points and comments, maybe others can have enough data to evaluate their own personal situations.

In your case, the 240k cost of college could benefit from tax sheltering from a 529 plan. The taxes that you could have saved from taxable investing could be invested as well. It may be washed out at the end. It may not. Maybe someone could run the numbers to prove it out.
H-Town,

<<In your case, the 240k cost of college could benefit from tax sheltering from a 529 plan. >>


Only if I can afford to pay for a college education. If I am unemployed much longer or a few more times, my portfolio could be much less than 1 million. Then, I cannot afford to pay.


Back to my basic question which every parent should ask themselves.

I will just use 240K for college education as an example,

Are you willing to pay 240K if your portfolio is X at that time?


A) 240K?


B) 500K?


C) 750K?


D) 1 million?

My answer is (D). My kids got lucky. We make it in time barely.


Are you willing to pay that amount if you have zero job security at that time? Aka, many of your peers are permanently unemployed or under-employed?


Can you really predict you would not be in that situation in the future?


KlangFool
H-Town
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Re: Why max 401k before 529?

Post by H-Town »

KlangFool wrote: Tue Jan 12, 2021 12:02 pm
H-Town,

<<In your case, the 240k cost of college could benefit from tax sheltering from a 529 plan. >>


Only if I can afford to pay for a college education. If I am unemployed much longer or a few more times, my portfolio could be much less than 1 million. Then, I cannot afford to pay.


Back to my basic question which every parent should ask themselves.

I will just use 240K for college education as an example,

Are you willing to pay 240K if your portfolio is X at that time?


A) 240K?


B) 500K?


C) 750K?


D) 1 million?

My answer is (D). My kids got lucky. We make it in time barely.


Are you willing to pay that amount if you have zero job security at that time? Aka, many of your peers are permanently unemployed or under-employed?


Can you really predict you would not be in that situation in the future?


KlangFool
From my point of view, you still got to the finish line with a fair share of job loss. You ended up with $1M and paid 240k for college without using 529. So what I saw is that you forego state tax deduction and tax free growth of 529 to have a peace of mind and to reduce uncertainty that comes with 529.

It’s for each parent to decide. But if I were in your position, I would at least put some contribution early to 529 (before taxable investing) when kid was born.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Why max 401k before 529?

Post by KlangFool »

H-Town wrote: Tue Jan 12, 2021 12:14 pm
KlangFool wrote: Tue Jan 12, 2021 12:02 pm
H-Town,

<<In your case, the 240k cost of college could benefit from tax sheltering from a 529 plan. >>


Only if I can afford to pay for a college education. If I am unemployed much longer or a few more times, my portfolio could be much less than 1 million. Then, I cannot afford to pay.


Back to my basic question which every parent should ask themselves.

I will just use 240K for college education as an example,

Are you willing to pay 240K if your portfolio is X at that time?


A) 240K?


B) 500K?


C) 750K?


D) 1 million?

My answer is (D). My kids got lucky. We make it in time barely.


Are you willing to pay that amount if you have zero job security at that time? Aka, many of your peers are permanently unemployed or under-employed?


Can you really predict you would not be in that situation in the future?


KlangFool
From my point of view, you still got to the finish line with a fair share of job loss. You ended up with $1M and paid 240k for college without using 529. So what I saw is that you forego state tax deduction and tax free growth of 529 to have a peace of mind and to reduce uncertainty that comes with 529.

It’s for each parent to decide. But if I were in your position, I would at least put some contribution early to 529 (before taxable investing) when kid was born.
H-Town,

<<But if I were in your position, I would at least put some contribution early to 529 (before taxable investing) when kid was born.>>


No. That is the worse possible idea! If I cannot afford to pay and unemployed, I would spend down my taxable account and maximize my kids' financial aid eligibility.


KlangFool
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teen persuasion
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Re: Why max 401k before 529?

Post by teen persuasion »

vineviz wrote: Tue Jan 12, 2021 10:51 am
teen persuasion wrote: Tue Jan 12, 2021 10:17 am
vineviz wrote: Mon Jan 11, 2021 8:43 pm
Soon2BXProgrammer wrote: Sun Jan 10, 2021 5:00 pm Most people struggle to hit 20% saving regardless if it's an employer plan or IRA. Pretax or roth. I'm just saying most people would be better off maxing their retirement accounts.
I'm not sure what audience you are considering when you say "most people".

Most American households make less than $65,000 a year: they aren't "maxing out" their retirement 401k accounts (or even their IRAs, likely), nor do they likely need to. On the other hand, the EFC for households with incomes of between $50,000 and $75,000 house can easily approach or exceed $10k - $15k per year.

I don't know what the income level of "most" Bogleheads would be, but my guess is that it's higher. Maybe it's high enough that they can max out a pair of 401k plans and Roth IRAs, but with an EFC north of $25k my experience is that most them WOULD be better off taking advantage of a 529 plan even if they aren't "maxing their retirement accounts".
Just ran the numbers for families of 4 earning $50k and $75k. EFC for $50k is $1822, and for $75k is $6012.

This assumes no assets (or none reported). I'm also using the current year charts. The new charts for 2022 increase the Income Protection amount by 20% IIRC, so would reduce EFC/SAI.

The thing you are missing is that at this income level, pre-tax contributions to 401k (not Roth, not IRA, not 529) have a high marginal tax rate, due to refundable credits. Contributions to 401k can generate nearly a 50% return by reversing EITC phaseouts + analogous state credit phaseouts + taxes avoided + getting into range for nonrefundable credits like Saver's credit. Saving to a 529 has a high cost, if you are forgoing 401k contributions instead, on top of the increase in EFC/SAI due to use of 529.
But the argument being made above was that these households should be heavily funding the 401k plans BEFORE the child starts college (ideally with a household savings rate of 20%) and SLASHING the 401k contribution during the college years. My argument is that the household will come out ahead by prudently contributing to a 529 all along so that they can avoid triggering a spike reportable income during the college years by reducing retirement contributions THEN.

Avoiding the 529 during the first 18 years of child's life potentially sets up a double whammy at the time of matriculation: no assets to cover the EFC AND higher reportable income due to reducing retirement plan contributions in order to "cash flow" college (which is bad for all the reasons you outline).

What I'm suggesting is that many families in this income range would be better off contributing $925/month to a 401k plan and $75/month to a 529 plan is LIKELY to be a much better financial plan than putting $1,000 into the 401k plan. If there's no state tax deduction for the 529 contribution then maybe a Roth IRA makes more sense.

The other thing I'm sensitive to is that the marginal federal tax rate has a big inflection point at $80k, from 12% to 22%. Because younger workers typically see real wage growth, a household in the 12% federal tax bracket when a child is born could easily find itself in the 24% tax bracket when the child is in college. If the household can manage to do some after-tax savings (i.e. 529 or Roth IRA) when they're in the lower bracket so that they can maximize pre-tax savings (e.g. 401k) later when they are potentially in a higher bracket I think they'll find they'll be much happier than if they'd just tried to "max out the 401k" all along.
If that family making $50k dropped 401k contributions by $75/month = $900/yr, they wouldn't have $900 to contribute to the 529, because of the refundable tax credit cost. The EITC would be phased out 21%, $189. My state matches at 30%, so another $57 lost. Then 10% federal tax on the non-tax deferred amount, $90. I guess the state tax would be a wash, raised and then reduced by the 529 credit. $336 lost to put $900 in a 529 account.
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Vulcan
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Re: Why max 401k before 529?

Post by Vulcan »

H-Town wrote: Tue Jan 12, 2021 12:14 pm It’s for each parent to decide. But if I were in your position, I would at least put some contribution early to 529 (before taxable investing) when kid was born.
The problem is, there are just too many unknowns when the kid is born, both in the sense of your career and income trajectory, and in terms of their ultimate college destination.

It is a lot easier to imagine a scenario where underfunding retirement in favor of 529 comes out suboptimal than the opposite one.

In our case, we bit the conventional wisdom of 529s and started contributing when our elder was born, even though we could barely afford to contribute to 401k up to employer's match at the time.

Luckily, a combination of financial education (in large part on this site) and a realization that our kids college expenses could range from zero (full tuition merit at a state flagship in-town they were both on track for pretty early in their school careers) to a whole lot (expensive top privates), and that the schools really worth the money are all "full-need", and in an event they ended up there the best strategy was to maximize need-based finaid, all led us to conclude that the best place to place assets was tax-advantaged retirement accounts.

Luckily, this realization arrived before out household income was about to take off, so we were not stuck with too much dough in 529s or taxable to hurt us too badly when our elder left full tuition merit offers at our state flagship and Vanderbilt on the table to attend his top choice the same year we joined the two-comma club.

Because almost all our assets are in retirement vehicles and paid-off house, and our income is just south of 200K, he is receiving a significant need-based scholarship, about 1/3 off the total sticker price. We are happily cash flowing the remaining 2/3.

YMMV, but unless you are absolutely sure you will not qualify for need-based money (i.e. your income during your kids college years will be over $250K in today's money), do yourself a favor and shelter your assets prudently. If you are doing well when kids are in college, you can cash flow the bill. If you are not doing well, the savings from need-based scholarships will far outstrip any tax savings your 529 offers over retirement accounts, if any.

And if your students don't end up at one of those schools, in-state flagships are just not that expensive.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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vineviz
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Re: Why max 401k before 529?

Post by vineviz »

teen persuasion wrote: Tue Jan 12, 2021 1:30 pm If that family making $50k dropped 401k contributions by $75/month = $900/yr, they wouldn't have $900 to contribute to the 529, because of the refundable tax credit cost. The EITC would be phased out 21%, $189. My state matches at 30%, so another $57 lost. Then 10% federal tax on the non-tax deferred amount, $90. I guess the state tax would be a wash, raised and then reduced by the 529 credit. $336 lost to put $900 in a 529 account.
I agree that the vast majority of families eligible for the EITC should prioritize retaining that eligibility over funding a 529 plan. In 2021 the EITC income limit with two children is $53,865 though, and since nobody earning $53k is "maxing out the 401k" anyway I feel like we've drifted away from the topic of the thread.

And let's not lose sight of the fact that this family of four earning $50k is quite possibly going to need a way of coming up with $25k or more to cover the out-of-pocket expenses for a four-year college degree. Slashing the 401k contribution during the college years to cover an annual net price of $7,000 or $8,000 (e.g. University of Washington) isn't likely to be smarter than trying to manage that expense ahead of time.
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Re: Why max 401k before 529?

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Vulcan wrote: Tue Jan 12, 2021 1:57 pm
H-Town wrote: Tue Jan 12, 2021 12:14 pm It’s for each parent to decide. But if I were in your position, I would at least put some contribution early to 529 (before taxable investing) when kid was born.
The problem is, there are just too many unknowns when the kid is born, both in the sense of your career and income trajectory, and in terms of their ultimate college destination.

It is a lot easier to imagine a scenario where underfunding retirement in favor of 529 comes out suboptimal than the opposite one.

In our case, we bit the conventional wisdom of 529s and started contributing when our elder was born, even though we could barely afford to contribute to 401k up to employer's match at the time.

Luckily, a combination of financial education (in large part on this site) and a realization that our kids college expenses could range from zero (full tuition merit at a state flagship in-town they were both on track for pretty early in their school careers) to a whole lot (expensive top privates), and that the schools really worth the money are all "full-need", and in an event they ended up there the best strategy was to maximize need-based finaid, all led us to conclude that the best place to place assets was tax-advantaged retirement accounts.

Luckily, this realization arrived before out household income was about to take off, so we were not stuck with too much dough in 529s or taxable to hurt us too badly when our elder left full tuition merit offers at our state flagship and Vanderbilt on the table to attend his top choice the same year we joined the two-comma club.

Because almost all our assets are in retirement vehicles and paid-off house, and our income is just south of 200K, he is receiving a significant need-based scholarship, about 1/3 off the total sticker price. We are happily cash flowing the remaining 2/3.

YMMV, but unless you are absolutely sure you will not qualify for need-based money (i.e. your income during your kids college years will be over $250K in today's money), do yourself a favor and shelter your assets prudently. If you are doing well when kids are in college, you can cash flow the bill. If you are not doing well, the savings from need-based scholarships will far outstrip any tax savings your 529 offers over retirement accounts, if any.

And if your students don't end up at one of those schools, in-state flagships are just not that expensive.
I agree that the risks involved seem to be asymmetric. The potential gain from a 529 in many situations may be smaller than the potential loss (e.g., if the 529 funds aren't needed or if one's retirement is underfunded*), especially if you're in one of the 14 states that doesn't allow for contributions to be deducted. That doesn't make a 529 a bad choice; individual investors have to gauge for themselves if the potential gain is worth the risk.

*Note that for high income investors with a high saving rate, the risk of an underfunded retirement is probably very low.
Last edited by willthrill81 on Tue Jan 12, 2021 2:08 pm, edited 1 time in total.
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Re: Why max 401k before 529?

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Because 401k has a bigger tax advantage. I would rather save $1 than $.78 at the same cost to my check. Money is fungible, so that means if I am able to save for retirement faster I will have more money to spend on college.
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Re: Why max 401k before 529?

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vineviz wrote: Tue Jan 12, 2021 2:03 pm
teen persuasion wrote: Tue Jan 12, 2021 1:30 pm If that family making $50k dropped 401k contributions by $75/month = $900/yr, they wouldn't have $900 to contribute to the 529, because of the refundable tax credit cost. The EITC would be phased out 21%, $189. My state matches at 30%, so another $57 lost. Then 10% federal tax on the non-tax deferred amount, $90. I guess the state tax would be a wash, raised and then reduced by the 529 credit. $336 lost to put $900 in a 529 account.
I agree that the vast majority of families eligible for the EITC should prioritize retaining that eligibility over funding a 529 plan. In 2021 the EITC income limit with two children is $53,865 though, and since nobody earning $53k is "maxing out the 401k" anyway I feel like we've drifted away from the topic of the thread.

And let's not lose sight of the fact that this family of four earning $50k is quite possibly going to need a way of coming up with $25k or more to cover the out-of-pocket expenses for a four-year college degree. Slashing the 401k contribution during the college years to cover an annual net price of $7,000 or $8,000 (e.g. University of Washington) isn't likely to be smarter than trying to manage that expense ahead of time.
Except at 53k they will get need based aid. If the income has been at this level since middle school they should have registered for WA College Promise:
https://ofm.wa.gov/sites/default/files/ ... romise.pdf

For even lower incomes (those that qualify for the pell grant, as well as the other requirements.):
https://www.washington.edu/huskypromise/

The point overall is at low incomes, people shoudl save for their self, because there is need based aid.
for incomes 50-100k, if they don't put their own oxygen mask first (saving for retirement) the likelihood is they wont have enough saved. and if they save for their own retirement, and not their childrens school, it maximizes any potential need based aid.
and 100k+ if only one 401k, they they need to be at minimum maxing one retirement account to be on track.

hence, save for your own retirement first is the general recommendation.
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Re: Why max 401k before 529?

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aristotelian wrote: Tue Jan 12, 2021 2:08 pm Because 401k has a bigger tax advantage. I would rather save $1 than $.78 at the same cost to my check. Money is fungible, so that means if I am able to save for retirement faster I will have more money to spend on college.
That's not accurate. In a state where 529 contributions are deductible, the 529 will come out ahead of using 401(k) funds or cash flow when used to pay for college expenses unless the total tax arbitrage with the 401(k) that is greater than the state tax rate. This has been demonstrated repeatedly in this thread.
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Re: Why max 401k before 529?

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willthrill81 wrote: Tue Jan 12, 2021 2:20 pm
aristotelian wrote: Tue Jan 12, 2021 2:08 pm Because 401k has a bigger tax advantage. I would rather save $1 than $.78 at the same cost to my check. Money is fungible, so that means if I am able to save for retirement faster I will have more money to spend on college.
That's not accurate. In a state where 529 contributions are deductible, the 529 will come out ahead of using 401(k) funds or cash flow when used to pay for college expenses unless the total tax arbitrage with the 401(k) that is greater than the state tax rate. This has been demonstrated repeatedly in this thread.
Sure, the state tax benefit should be considered on the 529 side of the ledger. I would think in most cases that would be significantly less than the benefit of deferring federal tax but certainly one should do the math.
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Re: Why max 401k before 529?

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aristotelian wrote: Tue Jan 12, 2021 2:32 pm
willthrill81 wrote: Tue Jan 12, 2021 2:20 pm
aristotelian wrote: Tue Jan 12, 2021 2:08 pm Because 401k has a bigger tax advantage. I would rather save $1 than $.78 at the same cost to my check. Money is fungible, so that means if I am able to save for retirement faster I will have more money to spend on college.
That's not accurate. In a state where 529 contributions are deductible, the 529 will come out ahead of using 401(k) funds or cash flow when used to pay for college expenses unless the total tax arbitrage with the 401(k) that is greater than the state tax rate. This has been demonstrated repeatedly in this thread.
Sure, the state tax benefit should be considered on the 529 side of the ledger. I would think in most cases that would be significantly less than the benefit of deferring federal tax but certainly one should do the math.
If you contribute to a 401(k) in one bracket and later withdraw from the 401(k) in that same bracket, then tax-deferment is the only benefit from using the 401(k) at all, but the 529 gets that in addition to the state tax deduction on contributions in 36 states. Now if you can do something like contribute in the 22% bracket, withdraw in the 12% bracket, and that 10% difference is greater than the state tax rate, then the 401(k) would come out ahead.
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Re: Why max 401k before 529?

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willthrill81 wrote: Tue Jan 12, 2021 2:52 pm
aristotelian wrote: Tue Jan 12, 2021 2:32 pm
willthrill81 wrote: Tue Jan 12, 2021 2:20 pm
aristotelian wrote: Tue Jan 12, 2021 2:08 pm Because 401k has a bigger tax advantage. I would rather save $1 than $.78 at the same cost to my check. Money is fungible, so that means if I am able to save for retirement faster I will have more money to spend on college.
That's not accurate. In a state where 529 contributions are deductible, the 529 will come out ahead of using 401(k) funds or cash flow when used to pay for college expenses unless the total tax arbitrage with the 401(k) that is greater than the state tax rate. This has been demonstrated repeatedly in this thread.
Sure, the state tax benefit should be considered on the 529 side of the ledger. I would think in most cases that would be significantly less than the benefit of deferring federal tax but certainly one should do the math.
If you contribute to a 401(k) in one bracket and later withdraw from the 401(k) in that same bracket, then tax-deferment is the only benefit from using the 401(k) at all, but the 529 gets that in addition to the state tax deduction on contributions in 36 states. Now if you can do something like contribute in the 22% bracket, withdraw in the 12% bracket, and that 10% difference is greater than the state tax rate, then the 401(k) would come out ahead.
Sort of. At the bottom of the 12% bracket, the effective tax is like 6 or 7%, so the benefit would be even greater for 401k.
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Re: Why max 401k before 529?

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aristotelian wrote: Tue Jan 12, 2021 3:01 pm
willthrill81 wrote: Tue Jan 12, 2021 2:52 pm
aristotelian wrote: Tue Jan 12, 2021 2:32 pm
willthrill81 wrote: Tue Jan 12, 2021 2:20 pm
aristotelian wrote: Tue Jan 12, 2021 2:08 pm Because 401k has a bigger tax advantage. I would rather save $1 than $.78 at the same cost to my check. Money is fungible, so that means if I am able to save for retirement faster I will have more money to spend on college.
That's not accurate. In a state where 529 contributions are deductible, the 529 will come out ahead of using 401(k) funds or cash flow when used to pay for college expenses unless the total tax arbitrage with the 401(k) that is greater than the state tax rate. This has been demonstrated repeatedly in this thread.
Sure, the state tax benefit should be considered on the 529 side of the ledger. I would think in most cases that would be significantly less than the benefit of deferring federal tax but certainly one should do the math.
If you contribute to a 401(k) in one bracket and later withdraw from the 401(k) in that same bracket, then tax-deferment is the only benefit from using the 401(k) at all, but the 529 gets that in addition to the state tax deduction on contributions in 36 states. Now if you can do something like contribute in the 22% bracket, withdraw in the 12% bracket, and that 10% difference is greater than the state tax rate, then the 401(k) would come out ahead.
Sort of. At the bottom of the 12% bracket, the effective tax is like 6 or 7%, so the benefit would be even greater for 401k.
Effective rates aren't applicable.

Especially when 529 contributions are deductible from state taxes, it's virtually certain that using 529 funds to pay for college expenses will beat everything else unless there is the opportunity for significant tax-arbitrage, as I noted above. Now whether the benefit of the 529 is worth the risk involved is another question.
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Re: Why max 401k before 529?

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willthrill81 wrote: Tue Jan 12, 2021 3:05 pm Effective rates aren't applicable.
Why would effective rate not be applicable if not all of the 401k withdrawal is taxable at 12%
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Re: Why max 401k before 529?

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Soon2BXProgrammer wrote: Tue Jan 12, 2021 2:15 pm The point overall is at low incomes, people shoudl save for their self, because there is need based aid.

People should save for the things that are important to them.

It's not up to us to tell people what they should want. Let's keep the advice focused on how to help people get what THEY want, not what we THINK they should want.

Soon2BXProgrammer wrote: Tue Jan 12, 2021 2:15 pmfor incomes 50-100k, if they don't put their own oxygen mask first (saving for retirement) the likelihood is they wont have enough saved.
This is vague enough to be almost right, but it moves the goalpost a bit. Obviously it's true that IF saving for a child's college education does more harm than good people should not do that. On that I suspect we can agree, but that's not exactly the proposition we have been discussing. It's entirely possible for households with incomes between $50k and $100k to balance retirement savings and college savings, and we do no one any favors by repeatedly telling them to focus exclusively on only one of their financial goals (retirement) and completely ignore another financial goal (college).

In many states (Maryland, for example) the net price of 4-year public universities for households in the $50k to $100k range easily be 2x or 3x the costs you're talking about in Washington. A household here with $90k in income can easily be asked to spend $20k/year at a state university, and for many households there is just no way to accommodate that kind of consumption shock without good planning. Most such households do NOT need to "max out their 401k" in order to be on track for a comfortable retirement, and if they want to launch a child into the world without student loans then they're better off saving in a 529 plan than not doing so.
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Re: Why max 401k before 529?

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aristotelian wrote: Tue Jan 12, 2021 3:09 pm
willthrill81 wrote: Tue Jan 12, 2021 3:05 pm Effective rates aren't applicable.
Why would effective rate not be applicable if not all of the 401k withdrawal is taxable at 12%
The Wiki explains why. There are many threads on this too.
Marginal tax rates are useful in many contexts for making decisions, because they describe the effect of a particular change. While the average tax rate is interesting to know, it doesn't help in making decisions the same way the marginal tax rate can.
https://www.bogleheads.org/wiki/Marginal_tax_rate
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Re: Why max 401k before 529?

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willthrill81 wrote: Tue Jan 12, 2021 3:17 pm
aristotelian wrote: Tue Jan 12, 2021 3:09 pm
willthrill81 wrote: Tue Jan 12, 2021 3:05 pm Effective rates aren't applicable.
Why would effective rate not be applicable if not all of the 401k withdrawal is taxable at 12%
The Wiki explains why. There are many threads on this too.
Marginal tax rates are useful in many contexts for making decisions, because they describe the effect of a particular change. While the average tax rate is interesting to know, it doesn't help in making decisions the same way the marginal tax rate can.
https://www.bogleheads.org/wiki/Marginal_tax_rate
If OP is starting from scratch and choosing between 401k and 529, I don't see why you would not look at the overall tax rate when only a small portion will be taxed at 12%. I agree, if your current 401k balance already puts you in the 12% bracket then you would look at your projected marginal rate.
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Re: Why max 401k before 529?

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aristotelian wrote: Tue Jan 12, 2021 3:29 pm
willthrill81 wrote: Tue Jan 12, 2021 3:17 pm
aristotelian wrote: Tue Jan 12, 2021 3:09 pm
willthrill81 wrote: Tue Jan 12, 2021 3:05 pm Effective rates aren't applicable.
Why would effective rate not be applicable if not all of the 401k withdrawal is taxable at 12%
The Wiki explains why. There are many threads on this too.
Marginal tax rates are useful in many contexts for making decisions, because they describe the effect of a particular change. While the average tax rate is interesting to know, it doesn't help in making decisions the same way the marginal tax rate can.
https://www.bogleheads.org/wiki/Marginal_tax_rate
If OP is starting from scratch and choosing between 401k and 529, I don't see why you would not look at the overall tax rate when only a small portion will be taxed at 12%. I agree, if your current 401k balance already puts you in the 12% bracket then you would look at your projected marginal rate.
Read the Wiki to see why. It's a very common misconception to look at effective rates in retirement, but the correct comparison is marginal vs. marginal. But you're on the right track with your thinking.

Remember that SS benefits alone can easily 'fill up' the 0% and 10% bracket for many here, meaning that all or at least most of 401(k) contributions will be taxed at a minimum of 12% upon withdrawal.
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Re: Why max 401k before 529?

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willthrill81 wrote: Tue Jan 12, 2021 3:38 pm
Read the Wiki to see why. It's a very common misconception to look at effective rates in retirement, but the correct comparison is marginal vs. marginal. But you're on the right track with your thinking.

Remember that SS benefits alone can easily 'fill up' the 0% and 10% bracket for many here, meaning that all or at least most of 401(k) contributions will be taxed at a minimum of 12% upon withdrawal.
Fair enough. I think both "marginal" and "effective" are overly simplistic but that is going beyond the scope of this thread.
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

vineviz wrote: Tue Jan 12, 2021 3:16 pm
Soon2BXProgrammer wrote: Tue Jan 12, 2021 2:15 pm The point overall is at low incomes, people shoudl save for their self, because there is need based aid.

People should save for the things that are important to them.

It's not up to us to tell people what they should want. Let's keep the advice focused on how to help people get what THEY want, not what we THINK they should want.
We can agree to disagree.

When I meet with local people, while their first statement might be that they want to save for college. Through our actual conversation is that they have many goals. Normally they want a secure retirement and if they can they would like their children to graduate college with little to no debt. (this is to be defined).

They don't care the how. They just want a strategy to meet the objectives. The objective isn't to save for college. It is to graduate with little to no debt. There is a difference.

The other thing that comes out of the conversation and this approach is that it keeps their options open as long as possible. What if their kids don't want to go to 4 years? What if they want to start a business? etc. etc. etc.

By deferring the decision to load up a 529 and by super funding (its not really super funding, but lets call it that) their retirement, they are retaining the flexibility to make the decisions later closer to the need. If deferring a decision, doesn't have serious side affects, there is value in deferring the decision. (and the inverse is true, if making a decision doesn't have serious side affects, it should be made. such as Roth IRA contributions for people who can't make deductible IRA contributions)

Also, there is some behavioral finance in this, if I show someone what they need to save for retirement, (really show with exact numbers and projections), and then say that college is on top of this, they then can make decisions for themselves.

Some people respond that they would rather have $4k less retirement income and 100k for their kid to go to college if things go bad. There is nothing wrong with this answer. Most people that I talk with this isn't the case, because they are barely going to get their retirement funded by 65. and they might face age-ism and be forced out sooner. This strategy allows them to make the decisions about actually paying for school closer to the school time, and to make better decisions about if their career is going to be interrupted.

They can't afford to not take the free money if it is available.
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Re: Why max 401k before 529?

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Soon2BXProgrammer wrote: Tue Jan 12, 2021 4:58 pm
They don't care the how. They just want a strategy to meet the objectives. The objective isn't to save for college. It is to graduate with little to no debt. There is a difference.
For most people, that objective will be achieved at minimal cost by using a 529 plan.

It’s too bad people in this income range have a hard time affording qualified professional advice. This is an area where they could really benefit from it.
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

vineviz wrote: Tue Jan 12, 2021 5:33 pm
Soon2BXProgrammer wrote: Tue Jan 12, 2021 4:58 pm
They don't care the how. They just want a strategy to meet the objectives. The objective isn't to save for college. It is to graduate with little to no debt. There is a difference.
For most people, that objective will be achieved at minimal cost by using a 529 plan.

It’s too bad people in this income range have a hard time affording qualified professional advice. This is an area where they could really benefit from it.
529s are not magic, they are merely a bucket. they aren't always the best bucket to use.

but i agree, lots of people need some basic help to figure out a reasonable strategy.
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Re: Why max 401k before 529?

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Soon2BXProgrammer wrote: Tue Jan 12, 2021 5:39 pm
vineviz wrote: Tue Jan 12, 2021 5:33 pm
Soon2BXProgrammer wrote: Tue Jan 12, 2021 4:58 pm
They don't care the how. They just want a strategy to meet the objectives. The objective isn't to save for college. It is to graduate with little to no debt. There is a difference.
For most people, that objective will be achieved at minimal cost by using a 529 plan.

It’s too bad people in this income range have a hard time affording qualified professional advice. This is an area where they could really benefit from it.
529s are not magic, they are merely a bucket. they aren't always the best bucket to use.
And also, despite the propaganda floated from some quarters, they aren’t an evil to be religiously avoided.

529s appear to be the Nickleback of investment accounts.
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Re: Why max 401k before 529?

Post by Soon2BXProgrammer »

vineviz wrote: Tue Jan 12, 2021 6:08 pm
Soon2BXProgrammer wrote: Tue Jan 12, 2021 5:39 pm
vineviz wrote: Tue Jan 12, 2021 5:33 pm
Soon2BXProgrammer wrote: Tue Jan 12, 2021 4:58 pm
They don't care the how. They just want a strategy to meet the objectives. The objective isn't to save for college. It is to graduate with little to no debt. There is a difference.
For most people, that objective will be achieved at minimal cost by using a 529 plan.

It’s too bad people in this income range have a hard time affording qualified professional advice. This is an area where they could really benefit from it.
529s are not magic, they are merely a bucket. they aren't always the best bucket to use.
And also, despite the propaganda floated from some quarters, they aren’t an evil to be religiously avoided.

529s appear to be the Nickleback of investment accounts.
Agreed, they make sense when there is ample free cash flow available that shouldn't be prioritized for higher priority goals. (which includes risk mitigation)

I even used a 529. (already mentioned earlier in the thread)
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Re: Why max 401k before 529?

Post by teen persuasion »

vineviz wrote: Tue Jan 12, 2021 2:03 pm
teen persuasion wrote: Tue Jan 12, 2021 1:30 pm If that family making $50k dropped 401k contributions by $75/month = $900/yr, they wouldn't have $900 to contribute to the 529, because of the refundable tax credit cost. The EITC would be phased out 21%, $189. My state matches at 30%, so another $57 lost. Then 10% federal tax on the non-tax deferred amount, $90. I guess the state tax would be a wash, raised and then reduced by the 529 credit. $336 lost to put $900 in a 529 account.
I agree that the vast majority of families eligible for the EITC should prioritize retaining that eligibility over funding a 529 plan. In 2021 the EITC income limit with two children is $53,865 though, and since nobody earning $53k is "maxing out the 401k" anyway I feel like we've drifted away from the topic of the thread.

And let's not lose sight of the fact that this family of four earning $50k is quite possibly going to need a way of coming up with $25k or more to cover the out-of-pocket expenses for a four-year college degree. Slashing the 401k contribution during the college years to cover an annual net price of $7,000 or $8,000 (e.g. University of Washington) isn't likely to be smarter than trying to manage that expense ahead of time.
I remember DH contributing 55% of his earnings to max his 401k, and maxing 2 Roth IRAs (using the refundable credits due to the maxed 401k) ten years ago. I didn't have access then to any employer retirement plan. I'd guess our combined earned income then was $45k.

Now our combined income is almost $75k, I've gained access to a SIMPLE IRA, we are both 50+ so have extra room in catchup contributions, and are maxing an HSA, so we have a much greater combined total to max everything. We've cut back on DH's contributions, from 50% to 30%, so I can max my SIMPLE IRA (at 80%) to try to shift at least some pre-tax $$ into my side (for a state tax break in retirement), max HSA after $1k employer contribution, and max 2 Roth IRAs (only about one from refundable credits now with fewer CTC /lower level EITC). And our DS4 in college does not have $25k or even $7k in OOP for college expenses; rather more like $2k at most.

Now, as this tax year will be the first one to be reported for DS5's first FAFSA, and by then we expect DS4 to no longer qualify as a dependent (dropping our family size from a high of 7 to 3), I expected the FAFSA math to become much more challenging for what looks like a single child of a couple making double what they did when we had 5 dependents. I've been plotting this a long time (first FAFSA was 2008), knew the special conditions, watched the Asset Protection amount drop from in the $40k range (covering a good size EF) to $6k or $7k now, saw the auto EFC cutoff retroactively dropped from $32k AGI (very comfortable to live in, then) to $23k (much too low to work for a family of 7) and gradually creep back up to $27k currently (possible for 3 now).

We've saved aggressively to tax deferred accounts. We were making up for lost time, getting a late start. In 2008/9 when DH's employer dropped the 401k match, he wanted to stop contributing his 5%. I wanted to contribute more to replace the lost match. Scrounged around and tweaked withholdings to double his contribution with little change to take home. Then doubled it again (turned off tax withholding, increased credits, matching state credits). And again. Once I saw the stacked refundable tax credit math, and began leveraging it (paid down ugly 9.75% mortgage 15 years early with refundable credits, then used credits for Roth IRAs and redirected mortgage payments to maxing 401k) , everything fell together, and we've accumulated enough that DH expects to retire midway thru this year. So I've run all the scenarios to make sure our AGI is below the auto EFC = 0 cutoff for DS5 for the next 4 years. The FAFSA Simplification was a surprise, and I've been parsing the spaghetti-code COBOLesque legalese for details. It looks like the new SAI = 0 will be at a more generous level, so we could relax our numbers, but we really don't need to (expenses) and probably don't want to (loss of refundable credits) except to allow larger Roth conversions.
AnEngineer
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Joined: Sat Jun 27, 2020 4:05 pm

Re: Why max 401k before 529?

Post by AnEngineer »

willthrill81 wrote: Tue Jan 12, 2021 2:20 pm
aristotelian wrote: Tue Jan 12, 2021 2:08 pm Because 401k has a bigger tax advantage. I would rather save $1 than $.78 at the same cost to my check. Money is fungible, so that means if I am able to save for retirement faster I will have more money to spend on college.
That's not accurate. In a state where 529 contributions are deductible, the 529 will come out ahead of using 401(k) funds or cash flow when used to pay for college expenses unless the total tax arbitrage with the 401(k) that is greater than the state tax rate. This has been demonstrated repeatedly in this thread.
I have not seen an analysis here that factors in the impact of using 529 on EFC.

Also, as paid tax reduces EFC as was pointed out in this thread, the effective marginal income tax is about halved (I believe actually x0.53) for those in phase out region.
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