FAFSA student aid. Should I forgo Roth and use up brokerage account?

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cshell2
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

mmmodem wrote: Tue Apr 27, 2021 2:34 pm
cshell2 wrote: Tue Apr 27, 2021 12:51 pm
mmmodem wrote: Tue Apr 27, 2021 12:42 pm
miamivice wrote: Tue Apr 27, 2021 10:16 am Can you explain to me how one pulls $66k out of retirement accounts without incurring penalties or taxes? I am familiar with Roth IRA contributions. Have not figured out how other types of retirement money can be used to pay for college without penalty.
https://www.madfientist.com/how-to-acce ... nds-early/
Plenty of ways.
Those two examples didn't seem particularly helpful for me for using retirement money for paying for college because they both started with Step 1. When you quit your job.

I'm not going to quit my job to set up a Roth Conversion ladder or 72t withdrawals to pay for college.
Cash flow first. Stop contributing to retirement accounts as necessary if you are still working. Use Roth IRA contributions as necessary. If you are unemployed, then consider using other retirement accounts to pay for college.
Is it not better to have dedicated college savings so you don't have to stop putting money in retirement those years? It seems like even a taxable account would be better than just skipping saving entirely. I can maybe understand if you're not using all your space, but if you're already maxing retirement, why not?

And again, in my situation it would be absolutely horrible for our financial aid to stop contributing to retirement. People near the SNT and Auto-Zero thresholds could really be shooting themselves in the foot going the cash flow route.
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mmmodem
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mmmodem »

cshell2 wrote: Tue Apr 27, 2021 3:23 pm Is it not better to have dedicated college savings so you don't have to stop putting money in retirement those years?
It seems like even a taxable account would be better than just skipping saving entirely. I can maybe understand if you're not using all your space, but if you're already maxing retirement, why not?
Agreed. I am not against using the 529 but only when one has already maxed out retirement accounts. I'm sure there are exceptions as the tax code is complicated especially if one gets a state tax deduction for 529s.
cshell2 wrote: Tue Apr 27, 2021 3:23 pm And again, in my situation it would be absolutely horrible for our financial aid to stop contributing to retirement. People near the SNT and Auto-Zero thresholds could really be shooting themselves in the foot going the cash flow route.
Not necessarily. I see 2 scenarios for people near SNT and Auto-Zero thresholds

Scenario 1: Save in 529 before kids go to college.
Less money in retirement accounts
Continue to save in retirement accounts to stay under thresholds
Pay for college from 529

Scenario 2: Max out retirement accounts before kids go to college
More money in retirement accounts
Continue to save in retirement accounts to stay under threshold
Pay for college from Roth IRA

At the end of both scenarios college will be paid for, financial aid will be the same and retirement accounts will be the same. The preference for the latter is because it is not knowable whether one will be employed when they go to college.
miamivice
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by miamivice »

mmmodem wrote: Wed Apr 28, 2021 10:44 am Scenario 2: Max out retirement accounts before kids go to college
More money in retirement accounts
Continue to save in retirement accounts to stay under threshold
Pay for college from Roth IRA
The issue that I have with this scenario is that it probably works fine for 1 kid, but less likely for 2. My projection for college is that it will cost somewhere around $150,000 per kid by the time our kids are in college (10 years from now). We have 2 kids, so we need about $300,000 for college to fully pay their schooling. We can argue about a child's portion, but let's say for now that we are planning on paying for all of it.

One can contribute about $12,000 per year to a Roth IRA or about $216,000. So we could probably pay for college for 1 kid from Roth IRA contributions, but not for 2 kids. Three or four kids would be really tough to pay a decent amount just from Roth IRA contributions.
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TomatoTomahto
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by TomatoTomahto »

cshell2 wrote: Tue Apr 27, 2021 3:23 pm in my situation it would be absolutely horrible for our financial aid to stop contributing to retirement. People near the SNT and Auto-Zero thresholds could really be shooting themselves in the foot going the cash flow route.
I’m not usually one of the posters who complains about TLA (3 letter acronyms), but I was scratching my head wondering: Special Needs Trust???? Google helped me find Simplified Needs Test, but I think this is a case where the TLA made things obscure.
I get the FI part but not the RE part of FIRE.
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teen persuasion
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by teen persuasion »

miamivice wrote: Wed Apr 28, 2021 10:51 am
mmmodem wrote: Wed Apr 28, 2021 10:44 am Scenario 2: Max out retirement accounts before kids go to college
More money in retirement accounts
Continue to save in retirement accounts to stay under threshold
Pay for college from Roth IRA
The issue that I have with this scenario is that it probably works fine for 1 kid, but less likely for 2. My projection for college is that it will cost somewhere around $150,000 per kid by the time our kids are in college (10 years from now). We have 2 kids, so we need about $300,000 for college to fully pay their schooling. We can argue about a child's portion, but let's say for now that we are planning on paying for all of it.

One can contribute about $12,000 per year to a Roth IRA or about $216,000. So we could probably pay for college for 1 kid from Roth IRA contributions, but not for 2 kids. Three or four kids would be really tough to pay a decent amount just from Roth IRA contributions.
I'm confused. If you are planning to pay for college in full, then you must be expecting zero financial aid, so managing FAFSA inputs is pointless. So just use the 529, you are the poster child for it.

The discussions about saving for retirement vs college are about those in the middle range - not low income who will qualify for max college aid, not high income who are filling all tax deferred accounts and have more to save.

If you have to decide where to put your limited saving $$, retirement comes long before either taxable or 529 - because both of those are penalized on the FAFSA.
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mmmodem
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mmmodem »

miamivice wrote: Wed Apr 28, 2021 10:51 am The issue that I have with this scenario is that it probably works fine for 1 kid, but less likely for 2. My projection for college is that it will cost somewhere around $150,000 per kid by the time our kids are in college (10 years from now). We have 2 kids, so we need about $300,000 for college to fully pay their schooling. We can argue about a child's portion, but let's say for now that we are planning on paying for all of it.

One can contribute about $12,000 per year to a Roth IRA or about $216,000. So we could probably pay for college for 1 kid from Roth IRA contributions, but not for 2 kids. Three or four kids would be really tough to pay a decent amount just from Roth IRA contributions.
Under those condition, if one intends on paying $300k for college then I would not disagree on using a 529 before maxing out retirement accounts.

I see retirement and children's college savings as the primary responsibility of the parent. Therefore, I look at both as one fungible bucket. Total savings in the bucket is higher if one maximizes retirement accounts before utilizing 529. In other words, the money coming out of my pocket to pay for college is less if I maximize retirement accounts.

If one looks at each bucket separately and intends to fill the college bucket to $300k first, then using a 529 would be prudent. Total savings combined would be lower versus above. But I can see why one would want to separate it this way, therefore, I do not disagree with you.
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teen persuasion
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by teen persuasion »

mmmodem wrote: Wed Apr 28, 2021 10:44 am
cshell2 wrote: Tue Apr 27, 2021 3:23 pm Is it not better to have dedicated college savings so you don't have to stop putting money in retirement those years?
It seems like even a taxable account would be better than just skipping saving entirely. I can maybe understand if you're not using all your space, but if you're already maxing retirement, why not?
Agreed. I am not against using the 529 but only when one has already maxed out retirement accounts. I'm sure there are exceptions as the tax code is complicated especially if one gets a state tax deduction for 529s.
cshell2 wrote: Tue Apr 27, 2021 3:23 pm And again, in my situation it would be absolutely horrible for our financial aid to stop contributing to retirement. People near the SNT and Auto-Zero thresholds could really be shooting themselves in the foot going the cash flow route.
Not necessarily. I see 2 scenarios for people near SNT and Auto-Zero thresholds

Scenario 1: Save in 529 before kids go to college.
Less money in retirement accounts
Continue to save in retirement accounts to stay under thresholds
Pay for college from 529

Scenario 2: Max out retirement accounts before kids go to college
More money in retirement accounts
Continue to save in retirement accounts to stay under threshold
Pay for college from Roth IRA

At the end of both scenarios college will be paid for, financial aid will be the same and retirement accounts will be the same. The preference for the latter is because it is not knowable whether one will be employed when they go to college.
If they qualify for auto EFC = 0, both scenarios have the same EFC (zero).

But if they can only stay below the SNT threshold, the calculated EFC will be higher in the Roth version - the Roth withdrawals will count as untaxed income, which is added to Available Income. You could use this option in later college years, when you are beyond all prior-prior year reporting, without increasing EFC, but not all 4 years, and not with overlapping children.
miamivice
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by miamivice »

teen persuasion wrote: Wed Apr 28, 2021 11:27 am
miamivice wrote: Wed Apr 28, 2021 10:51 am
mmmodem wrote: Wed Apr 28, 2021 10:44 am Scenario 2: Max out retirement accounts before kids go to college
More money in retirement accounts
Continue to save in retirement accounts to stay under threshold
Pay for college from Roth IRA
The issue that I have with this scenario is that it probably works fine for 1 kid, but less likely for 2. My projection for college is that it will cost somewhere around $150,000 per kid by the time our kids are in college (10 years from now). We have 2 kids, so we need about $300,000 for college to fully pay their schooling. We can argue about a child's portion, but let's say for now that we are planning on paying for all of it.

One can contribute about $12,000 per year to a Roth IRA or about $216,000. So we could probably pay for college for 1 kid from Roth IRA contributions, but not for 2 kids. Three or four kids would be really tough to pay a decent amount just from Roth IRA contributions.
I'm confused. If you are planning to pay for college in full, then you must be expecting zero financial aid, so managing FAFSA inputs is pointless. So just use the 529, you are the poster child for it.

The discussions about saving for retirement vs college are about those in the middle range - not low income who will qualify for max college aid, not high income who are filling all tax deferred accounts and have more to save.

If you have to decide where to put your limited saving $$, retirement comes long before either taxable or 529 - because both of those are penalized on the FAFSA.
KlangFool's argument is against the FAFSA for all but the uber rich. When my kids were in the womb, we definitely weren't uber rich, but I didn't think we were poor enough to qualify for based financial aid. Hoping for some merit based scholarships but not counting on much in this department.

We don't fill all retirement accounts. Getting closer each year, but we are 2 income so we have 2x the amount of retirement space as a single income family.
cshell2
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by cshell2 »

TomatoTomahto wrote: Wed Apr 28, 2021 10:51 am
cshell2 wrote: Tue Apr 27, 2021 3:23 pm in my situation it would be absolutely horrible for our financial aid to stop contributing to retirement. People near the SNT and Auto-Zero thresholds could really be shooting themselves in the foot going the cash flow route.
I’m not usually one of the posters who complains about TLA (3 letter acronyms), but I was scratching my head wondering: Special Needs Trust???? Google helped me find Simplified Needs Test, but I think this is a case where the TLA made things obscure.
I normally spell them all out, but their was discussion about Simplified Needs Test earlier in the thread.
FoolStreet
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by FoolStreet »

mmmodem wrote: Wed Apr 28, 2021 11:41 am
miamivice wrote: Wed Apr 28, 2021 10:51 am The issue that I have with this scenario is that it probably works fine for 1 kid, but less likely for 2. My projection for college is that it will cost somewhere around $150,000 per kid by the time our kids are in college (10 years from now). We have 2 kids, so we need about $300,000 for college to fully pay their schooling. We can argue about a child's portion, but let's say for now that we are planning on paying for all of it.

One can contribute about $12,000 per year to a Roth IRA or about $216,000. So we could probably pay for college for 1 kid from Roth IRA contributions, but not for 2 kids. Three or four kids would be really tough to pay a decent amount just from Roth IRA contributions.
Under those condition, if one intends on paying $300k for college then I would not disagree on using a 529 before maxing out retirement accounts.

I see retirement and children's college savings as the primary responsibility of the parent. Therefore, I look at both as one fungible bucket. Total savings in the bucket is higher if one maximizes retirement accounts before utilizing 529. In other words, the money coming out of my pocket to pay for college is less if I maximize retirement accounts.

If one looks at each bucket separately and intends to fill the college bucket to $300k first, then using a 529 would be prudent. Total savings combined would be lower versus above. But I can see why one would want to separate it this way, therefore, I do not disagree with you.
So which is better? Putting money into mega back door Roth? Or 529?
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mmmodem
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Re: FAFSA student aid. Should I forgo Roth and use up brokerage account?

Post by mmmodem »

FoolStreet wrote: Mon May 03, 2021 9:44 am So which is better? Putting money into mega back door Roth? Or 529?
I would fund a mega back door Roth before a 529. More reading here:
viewtopic.php?p=4534715#p4534715
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