New job- cash out ROTH 457 for college savings?

[TTGO808]

I have a Roth 457 with Calpers and am taking a new job at a different company. My understanding is that I can withdraw this money upon separation from service. My husband is a teacher and will have a CalSTRS pension. I will have a Calpers pension that I won’t take until I’m 62 in 16 years. We have about 900k saved in pretax 403bs and 350k in Roth IRAs and have about 12 more years to work. The pensions and current retirement savings will cover our expenses. We also have undersaved for college for three kids and are suspending retirement savings to add to the 529s. Should I withdraw the money in my Roth 457 and add it to the 529s or brokerage account?

Since it is Roth, how will the withdrawal be taxed? How might this affect my tax return next year as that is the one we will use for the FAFSA. Oldest is finishing 10th grade. Youngest is in kindergarten.

[tomsense76]

What about rolling over the Roth 457b to a Roth IRA?

[celia]

Your Roth accounts have the most valuable dollars since they can continue to grow for at least another 12 years TAX-FREE!!! I wouldn’t touch them unless you want to transfer them to Roth IRAs and let them grow there instead.

In California, 529s don’t make as much sense compared to other states as California doesn’t give you a tax-deduction on the contributions like the IRS does. But they do have the “advantage” of having withdrawals be tax-free federally if spent on college costs. I believe Californica will tax the withdrawals that are capital gains.

529 Plans by State

Or you could save for college in Taxable instead and fund college out of current income each year. You’re unlikely to get financial aid (except loans) at California state colleges and universities since there are so many more needy students who have less resources than your family’s. But things would probably be different if your kids went to private colleges instead.

[thedaybeforetoday]

Your Roth accounts have the most valuable dollars since they can continue to grow for at least another 12 years TAX-FREE!!! I wouldn’t touch them unless you want to transfer them to Roth IRAs and let them grow there instead.

In California, 529s don’t make as much sense compared to other states as California doesn’t give you a tax-deduction on the contributions like the IRS does. But they do have the “advantage” of having withdrawals be tax-free federally if spent on college costs. I believe Californica will tax the withdrawals that are capital gains.

529 Plans by State

Or you could save for college in Taxable instead and fund college out of current income each year. You’re unlikely to get financial aid (except loans) at California state colleges and universities since there are so many more needy students who have less resources than your family’s. But things would probably be different if your kids went to private colleges instead.

Based on the information we have from the OP at this point, the bolded is unknown as financial aid is based mainly on income and after tax savings. Funds in any retirement vehicle aren't part of the FAFSA formula. Funds in after tax accounts will drag down need based aid, however, so without knowing the rest of the OP's financial situation, best to keep in the Roth vehicle. https://www.unigo.com/admissions-advice ... -aid-forms

OP: Keep the money in some type of Roth of your choosing, either where the funds are currently or roll over to a Roth IRA you control. Funds in a Roth currently don't impact financial aid determination and are the most valuable of all retirement funds as poster mentioned.

[pizzy]

I have a Roth 457 with Calpers and am taking a new job at a different company. My understanding is that I can withdraw this money upon separation from service. My husband is a teacher and will have a CalSTRS pension. I will have a Calpers pension that I won’t take until I’m 62 in 16 years. We have about 900k saved in pretax 403bs and 350k in Roth IRAs and have about 12 more years to work. The pensions and current retirement savings will cover our expenses. We also have undersaved for college for three kids and are suspending retirement savings to add to the 529s. Should I withdraw the money in my Roth 457 and add it to the 529s or brokerage account?

Since it is Roth, how will the withdrawal be taxed? How might this affect my tax return next year as that is the one we will use for the FAFSA. Oldest is finishing 10th grade. Youngest is in kindergarten.

Prior to cutting back on retirement savings, how much were you saving per year?

[Admiral]

Terrible idea. You are 46 (correct?) and with a 5 year old. Your pension is far, far away. Worry about paying for that kid's college later. I'd argue you should be saving even more in Roth for that kid's college, since the 529 is fairly useless to you, tax wise.

For now, take loans if needed for the other kids, and then if you face a pinch later, use Roth monies to pay them down or off. You can't get loans for your retirement.

[TTGO808]

OP here. Thank you for the replies. Prior to pausing retirement savings we were saving about 80k per year between 457s, 403bs, Roth IRAs and HSA. We earn too much now to contribute to the Roth IRAs and anticipate we will get zero aid to CA public universities. We are budgeting for 40k per year for the 8 years the older kids are in school. We have saved about 80k so far in the 529s and plan to stash another 40k per year the next two years. We will cash flow the rest while they are in college.

Instead of rolling over the 457 Roth to my Roth IRA (a paperwork pain) I thought I’d just withdraw it when I leave my job and add it to the 529s. There’s only about 16k in there. I will roll the rest of the pretax 457 (100k) into a tIRA at Vanguard.

I’ve always saved in those retirement vehicles since I started working, so it feels weird to stop saving in them. I will still max the HSA, but I’m getting to the point with the older kids, now 14 and 16, that I want to maximize my take home pay for college and travel while they’re still home with us! Plus, those teens are expensive with their sports, inflated food bills and added insurance.

I know some of you will tell me I should keep saving for my retirement and some will say I can’t afford 40k a year for college.
At 46 I am questioning what money is for. Our pensions should be enough so I will feel silly if I skimp on living now only to be sitting on pile of retirement funds in my 70s trying to avoid RMDs.

[pizzy]

Prior to pausing retirement savings we were saving about 80k per year

We are budgeting for 40k per year for the 8 years the older kids are in school. We have saved about 80k so far in the 529s and plan to stash another 40k per year the next two years. We will cash flow the rest while they are in college.

Sounds like you keep your retirement contributions at full throttle until the oldest starts college and then cash flow the entire thing by pausing retirement contributions AT THAT POINT.

You have $80,000 head start and room to cash flow another ~$80,000 (less taxes) each year.

There is no need to stop retirement contributions prematurely.

[GreendaleCC]

I believe Californica will tax the withdrawals that are capital gains.

Who told you this about 529 plan withdrawals in California? This is not true.

California does tax the earnings portion of 529 plan withdrawals used for K-12 tuition, but that’s not being discussed here.

[ThankYouJack]

Instead of transferring now to a 529, I'd just earmark some of the Roth money for college. Then when college comes, I'd pay for it first out of my current 529, then cashflow and then Roth account (if needed). I wouldn't want to overfund the 529 which would be more costly than overfunding a Roth

[TTGO808]

If any Roth funds are used for college expenses, how does that get treated on taxes or the following year’s FAFSA?

[Pdxnative]

If any Roth funds are used for college expenses, how does that get treated on taxes or the following year’s FAFSA?

If you think you’ll be eligible for need-based aid, planning to withdraw from a Roth to fund college is usually a bad option (unless done in the last few years of the last kid’s college years, when income is no longer “seen”). It is treated as untaxed income by most of the formulas and will reduce aid by 40-50% per dollar of that income reported.

Retirement accounts are great for shielding assets from financial aid formulas, as those funds are ignored. If in taxable, 5-6% of assets are considered available each year. But if you will need to funds for college, you’d have been better off having them in taxable given the way distributions are treated.

But do you think it’s likely your kids will end up at schools giving great need-based aid to middle and upper income families? Most of those schools are highly selective—Stanford, MIT, etc. If your kids are really outstanding students then planning for this possibility is worthwhile. If they are just very good students, chances are pretty good that you’ll be looking for merit aid not need-based aid. In that case you probably don’t need to worry too much about need based aid formulas.

I definitely applaud your balanced approach and agree that when one has sufficient resources for retirement it makes sense to invest in the time you have with your kids still at home, and on college educations that will enrich their lives.

[ThankYouJack]

If any Roth funds are used for college expenses, how does that get treated on taxes or the following year’s FAFSA?

Based on what you wrote before, I thought financial aid was out of the question.

We earn too much now to contribute to the Roth IRAs and anticipate we will get zero aid to CA public universities. We are budgeting for 40k per year for the 8 years the older kids are in school. We have saved about 80k so far in the 529s and plan to stash another 40k per year the next two years. We will cash flow the rest while they are in college.

If you can cashflow college, won't your EFC be full price?

[celia]

If any Roth funds are used for college expenses, how does that get treated on taxes or the following year’s FAFSA?

If you withdraw before 59.5 or the Roth 457/ IRA is less than 5 years old, the contributions will be tax-free (since those dollars were already taxed). But the growth will be taxed as ordinary income (not as capital gains) plus there is an early withdrawal penalty of 10%.

I discourage you from touching the Roth since those are the most valuable dollars that should be the last dollars spent after you are 59.5!!!

Transferring the Roth 457 to an IRA is a one-time event. Of course, you have to fill out some paperwork, but you would have to that even if you withdrew to Taxable as you were previously thinking.

My knowledge of FAFSA is long out of date.

[FiveK]

We earn too much now to contribute to the Roth IRAs....

Have you looked at using the backdoor Roth process?

[retiredjg]

Instead of rolling over the 457 Roth to my Roth IRA (a paperwork pain) I thought I’d just withdraw it when I leave my job and add it to the 529s. There’s only about 16k in there. I will roll the rest of the pretax 457 (100k) into a tIRA at Vanguard.

I suggest that you do not do this. You are not yet 59.5 so the earnings in the Roth 457 are still taxable if you withdraw the money from the Roth 457.

You can roll it to Roth IRA with no tax, but then it become part of the Roth IRA withdrawal train - where there are certain rules about the order of the withdrawals. Not knowing what you have in Roth IRA and how it got there, it is difficult to know what your order is required to be.

A better idea is to leave the money where it is till college time comes, then decide what to do with it. Taking it out of 457 and putting it into 529 makes no sense to me.

[retiredjg]

I will roll the rest of the pretax 457 (100k) into a tIRA at Vanguard.

Don't do this either. If you leave it there, you can take it out anytime with no penalty. You just pay tax. If you roll it to IRA, you lose that ability until you are age 59.5.

Why are you in such a hurry to unnecessarily take the money out of the 457? Are the fees high or something?

[TTGO808]

Thanks, retiredJg! I had forgotten about preserving optionalitt by leaving the 457 funds with CAlPers. In this way can be withdrawn if I retire earlier than expected.

The fees are a little higher than vanguard and I wanted to streamline and simplify by moving the accounts to the same house. I do agree that I should protect the option to draw it earlier.

[teen persuasion]

You can work thru the current EFC formulas to see how earned income, unearned income, and assets (not retirement accounts) affect EFC. https://fsapartners.ed.gov/sites/defaul ... aGuide.pdf


Note that FAFSA Simplification is slowly kicking in. EFC will change to SAI, and some parts of the formula will go away (state tax allowance) and thresholds will change soon. It's not yet clear how this will all shake out.