Paying for college without 529

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Citifan
Posts: 40
Joined: Tue Oct 23, 2018 4:53 pm

Paying for college without 529

Post by Citifan »

Like most people, my financial situation has changed quite a bit from before I had kids. When my kids were born I was strapped financially and when I started looking into saving for their college I found the advice about saving for retirement first and the flexibility that the roth IRA offered (to also pay for college). So long story short, I chose to not open a 529 and instead fund Roth IRAs for me and my wife.

Over the years, my financial situation has improved. I began to hit many milestones, like maxing my 401k every year, maxing HSA family (and no withdrawals), becoming debt free except for 2.65% mortgage, continued funding Roth (eventually needing the backdoor Roth as my salary improved), and even maxing mega backdoor Roth. I feel great about the progress I’ve made, but it was always a struggle to save and I never felt like I had any more I could save.

So as a result I never opened a 529.

Time has flown by and it’s time to start paying for college and I’m faced with the decision of where to pull the funds from. I’d love some advice from like-minded folks here.

Withdraw contributions only from Roth
Pros: Tax Free/Penalty Free, Treat this as if I had opened a 529 instead of a Roth
Cons: Losing future gains in Roth

Withdraw from Inherited IRA (currently I’m allowed to stretch the RMDs over my lifetime)
Pros: This is money I have to withdraw eventually anyway
Cons: all taxable

Withdraw from HSA (Reimburse for prior years medical expenses)
Pros: Tax Free/Penalty Free
Cons: Losing future gains in HSA

Withdraw from Wife’s traditional IRA
Cons: All taxable
Pros: If I removed all of it, would allow for future backdoor Roth contributions for her

Student Loans
Cons: Interest/Debt
Pros: "Everybody does it"

Reduce 401k contributions (still enough for full company match)
Pros: This might allow me to pay the tuition without any withdrawals/loans, 401k balance is large so gains already outpace the contributions anyway
Cons: psychological issue of taking my foot off the gas on retirement, getting out of the habit of maxing 401k might make it tough to go back

Sell some stock in taxable account
Pros: long term capital gains only
Cons: Losing future gains/might need this money for other expenses

Other suggestions?
oktax
Posts: 144
Joined: Thu Dec 29, 2016 3:59 pm

Re: Paying for college without 529

Post by oktax »

If you can cash flow the payments, that’s the obvious answer. I’d probably pull from the inherited IRA second. I wouldn’t touch your retirement accounts.
avalpert1
Posts: 565
Joined: Sat Mar 02, 2024 6:15 pm

Re: Paying for college without 529

Post by avalpert1 »

Obviously cash flow first (including the RMDs on the inherited IRA) - after that, what is your tax bracket now and what do you anticipate in retirement. It comes down to the same question as choosing between traditional and roth contributions, if you would generally prefer traditional then you should roll back your roth contributions, use prior roth contributions/hsa - if you would generally prefer roth then you can use taxable investments, rollback your 401k contributions and take more from the inherited IRA if needed (though I doubt it would be). Unless you qualify for subsidized loans, I wouldn't use debt except as a last resort.
Topic Author
Citifan
Posts: 40
Joined: Tue Oct 23, 2018 4:53 pm

Re: Paying for college without 529

Post by Citifan »

avalpert1 wrote: Fri May 10, 2024 10:47 pm Obviously cash flow first (including the RMDs on the inherited IRA) - after that, what is your tax bracket now and what do you anticipate in retirement. It comes down to the same question as choosing between traditional and roth contributions, if you would generally prefer traditional then you should roll back your roth contributions, use prior roth contributions/hsa - if you would generally prefer roth then you can use taxable investments, rollback your 401k contributions and take more from the inherited IRA if needed (though I doubt it would be). Unless you qualify for subsidized loans, I wouldn't use debt except as a last resort.
Unfortunately no subsidized loans.

I'm in 24% federal bracket MFJ. Since the most recent tax cuts I've been maxing roth 401k and IRA backdoors. It just feels like taxes will be way higher in the future.

I imagine I'll be slightly lower in retirement but who knows? I do have a pension.

I also have some stock options/RSUs which will help in future years.

This first year I'm leaning towards lowering my 401k contribution to only get the company match and maybe that will be enough.
babystep
Posts: 850
Joined: Tue Apr 09, 2019 9:44 am

Re: Paying for college without 529

Post by babystep »

You didn't specify the amount of money needed every year as well as balances in inherited IRA, taxable and others.

I would switch Roth 401k to traditional 401k. This will save you 5.5k per year for the college.

In order to go above the 24% tax bracket, one has to withdraw/earn about 400k per year for MFJ which is not very likely for most folks. It is better to do traditional 401k.

If you have any stocks with minimal capital gains then you can sell those and cash flow it.

Withdrawing smaller amounts each year from stretch IRA might also be a good option.

I wouldn't withdraw from IRAs.
livesoft
Posts: 86368
Joined: Thu Mar 01, 2007 7:00 pm

Re: Paying for college without 529

Post by livesoft »

I think you did the right move to max out retirement plan contributions instead of worrying about 529 plans.

Not mentioned in your list is borrowing from a 401(k) in order to make 529 plan contributions now. We did this and it saved us some money plus kept the 401(k) "space" open as the loan was repaid.

Anyways, from what you have written I don't see any problem with you paying for college expenses. You really don't need any advice on this as what you will have to do will come naturally to you.
Wiki This signature message sponsored by sscritic: Learn to fish.
legalwriter1
Posts: 140
Joined: Tue Aug 16, 2022 9:59 am

Re: Paying for college without 529

Post by legalwriter1 »

I would withdraw from the inherited IRA or perhaps do a combination of cash flow/withdraw from inherited IRA. Tell the child that you are gifting the inheritance and encourage the child not to squander the opportunity. If the money is from a grandparent, this might have the psychological effect of helping the child to try harder in school.

Just account for taxes from the inherited IRA and withdraw a higher amount. Eventually someone is going to have to pay for the taxes. Don't take out loans for undergrad when you are sitting on an inherited IRA.

I received a small inheritance that I used to help pay for a bar exam prep course after I graduated from law school. I think using inheritance to pay for education is a nice legacy.
Dpmbball
Posts: 103
Joined: Fri Apr 19, 2024 3:50 pm

Re: Paying for college without 529

Post by Dpmbball »

Citifan wrote: Fri May 10, 2024 10:29 pm Like most people, my financial situation has changed quite a bit from before I had kids. When my kids were born I was strapped financially and when I started looking into saving for their college I found the advice about saving for retirement first and the flexibility that the roth IRA offered (to also pay for college). So long story short, I chose to not open a 529 and instead fund Roth IRAs for me and my wife.

Over the years, my financial situation has improved. I began to hit many milestones, like maxing my 401k every year, maxing HSA family (and no withdrawals), becoming debt free except for 2.65% mortgage, continued funding Roth (eventually needing the backdoor Roth as my salary improved), and even maxing mega backdoor Roth. I feel great about the progress I’ve made, but it was always a struggle to save and I never felt like I had any more I could save.

So as a result I never opened a 529.

Time has flown by and it’s time to start paying for college and I’m faced with the decision of where to pull the funds from. I’d love some advice from like-minded folks here.

Withdraw contributions only from Roth
Pros: Tax Free/Penalty Free, Treat this as if I had opened a 529 instead of a Roth
Cons: Losing future gains in Roth

Withdraw from Inherited IRA (currently I’m allowed to stretch the RMDs over my lifetime)
Pros: This is money I have to withdraw eventually anyway
Cons: all taxable

Withdraw from HSA (Reimburse for prior years medical expenses)
Pros: Tax Free/Penalty Free
Cons: Losing future gains in HSA

Withdraw from Wife’s traditional IRA
Cons: All taxable
Pros: If I removed all of it, would allow for future backdoor Roth contributions for her

Student Loans
Cons: Interest/Debt
Pros: "Everybody does it"

Reduce 401k contributions (still enough for full company match)
Pros: This might allow me to pay the tuition without any withdrawals/loans, 401k balance is large so gains already outpace the contributions anyway
Cons: psychological issue of taking my foot off the gas on retirement, getting out of the habit of maxing 401k might make it tough to go back

Sell some stock in taxable account
Pros: long term capital gains only
Cons: Losing future gains/might need this money for other expenses

Other suggestions?
I would reduce 401k contributions to just employer match.

You chose to have kids and want them to go to college. Did you think you could max out all saving/retirement accounts in perpetuity AND still pay for their school?

If so it’s rare and most parents can’t do it fund both their accounts to max and pay for kids college in full. Employer parents that is - it’s rare.

Let your accounts grow and fund what you can
queenofthemadhouse
Posts: 326
Joined: Fri Jun 04, 2021 5:26 pm

Re: Paying for college without 529

Post by queenofthemadhouse »

Search threads here on back door AOTC. It your taxable account is large enough, this may be a good option.
delamer
Posts: 17683
Joined: Tue Feb 08, 2011 5:13 pm

Re: Paying for college without 529

Post by delamer »

How far from retirement are you? Do you have an estimate of how big a portfolio you’ll need to cover your residual expenses (total expenses minus pensions and Social Security) in retirement?

There can be a knee-jerk reaction on this forum to max out all retirement and HSA accounts and not touch them except as a last resort. But those decisions should reflect the realities of your personal situation and goals. Reducing 401(k) contributions to get just the match could make sense for you, as a partial solution.

Roths are precious real estate, without a doubt. But if you funded them in lieu of 529 plans, then you should consider using them that way.

And sometimes the answer is to use some of each type of account . . .
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Topic Author
Citifan
Posts: 40
Joined: Tue Oct 23, 2018 4:53 pm

Re: Paying for college without 529

Post by Citifan »

queenofthemadhouse wrote: Sat May 11, 2024 3:54 pm Search threads here on back door AOTC. It your taxable account is large enough, this may be a good option.
I am so glad I asked this question and got these answers. I was not even thinking along these lines. I've been reading up on the threads regarding the student taking the aotc. This seems like a really smart idea.

My son is 18, so no longer a child. He should have some earned income this summer. Hopefully 6k. Am I understanding correctly that I could gift him stock with enough capital gains to bring him up to 14600 (std deduction for single) and he would owe 0 in taxes when he sells it to pay tuition? And the AOTC would be on top of this so potentially even more could be gifted? (Not going over 34k total value)

And by not claiming him as a dependent I'm only losing the $500 tax credit?

Is there any other downside to not claiming him? I'm in NJ.
queenofthemadhouse
Posts: 326
Joined: Fri Jun 04, 2021 5:26 pm

Re: Paying for college without 529

Post by queenofthemadhouse »

You might add ‘back door AOTC’ to your title to bat signal those more knowledgeable on it.
Post Reply