mortgage/college/retirement does our strategy make sense?

**NJDebbie** · 08-26-2010, 03:40 PM

Firstable, congratulations on being so close to paying off your mortgage. I wish we were that close! Hopefully DisneySteve and Jim_Ohio will log on later and provide you with what I think is sound advice.

**disneysteve** · 08-26-2010, 04:40 PM

Thamk you Debbie. I'm busy at the moment waiting for the Main Street Electrical Parade to start at Disney World but I'll respond later or tomorrow. I'm sure Jim will be along.

**jIM_Ohio** · 08-26-2010, 04:46 PM

Originally posted by frugalgirl View Post

Pretty new here but have been reading for a few months and learning much from all of you here. I am hoping to get some good insight into our situation. My Dh and I have 28 months left on our mortgage which is $1750 per month. We have always maxed out his 401k (and mine when I worked full time) and he gets an 8% employer match regardless of whether he contributes or not. We cannot get into the 15% tax bracket with deductions as our income fluctuates between 135 k to 120 k per year. We have a small Roth that we have put a little money into but we cannot afford to save more than we do currently. We have about $400k combined in our 401k s. We feel like we need to have 1.5 Million in retirement. I feel like we are never going to get there because of the lack of growth in the markets. We have 2 children. DH is a college professor and is 46 yo and I am 42 yo. We would like to retire when DH reaches 62. He has a terrific benefit that will pay tuition for 2 kids for 4 years each up to 66% of his university's tuition for them to go anywhere they want. The benefit will pay 100% of the tuition where he works if they can get admitted - currently about $40,000 per year. We would be required to pay income tax on this benefit as well as their room and board. We have not saved anything yet for college. When the mortgage is paid off, we will have 4 years until kid #1 enters college and 7 years until kid #2 gets there. We are trying to decide if, once the mortgage is paid off, we should:
A. throw all of that mortgage money into retirement savings like Roths and other investments for both of us and then cash flow the college expenses
B. start a 529 for the kids with the money that was going to the mortgage
C. a combination of the two.
D. refinance to a ridiculously small mortgage payment and start saving more now - I am not a fan of this idea as getting rid of that mortgage is a fantasy fulfilled for me!

My sense is that we should focus on retirement to get our money in there and earning for as many years as possible. Our tax situation makes me think that maybe we should try to get some deductions with the 529 or 529 and Roth combination. Not sure what is best. Advice? What else should we be thinking about with this scenario? Are we doing anything right? I am trying to find full-time employment again which would be another real bonus for us.

The answer is C. Combination

the paid off mortgage in and of itself is a major financial milestone- do not delay it.
The current retirement balance is probably enough (400k in 16 years will be real close to 1.5 M if you do nothing.

With the $1750/mo once mortgage is paid off, I would

put $500/mo into Roth for spouse 1
put $500/mo into Roth for spouse 2
put $350/mo into 529 for kid 1
put $250/mo into 529 for kid 2
put $150/mo into general taxable savings (mutual fund works, money market works, muni bonds work)

Logic is that kid 2 gets 3 more years of contributions, so its OK if that account gets a little less.

Logic is that the taxable savings should accumulate enough to take advantage of federal tax credits as well (do not pay 100% of tuition from 529).

**disneysteve** · 08-26-2010, 07:01 PM

Ok, I'm back from the Magic Kingdom (unfortunately). First, congrats on being so close to being mortgage-free. That's great. I'm not entirely sure I agree with Jim's breakdown. If your husband's job will pay at least 66% of 40K (current value) for any college your kids attend, I'm not sure I would tie up money in a 529. You run a pretty significant risk of overfunding the accounts and having to pay a penalty to get the money back. It might be reasonable to open one 529 for kid #1 and if the money doesn't get used, change the beneficiary to kid #2 later. You should be able to cash flow college otherwise. Also, though Jim says $500/month to each Roth, it is actually $416.67/month with the current limit of $5,000/year. That's an extra $166/month available even after the Roths are maxed. So after maxing Roths, that gives you $166+750=$916/month free for savings.

The one thing that might alter my thinking is a state tax deduction for the 529 contributions. Personally, my state doesn't offer a deduction so it saves me nothing upfront to fund my daughter's 529. If your state lets you deduct 529 contributions, that might make them worthwhile, but I'd still be very careful not to put too much in due to the great benefit you already have to pay for college.

**greenskeeper** · 08-27-2010, 12:59 AM

pay yourself first.

It would be nice to put your kids through college but it's not required and you won't be a bad parent if you can't afford it. Plenty of student loans out there. Thats how I got my college degree and paid off my student loans 5 years early.

**frugalgirl** · 08-27-2010, 03:28 AM

Thanks for the replies.

We'll start looking into the 529 plan for at least the older child now so we'll be ready when we get the cash to fund it and use most of the extra mortgage for retirement savings. We still have to pay room and board which currently runs about 8-12K depending on the schools that they may likely attend and we have to come up with the tax payment on the tuition benefit itself. I am thinking that we should at least get the room and board into the 529 and then use some of our extra cash for the taxes we'll have to pay on the tuition benefit. Plus, if one of the kids does not finish in 4 years, we want to be ready to cover that with cash since the benefit won't. Husband has many good options for 529 and investment options through TIAA-CREF that we will probably use. In the meantime, we will keep doing what we have been doing and I hope to get back to full time to add to the savings.

**snshijuptr** · 08-27-2010, 04:15 AM

A couple things:

1) How many years until your children go to college? My university used to offer a similar deal, and then they took it away. Have a flexible back up plan (maybe your HELOC) in case this happens. This will also serve you if you child decides to go to trade school or junior college.

2) Before you get a TIA-CREF 529, see if there is a tax benefit in your state. Kiplinger has a nice breakdown of 529 advantages by state:
Best 529, College-Savings, Prepaid Plans - Kiplinger

Also, plans are much varied by the flexibility (number of options) they offer. Shop around.

**disneysteve** · 08-27-2010, 04:46 AM

Originally posted by frugalgirl View Post

We would be required to pay income tax on this benefit as well as their room and board. We have not saved anything yet for college.

Originally posted by frugalgirl View Post

We still have to pay room and board which currently runs about 8-12K depending on the schools that they may likely attend

Husband has many good options for 529 and investment options through TIAA-CREF that we will probably use.

I forgot about the room and board piece of the puzzle. Yes, if you are responsible for that, then a 529 isn't a bad idea. I agree that before choosing a 529, you should check on your state's tax deduction if any. If there is one, it is probably best to use your state's plan.

I think one thing you and your husband need to decide, and make clear to your kids, is what percentage of college costs you will cover. The wording of your posts makes it sound like you intend to cover 100% of costs no matter what.

if one of the kids does not finish in 4 years, we want to be ready to cover that with cash

Why? If one of them chooses to drag things out, let them pay the way, or at least help pay the way? We've made it clear to our daughter that college is a 4-year endeavor. We won't be giving her an unconditional free ride .

**frugalgirl** · 08-27-2010, 05:39 AM

We will check into our state's 529 plan but, from what I remember from checking into it five years ago, it was restricted to in-state schools only. Things change so I will look into it again.

Originally posted by disneysteve View Post

Why? If one of them chooses to drag things out, let them pay the way, or at least help pay the way? We've made it clear to our daughter that college is a 4-year endeavor. We won't be giving her an unconditional free ride .

The discussion about this topic will happen but the kids are a little young to talk to about it just yet. They are both excellent students and hard workers and know that school is their number one priority. We make them have an extracurricular intellectual activity as well as a physical one (chess and soccer for one; Latin, chess, and baseball for the other) to stress the importance of learning and working hard. The allowable extra year in college would be for a five-year program like pharmacy that we would be fine with paying for. Messing around and not being serious students is a completely different story as you are pointing out. We will not support that. It is a good suggestion to talk with them about it when the time is right.

**disneysteve** · 08-27-2010, 05:49 AM

Originally posted by frugalgirl View Post

We will check into our state's 529 plan but, from what I remember from checking into it five years ago, it was restricted to in-state schools only. Things change so I will look into it again.

Definitely check. The rules do change from time to time. Even the plans themselves change. For example, we are in the NY 529 plan. It was originally a TIAA-CREF plan but is now administered by Vanguard.

The allowable extra year in college would be for a five-year program like pharmacy that we would be fine with paying for. Messing around and not being serious students is a completely different story as you are pointing out. We will not support that. It is a good suggestion to talk with them about it when the time is right.

Agreed. You just need to make sure that everybody is on the same page and knows the ground rules. When I say we've told our daughter that college is a 4-year deal, I mean that if she pursues a traditional 4-year degree, she will be expected to earn it in 4 years. Of course, we will not likely be in a position to pay her way 100% so she will have to earn and/or borrow along the way.

**frugalgirl** · 08-27-2010, 05:57 AM

Originally posted by snshijuptr View Post

A couple things:

1) How many years until your children go to college? My university used to offer a similar deal, and then they took it away. Have a flexible back up plan (maybe your HELOC) in case this happens. This will also serve you if you child decides to go to trade school or junior college.

The kids are currently in 4th and 7th grades. This benefit is guaranteed - hopefully this holds true. Employees that started after my husband were given progressively scaled down versions of the tuition benefit so the university has been cutting back significantly. I am assuming that if they had planned on taking our benefit away that they would have done something to reduce it already to match the benefits of the incoming employees. Could be wishful thinking. Regardless, we will wait and address that problem if we have to. I think we are doing all we can at this point as far as saving. I do think that putting a portion of our money into accounts that are accessible is going to be part of our retirement savings strategy and will be available should we need them.

Thanks for the link to the 529 plans. I will be looking into them further but at first glance we live in PA where it says that we have income tax savings for any plan we choose. When we had discussed these plans a couple of years ago we were interested in the MI plan. I will have to go back and review everything again. Thanks!

**disneysteve** · 08-27-2010, 05:59 AM

Savingforcollege.com - The internet guide to funding college and Section 529 college savings plans. is also a great site for researching 529 plans.

**jpg7n16** · 08-27-2010, 06:35 AM

I'd think the large portion of your decision should be based on where the kids will go to college.

If abroad to a different school, you should save in 529 plan for the younger kid, and something short term for the older.

Why short term investments for the older, instead of a 529? Your mortgage will not be paid off for another 28 months - 2.33 years. At that time, you said the oldest will only have 4 years, which is a short term horizon. You'd be best advised to go with a money market account, CDs, short term treasuries, short term bonds, etc.

If you are planning on sending them to your current college, then don't use a 529 - but save up extra money for the taxes in a similar account (brokerage for the younger, short term for the older)

By the way, you get $0 tax deductions for contributing to a 529. The only tax benefits are for any growth made at the time of withdrawal. The withdrawals are tax free if used for tuition (and certain other school expenses - not room and board **edit - see below**), but not tax free for paying the taxes on free tuition. (in fact you'd be taxed on the growth plus a 10% penalty)

So if you won't need to pay any tuition, there are few advantages from the 529 plan.

**snshijuptr** · 08-27-2010, 07:50 AM

Originally posted by jpg7n16 View Post

By the way, you get $0 tax deductions for contributing to a 529. The only tax benefits are for any growth made at the time of withdrawal. The withdrawals are tax free if used for tuition (and certain other school expenses - not room and board), but not tax free for paying the taxes on free tuition. (in fact you'd be taxed on the growth plus a 10% penalty)

So if you won't need to pay any tuition, there are few advantages from the 529 plan.

529 plans can be used for room & board and supplies if the student is full time:

Special IRS Web Section Highlights Back-to-School Tax Breaks; Popular 529 Plans Expanded, New $2,500 College Credit Available

There is no federal benefit for contributions, but there is a state benefit it many states.

mortgage/college/retirement does our strategy make sense?