Prioritize Retirement and College

[moneybags]

Again, with the Roths, you have 16 years for your oldest child before college. 16 years times $5k per year for a Roth contribution is $80k. That would hopefully be enough for college. You could do $2k per child in a college fund (and maybe more later after you figure out the house situation) and then use your Roths if you need to.

I think the OP said she wants to pay for 2 kids to go to college. $80k is not going to cover it. I'm sending my first child to college in August. Private school is $40-$55k/year. One of our less expensive state schools is $17k/year and our best state school is $27-$32k/year. For 2 kids, I'm estimating our cost at $400k, and that is at today's cost!

[disneysteve]

I don't see why $2,000 a year wouldn't be enough...this seems very high.

Have you looked at the cost of college lately? Saving $2,000/year for 18 years would only be $36,000 in principal. Assume a 6% average annual return and that gets you to about $66,000. That wouldn't cover 4 years at most schools today and it certainly won't 16-18 years from now.

[Christian321]

as others have stated, retirement savings first, then fund college. There is no scholarship/grant/loan out there that will fund your retirement if you fail to plan adequately for it.

[LivingAlmostLarge]

I'm hoping that in 5 years we have more income and can cover more college savings and just keep saving for retirement. I hate giving up the tax break Jim for the flexibility. That bothers me since we can't go backwards.

My only hope is banking on student loans, and tying that to college. I want my kids to go to school and take out loans and we pay them back based on grades. I'm not trying to be mean, I just want them to do well, appreciate, and focus on school.

Like snafu I taught a lot of undergrad courses and I know a lot of kids who partied and flunked out. I don't want to pay 100% and have my kids just waste the money. I want them to work hard and realize the opportunity they have in front of them.

[jIM_Ohio]

I'm hoping that in 5 years we have more income and can cover more college savings and just keep saving for retirement. I hate giving up the tax break Jim for the flexibility. That bothers me since we can't go backwards.

My only hope is banking on student loans, and tying that to college. I want my kids to go to school and take out loans and we pay them back based on grades. I'm not trying to be mean, I just want them to do well, appreciate, and focus on school.

Like snafu I taught a lot of undergrad courses and I know a lot of kids who partied and flunked out. I don't want to pay 100% and have my kids just waste the money. I want them to work hard and realize the opportunity they have in front of them.

Is a 15% tax break now worth losing a $2500 tax credit later?
Even if 25 or 28%, you need to be educated on the tax advantages of college monies in parents name in a taxable account.

$2500 tax credit on $4000 spent is a 60% return, show me where else in your plan you get a 60% return?

This is NOT a simple problem. If you focus only on "tax savings now", then I can pretty much guarantee the plan will not be flexible, the plan will not get tax credits later, and emotions are forcing an inefficient decision.

[LivingAlmostLarge]

More like 28% plus state tax credit and we don't qualify income wise for the college tax credit. We don't qualify for the child tax credit either. Trying but don't.

I believe the college tax credit will be there but I wonder if we'll qualify for it then either?

[jIM_Ohio]

More like 28% plus state tax credit and we don't qualify income wise for the college tax credit. We don't qualify for the child tax credit either. Trying but don't.

I believe the college tax credit will be there but I wonder if we'll qualify for it then either?

The ESA mentioned has "little" tax advantage... no federal deduction, probably no state deduction, and takes away the possibility of the federal credits. Is their an upside?

$2k/year into an ESA

You clearly need to plan and verify the pieces are in place- taxes are a consideration, but should NOT drive the decision. The biggest challenge I see is keeping monies flexible and trying for tax efficiency.

If you have a good CPA, they should consult on the plan too.

Think about each problem both as a comprehensive challenge, and isolated issue.

For example, if you max Roth IRAs (in 28% bracket), that might not exactly be a great decision for retirement, but it might add some flexibility for college.

If you max 401ks, that is a great deal at 28% bracket
If you use a 529, consider putting 50% of the contribution into a taxable account, for example
If a stock fund is in the taxable account, realize that you might need to sell it when child is a Sophomore as you lower risk, this is both a taxable event, and an income increase right about time FAFSA is submitted.

Make sure you know the ins and outs of the FAFSA before entering this strategy, or hire a good planner, because this is delicate. Maximize flexibility while trying to avoid losing aid.

If you used a timeline approach to planning, you will see when kid 1 goes to college, you will need a networth of $X for retirement $Y for college and $Z total networth. You want flexibility to move money from X to Y at that time without triggering penalties.

[LivingAlmostLarge]

Still thinking out loud here Jim, thanks. So what was the 60% tax break you mentioned earlier?

So here are my thoughts. Roth IRA we are still at a low earning power though in the 28% bracket. I don't work and my DH is early in his career. He's still looking for his major pay jump due to gaining another degree and possibly doubling his salary. So while we still qualify for the Roth IRA, every year it's borderline depends on bonuses and how stock bonuses sort out, we contribute or contribute to a Non-deductible IRA. The reason is the gains are not taxed. The 401k helps us stay under as well.

That reasoning is why we chose the ESA, the gains aren't taxed versus using a taxable account we'd be taxed annually on the gains. I thought that was the upside. Those gains could also currently push us into higher brackets or make us ineligible to qualify even for the ESA at some point.

I didn't qualify for financial aid because of my parents income. Wasn't going to happen. I am pretty sure we're going to be in the same boat. It would have been easier if my Mom hadn't remarried my dad so late in my life. I love him dearly but financially honestly I could have gone to school anywhere 100% paid for and free.

So I'm not sure what to do. In five years we may not qualify for the Roth IRA or ESA. So then at that time it'll all be taxable accounts. At that time we'll be trying to minimize taxes as well in taxable accounts. So whatever we have saved for college in an ESA will be it and maybe $2k in a 529 a year?

The college tax credits like the Lifetime learning credit we don't qualify or the tuition deduction we are capped at $2k and the american opportunity I think we are in the phase out.

I don't know what networth we should have. I don't know if we'll have paid off our home, definitely we'll have bought a more expensive home, and I don't even know where we'll be living. It's stressful not having finite clues about our finances and what we really need and how to timeline it.

Should we time paying off the mortgage in 16 years? Or 20 years when we hit 55?

[kv968]

That reasoning is why we chose the ESA, the gains aren't taxed versus using a taxable account we'd be taxed annually on the gains. I thought that was the upside. Those gains could also currently push us into higher brackets or make us ineligible to qualify even for the ESA at some point.

As far as being taxed every year, if you were to use index funds the taxes shouldn't be that bad since there's little to no turnover in them. You would however have to pay capital gains, which currently stands at 15% for long-term, when you sold them. Although with the "fiscal cliff" coming that 15% may get modified.

[scubatim84]

What qualifies you to give tax advice? The blue highlighted part is just plain wrong and misguided at best.

I could go on, but brevity works.

What qualifies you to make snarky comments which have no basis in reality? I was under the impression that this thread was meant to solicit advice, not personal attacks. Brevity works except when it fails.

Go to Vanguard's web site, or any other investment brokerage's web site, and look up the 529 plan benefits. You can contribute money to a 529 plan, which grows tax-free, and withdrawals are tax-free if used for qualified (college) expenses. If you don't understand how this is a tax benefit, which allows you to put "pre-tax dollars" to work, then I can't help you. However, while I can't help you in that instance, I would caution others to help themselves by not listening to you (or me) without investigating everything mentioned.

I would never take financial advice from someone on a forum without vetting everything said. It wouldn't make sense unless I verified everything. However, the tax benefits of a 529 plan are public knowledge, and for most people, common knowledge.

Have you looked at the cost of college lately? Saving $2,000/year for 18 years would only be $36,000 in principal. Assume a 6% average annual return and that gets you to about $66,000. That wouldn't cover 4 years at most schools today and it certainly won't 16-18 years from now.

Yes, when I left UC Davis it was $14,000 per year for tuition. We can assume at 6% average real return, but then that gets you to a current value of about $66,000, not 16-18 years in the future. If you want to look at the future cost, you should be using nominal returns and figures and then discount for inflation. Still, a real return of 6% is reasonable, and already discounted for inflation to present dollars, so let's stick with the current value of $66,000. Even at Davis, and the UCs are fairly pricy as far as state universities goes, that would cover all of tuition. Even with 2 kids, again assuming that they both work part-time in college, this should pay for enough of college that they won't graduate with an enormous student debt load.

Keep in mind I'm not saying $2,000 a year is enough to pay for college in its entirety, tuition and all. I think everyone should work part-time through college, both to help ease the cost of schooling on whoever is paying and to gain job experience, and also take advantage of internships if possible since it will help them get a career after they graduate. I also think if kids have to take out some student loans, as long as it's a reasonable amount (IE less than $25,000) then so be it. Everyone's opinion will differ, and there's no right or wrong answer here, but I simply think kids should be responsible for at least some of the cost of their education. It makes it more valuable, gives them more incentive to graduate and it definitely gives them more incentive to pick a useful degree.

[kv968]

Go to Vanguard's web site, or any other investment brokerage's web site, and look up the 529 plan benefits. You can contribute money to a 529 plan, which grows tax-free, and withdrawals are tax-free if used for qualified (college) expenses. If you don't understand how this is a tax benefit, which allows you to put "pre-tax dollars" to work, then I can't help you. However, while I can't help you in that instance, I would caution others to help themselves by not listening to you (or me) without investigating everything mentioned.

Although 529's allow tax-free growth and withdrawls (if used for qualified expenses), they don't allow you to use "pre-tax dollars". Some 529's may offer state income tax benefits but not on the federal level. The money going in is after-tax.

[Like2Plan]

We had a goal of covering 100% of the cost of DS's college costs. In our situation, it was not at the expense of retirement savings or our housing objectives. But, in the early years we did have to sacrifice some luxuries such as vacations. The early sacrifices paid off because as we earned pay increases it was much easier to fund our savings goals and take vacations, et'c.

We had to take our cash flow during college into consideration since we were not planning on taking out any loans. We had to either have the money saved up front or taken out of our monthy budget.

We caught a couple of breaks. One was that DS elected to go to an in state college. The other was that we were able to purchase a pre-paid tuition plan for him when he was in 9th grade. That took care of a lot of heavy lifting--about half the overall cost of college. The prepaid plan paid over 2X's what we invested (with tax free earnings).

I am happy to say that we achieved our goal, DS graduated college without any student loans. (And he has a j-o-b! )

[LivingAlmostLarge]

Scuba 529s are not contributed with pre-tax dollars. Name the Top 7 Benefits of 529 Plans It might be state deductible but not federal. The contributions grow tax deferred not tax free unless used to pay for college.

$14k/year is $64k but we all know the UCs are in trouble and going up in cost. When I went it was $2800/trimester so $9k/year or so for tuition. But realizing that's just tuition not room and board or extras.

Congrats like2plan on DS graduating debt free. I would love to be somewhere with a prepaid tuition plan. I know we'd do that and tell our kids that's all we're contributing. Take it and go somewhere else great, but pay for the rest. It would make me breathe easier. What state did he go to?

[Like2Plan]

What state did he go to?

We live in VA.

[LivingAlmostLarge]

I'd love that.