FASFA College question

[LivingAlmostLarge]

My local credit union hired a "free" financial adviser for their members. (Free consultation, not free if you have him do anything for you). I talked to him about this one. First he grumbled that the 529 and FAFSA systems rewarded the unprepared and punished the prepared, then he promoted two options:

1. If you expect your kid to be level headed and not go crazy if they suddenly get $30k when they turn 18 (or whatever the age is for your account), you can put it in an investment account for your kid. It will be taxed at the kid's income rate. He also pointed out that method might ruin some kid's lives, so you've really got to teach your kid about money and about life priorities and hope it sticks.

2. You can just put your money in a Roth IRA. You won't be able to pull out any gains until you are retiring (without major tax consequences), but the principle is available 5 years after the account is opened (as in you can set it up with $100, then dump $100,000 in five years later, then withdraw $100,100 the very next day, but not any gains you had on that money). It won't grow and multiply your ability to pay for your kid's college because the interest is untouchable, but it won't be sitting idle or near idle in a savings account or CD either. It will be growing for your personal retirement use.

Here's my personal opinion: college debt is such a political topic right now that things are definitely going to change between now and when my 6 year old graduates HS. We might get crappy state college for all, forcing those who want to actually learn or stand out to go to extremely expensive private colleges, or college prices might be brought down (either through intervention or through the government backing out and letting free market forces pull away the abundant capital available for college students). Until I can see a little further into the future, I'd rather get my general use investments up and set myself up to pay for college out of pocket if it is needed.

What I'm actually doing: For the past 7 years, I have been aggressively paying down my house to where we are almost finished even at minimum payments. We bought our first investment property, which should be paid off by the time she hits college. We might even be able to get another one by then, but we'll start where we are and create a fat margin of safety before taking on another one. With those both paid off, we should be able to pocket a ton of cash monthly and pay for at least one student outright. Hopefully between their work, scholarships, etc. we can afford to help out all 3 when the oldest are in college at the same time. My parents had 4 kids in college at once for 2 years (2010-2011) and 3 kids in college for a year on each side of that. They also had no explicit college savings. They made it work just fine. I think all of us graduated debt free and they never paid more than half tuition for any of us. God makes things work when you trust him and are good stewards with what he blesses you with.

You can't just dump $100k into a Roth IRA there are limits unfortunately. I'm not sure if you meant 529, but that has a $75k/5 year limit

hmm...I will consider the mortgage idea I like hanging on to our tax break. Yes I know others do not but we get a very large benefit from it. Right now what we are saving in taxable accounts would easily carry college. I mostly stashed this cash in taxable accounts $12.5k as an inheritance because my MIL hates me. So she didn't want me to touch a penny of DH's money from his uncle as executor. The only way to keep the peace in the family was to give it to the kids. That way I can't touch it or use it or "abuse" it. That way my gold digging money grubbing hands won't get a cent if we get divorced. That way it stays in the "Family" of which I am NOT family but the kids still are even if she hates me. So we could have invested the $25k in our own taxable account but I think it's better.

Beside his uncle would have been happy. He gifted each of our girls $1k when born of apple stock and it's been growing. It's what started each UGMA was his generosity. We had no plans because we were too busy saving for ourselves and we figured coverdell and $2k/year was enough per kid.

[kork13]

hmm...I will consider the mortgage idea I like hanging on to our tax break. Yes I know others do not but we get a very large benefit from it.

Do you actually itemize above the artificially inflated standard deduction? Don't you live in California, where the new SALT limits cause further problems for itemizing?

My thought would be: "Why pay a bank $10k in interest to save $2.5k in taxes?" Trading a house payment for flexibility to cash-flow college is a pretty decent option if you're afraid of having too much captive in ESA/529 accounts.

[Like2Plan]

My local credit union hired a "free" financial adviser for their members. (Free consultation, not free if you have him do anything for you). I talked to him about this one. First he grumbled that the 529 and FAFSA systems rewarded the unprepared and punished the prepared, then he promoted two options:

1. If you expect your kid to be level headed and not go crazy if they suddenly get $30k when they turn 18 (or whatever the age is for your account), you can put it in an investment account for your kid. It will be taxed at the kid's income rate. He also pointed out that method might ruin some kid's lives, so you've really got to teach your kid about money and about life priorities and hope it sticks....
.

I just wanted to point out the info this FA gave you was at one time (many, many years ago) correct, but congress changed the kiddie tax law and this is not correct if your child is attending college. Kiddie tax rules apply to dependents attending full time college going all the way up to age 23.

That is part of my heartburn about UGMA accounts--it has been changed so many times! When we started saving for our son's college when he was born, the tax law was at age 14 the earnings would be taxed at our son's tax rate. That law changed (when our son was 13 ) It changed to 18. Then, up to 23. The kiddie tax rate under TCJA a couple years ago was changed to trust rate above a small threshold which in some cases was higher than the parent's rate. As far as I can tell the SECURE act changes it back to the parent's rate (above a certain threshold). Also, it looks like folks can redo their taxes for the kiddie tax in 2018 and 2019 where the higher trust rate applied. (Here is a link: https://www.forbes.com/sites/leonlab.../#7e4b0ae0106d )

We were lucky in that we over saved for son's college and had also saved in 529's (when they became available--they were not invented when DS was born). But, looking at it from several years post college, I just don't see any huge advantage to anything other than a small UGMA account (where earnings do not exceed the Child’s Standard Deduction). That is probably what congress was going for when they changed the law.

[LivingAlmostLarge]

ugh thanks for the notes.

Kork it's more like $40k and it's more like 1/3 of that back in taxes so $13k. I also do not like the idea of pushing all savings into a mortgage pay off and then nothing invested for the next 8 years. Then we'd be house rich and cash poor. Instead we could spend 14 years investing in things and letting the investments ride. Assuming a conservative 6% return for 8 years until 1st one goes to college then we are at breakeven of mortgage.

So it makes financial sense because we aren't spending the money instead of paying of the house to build portfolio. Saving $100k/year for 8 years = $1 m with 6% return. Then if we were to use that $100k to pay for college annually would be the best way. But I want to maximize time for kids funds to grow as well. I'll take the tax break as well.