I guess I will front-load DC2’s 529 too?

Previously we decided to stop contributing monthly to DC1’s 529 and instead invest a lump sum equal to what we would have invested each month in the time before zie graduated high school.  Once we knew more about hir college plans, we could adjust.

DC2’s 529 we kept investing in monthly as before.  I guess we’d decided not to because we were expecting to pay for DH’s relative’s son’s college.  But he didn’t go to college in the end.  And I was completely wrong about the stock market– I always am!  The stock market is unpredictable.  It’s irrational!  Especially when we have such huge income inequality.  (We will be paying for 2 years of DH’s relative’s daughter’s college though, tuition and fees but not living expenses– she’s recovering from being sick taking this semester off and plans to finish her remaining two community college courses in the fall, then transfer to a state school as an English major.  Hopefully that will actually happen.)

Right now we have too much in cash savings.  Even with the 12K gone for our annual IRA Backdoor Roth conversion.

We could also use a little bit more monthly cash flow to help me with accounting given DH’s continued unemployment.  Another $750/month wouldn’t go amiss, especially since my health insurance costs have gone up $300/month putting DH on the plan and switching from the  the Traditional 403(b) to Roth 403(b) (now that Trump is gone, I’m more willing to pay taxes now) is taking more money out of my take-home pay.

So we could do a lump sum in DC2’s 529 equivalent to what we would put in between now and when DC1 graduates from high school (or some other target date) and then stop contributing until we know what DC1’s college plans are going to cost.  DC1 is currently a second-semester sophomore so two full years would be $750*12*2 = $18,000 and then $750 a month additional for however many months more we want to add.  If we do that, our savings account will drop to a more reasonable level– a standard academic emergency fund (3 months summer salary + 1 month for emergencies) and a little bit more.

Now I just need to get around to actually doing this.  (Which is why this post has sat in drafts for a while.)

If DH suddenly gets employed before I get around to doing this, I might not?  But I don’t know if that is going to happen or not.  After the four interviews last week I’m not sure that there’s anything obvious to set in motion unless we are willing to move.

 

11 Responses to “I guess I will front-load DC2’s 529 too?”

  1. Emily Says:

    I am curious why $750 is the monthly contribution amount you have chosen. Was that based on calculating the full cost of what you anticipate a private college + room and board will cost by the time DC2 starts college? Or do you plan on cash flowing some of it?

    • nicoleandmaggie Says:

      https://nicoleandmaggie.wordpress.com/2017/01/23/college-savings-are-hard-to-plan/
      discusses how we planned things out when we made the change from $500/mo to $750/mo.

      If I could go back in time, I would max out both 457 plans before putting any money in a 529 (DH used to also be a professor and we were late to the 457 game). I would rather have more money hidden in retirement savings. But at the time, I didn’t know our incomes would be going up so much (albeit it was only temporary now that DH is unemployed again), so I was just making sure we were saving ~20% to make up for not saving in grad school.

      Retirement (including HSA) first, then housing (since that also hides money from colleges), then 529 plans. We are not financial planners, please do not make any important decisions without doing your own research and/or consulting an actual expert.

      I did just check DC1’s 529 plan and it has $244K(!) in it (!!!). So, in theory some of that will be handed down to DC2 given DC1’s chances of getting into Harvey Mudd (the most expensive option) are pretty low unless something dramatic changes in the next couple years. But who knows. (DC1 has ~$100K in hirs.)

      • Emily Says:

        That’s awesome ($244K!). My kids are in 2nd and 1st grade and we’ve been putting in just over 300/month per kid (we make sure we maximize our state income tax deduction even though that’s minimal) and the occasional lump sum. So we still have some time and have prioritized maxxing out retirement (401k for me, pension for DH, Roths IRAs for both of us) although I started saving for retirement later than I would have liked (mid-30s). I think we’re going to aim to increase to $500/month and maybe even $750/month to the 529s which seems like it should be doable for us now that we no longer pay for daycare.

      • nicoleandmaggie Says:

        That all sounds great! Woo!

  2. SP Says:

    I’m sure you meant switching to Roth 403b to pay taxes? I am more willing to give this gov’t taxes, but is there any other reason you made the change? I’m still more in the “take the tax break today” camp.

    LO is 2.5 and we only have about $4k saved, but it isn’t our most immediate priority, and not the only source of funding for college. Meaning I’m willing to use Roth savings (contributions w/out penalty) or cash flow some college. Still, I should redo our budget for 2021 and see what I want to do about it.

    • nicoleandmaggie Says:

      I did! Thanks! (I think I have mild undiagnosed dyslexia)

      Patriotism is the main reason I switched everything to traditional before. Why Roth now: I believe that tax rates will be overall higher in the future so not paying taxes on gains seems like a good idea (assuming future governments don’t renege on the Roth promise). I’m also not sure if/when we’ll retire (both DH and I are kind of worker types, and the average age of retirement for a professor is 72, give or take). I should probably also be trying to stuff as much as possible in there now for college financial aid reasons which would argue paying taxes now.

      • First Gen American Says:

        I’ve been waffling about whether is should convert some of my traditional to roth and pay the taxes as something to do with excess cash right now. For 2020 we decided against it but it’s not been ruled out completely. I consider it one of those conservative investment decisions like paying off the house. The math doesn’t work out as the best investment decision but it may make me feel more prepared for retirement if my roth balance was at a certain level (ie, 5 years of living expenses), For now I think making after tax contributions to my 401K for the next few years may get me most of the way there. The mad fientist now regrets not doing more roth as he didn’t anticipate still having high income in retirement. There may not be as many opportunities to convert while in a lower tax bracket if you plan on freelancing during retirement. This is a topic I could debate back and forth for hours.

      • nicoleandmaggie Says:

        Maybe next time there’s a stock market dip you could pull the trigger?

        Back when we converted all our traditional IRA to Roth, it was during the great recession so we didn’t end up actually paying any taxes. Hopefully you won’t be in that situation, but a large enough dip could lower your conversion taxes.

  3. Revanche @ A Gai Shan Life Says:

    I’m always reviewing my decision to stop putting away money in the 529 for JB and shifting to contributing to (non tax advantaged, sadly) retirement intended funds. I still think it’s the right decision since the future state of my health is a big question mark. I really don’t want to be in a position where I’ve invested for their college primarily and worked all my “good” years away and am laid up and disabled for any retired years.

    There’s a good amount in the 529 already from the earliest JB years. Now that we have Smol, there’s a higher chance that the funds will be used up between the two siblings. Maybe I’m just pessimistic but I’m still doubtful that we’re going to need as much as the max we can have for even one beneficiary ($370,000). That’d just about pay for two undergrad degrees, I think. I don’t expect them to be getting into Ivies or the like. Given that, I haven’t seen the point of opening a second 529 yet. I plan to just split the total down the middle at a certain point and transfer the beneficiary since there’s such a large age gap between the two kids. If we need more than we have in the 529, we’ll (I hope be able to) cash flow some part of it out of the retirement funds that I’m focused on now. And they can take some loans if necessary.

    • nicoleandmaggie Says:

      California has some really great public schools. If I were living there, I’d probably be saving less on the off chance that one of my kids decided they preferred a UC. As of now, Berkeley costs as much for us as a private school and I am thoroughly unimpressed with the ability to deal with ambiguity that our graduate students from the publics in our state have so my kids won’t be going local. (They learn to deal with ambiguity, but we don’t have to teach it to students who graduated from regional publics in the midwest because they learned it in college!)

  4. First Gen American Says:

    My current strategy is backdoor roth-ing as much money as possible through my 401K plan and then using that as the primary vehicle for college. This combined with covering insurances, etc currently eats up 2/3 of my take home pay.

    My 529 balances are still small. I am doing $200/month per kid but I didn’t start regular savings until a couple of years ago. The younger kid is still 6 years away from college so there is more value in the 529 for him. I still waffle about whether to save more in these investment vehicles but I don’t like how restrictive they are in their purpose. I think they’d be great for a grandparent who could contribute a lump sum when the kid is born so the investment has 17 years of growth potential. But when my kids were small, money was much tighter with daycare expenses and big mortgage balances and I just couldn’t do it all, even with 2 incomes.


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