Should you ever fill a non-tax-advantaged IRA (answer: maybe): An obnoxious post from having upper-middle class income

Now that DH’s income is back and I’ve GOTTEN PAID(!) for the first time this school year, it’s time to start up our obnoxious money posts again.  (Maybe you’ve noticed the new tag?)

This time we turn to planning for college.  If I’d known where we were going to be today I’d have planned things differently back when DC1 was born and opened up 457 plans earlier instead of saving in 529s or prepaying the mortgage.  Sunk cost!

People with upper-middle class income who plan to send their children someplace that isn’t a state school have an incentive to do some creative things with money before their children hit their junior year of high school.  The reason for this is that they’re on the margin of financial aid for some pretty expensive places.  Forbes has a bunch of articles about our “predicament”.  Check out the colorful charts in this one.  In it, you’ll note that AGI of 125K to 275K are eligible for some financial aid at various 4 year colleges if they play their cards right.

What does playing your cards right mean?  Well, a lot of playing your cards right is moving income from places that the CSS and FAFSA consider to be available for paying for college to those that the CSS/FAFSA consider to be out of bounds.  A big portion of that is moving regular assets and investments into retirement accounts.  (Here’s an article on how much cash is excluded from FAFSA formulas.  Here’s info on how different asset types are affected.)  5.64% of your non-excludable assets are expected to be available for paying for college.  Retirement savings, even non-tax-advantaged retirement savings, are not included in any of the financial aid calculations.

And that’s where the non-tax-advantaged traditional IRA comes in.  If your (married) joint adjusted gross income is less than 186,000 (for 2017), then you can just fill up a Roth and hide money into a retirement account in a tax-advantaged way.  If you have a workplace retirement plan available, then you can only get the full tax advantage from a traditional IRA plan if you make (jointly) less than $99,000.  More rules for single parents, those without retirement accounts, etc., are available here.

So if you’re in that upper-middle-class income range, have extra money floating around in taxable string-free investments and have children likely heading to private colleges in the future, it might be a good idea to start moving those over into traditional IRAs at the rate of $11K/year for a couple.  Should you do this instead of filling up a 529 with that 11K (if you can’t afford to do both)?  I don’t know– it’s probably best to sit down and crunch the numbers yourself given your age, preferred retirement age, targeted colleges, income, expected student loan rates, and so on.

Of course, because of loopholes in the tax code, it’s possible to turn that non-tax-advantaged traditional IRA into a backdoor Roth.  Here are some pitfalls to look out for if you choose to go that route.  And don’t do it if your eldest is in college or even a junior or senior because it will show up on an aid form according to Forbes.

So where are we?  Accumulating assets while we’re both employed.  DC1 on track to go to college in ~6 years.  That leaves ~4 years to try to move money around.  The easiest way to hide money from colleges would be to move to Paradise and to buy a house there because then we’d be back in debt with all our extra cash going towards retirement and the mortgage, plus there’s no guarantee I’d be employed at all.  But it’s unlikely we’d be able to actually do that given my, you know, career and stuff.  So it probably wouldn’t hurt to start making these asset moves.  (And we should replace our cars and remodel the kitchen at some point and maybe time finally getting that donor advised fund to a year that will count for financial aid calculators.)

I already save in a 403(b) and a 457 at work plus have required retirement savings on top of that  I don’t really *want* to save another $5,500 for retirement in my name.  DH only has a 401(k) and it’s not set up properly, so he ends up getting some of the money contributed back after the company does their taxes.  Right now I think we’re probably only going to do one traditional IRA and it will be DH’s.  I believe we have about $30 in another traditional IRA (we converted all our traditional IRAs to Roths back when it was first allowed, but one of them dripped during the conversion).  So it shouldn’t cost much to do the conversion unless the stock market goes crazy between putting the $5,500 in and converting.

If we made more, it wouldn’t be worth even thinking about all this stuff.  But we’re in that range.  And I’m not crazy about our state flagship.  So, this is where we are.

Have you ever put money away for retirement without getting the tax advantage?  Are you thinking about hiding assets from college financial aid calculators?

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It is harder to give directed donations to a public school than to a non-profit

This year, we want to give money to DC2’s classes (English and Spanish) to help them purchase items for “differentiation, independent learning, and/or enrichment”.  This is mainly because DC2 needs them, at least on English days.  (“Mommy, I’m in the green group which means that we have the trickiest problems, but they’re still way too easy.  I already know all the sight words from preschool.”)  We want this to be anonymous because it’s just weird giving money to public school when DC2 is a member of the class.  (We know the Spanish teacher already incorporates differentiation, at least in second semester from our class observation last Spring.  The English teacher does a little bit according to DC2, but maybe not enough for DC2 right now.)

When we did this back when DC1 was in Kindergarten in private school, it was super easy, we just wrote a check along with a little note outlining the particulars of the gift.  Since we were already paying tuition to the private school we were also able to talk to the teacher about what her ideas were and make sure the money would be of interest even given the strings attached (that it be for differentiation/independent learning activities).

This time DH called up the front desk and they said they couldn’t take directed donations of money, only general donations for the entire grade, but to contact the PTO president to see if she could help.  After some back and forth with her, the PTO president reiterated that she could only take donations for the entire grade and they would go towards defraying the cost of field trips, but she’d get in contact with the Assistant Principal on our behalf.  After a couple of weeks of not hearing from her, DH emailed the school Principal directly.   A couple days later the school principal emailed back and offered the following options:

1. Write a check to the school and the teachers would be told they could use that money, but only through the district’s preferred vendors.  The vendors are not actually that great, so their ability to make purchases would be pretty limited.
2. Provide several gift cards for Amazon/Walmart/Target so they have more options for what to purchase (though this also is limiting, and we might not get the amounts right).
3. Provide gift cards for cash from Visa/Amex/Mastercard.  This would be the least limiting of the choices.

Oh gentle grumpy nation, I have been trying so hard to get #3 to work.  But we want to get two $500 gift cards (one for each class) and Target/Walmart only carry Visa in $200 or less denominations, and it costs $6-7 to get one.  You can’t order Visa gift cards directly from Visa and we don’t belong to one of their participating banks that waives fees.  AmEx looked really promising with a flat $4 fee per $500 card until I tried to check out and realized there was an additional $8.95 shipping charge on top of that*.  But maybe it’s worth it since to get Visa cards at Target or Walmart we’d be paying $24 just to get $800 in gift cards.  (Mastercard is not an option because they start making the money disappear once there’s inactivity.)

I might be able to waive some fees if I wait for October’s promotion codes to show up somewhere– September’s AmEx promo code got rid of shipping costs but they’ve since expired.

Or we could just write a check and they’d be limited to the list of preferred vendors, none of which I’ve heard of.  (I have to wonder what kind of grift is going on there…)

Anyway, I’m leaning towards paying the exorbitant fees for turning plastic credit money into anonymous plastic gift money so that they can use the money wherever they want (albeit, maybe only places that take AmEx…).  Though with a minimum of $17 in fees, it’s tempting to go with Amazon cards since you can buy most things on Amazon.  Except, you can’t buy everything on Amazon.

We have our first (15 min) parent teacher conference uh… today.

*Looks like they regularly have online discounts for things like shipping fees, but October’s wasn’t up yet when I wrote this post.

What would you do, Grumpeteers?

I now pay convenience fees

Time is at such a premium these days that I just pay the little “convenience” fees that I used to refuse to pay out of principle.

It started with me deciding it wasn’t worth it to drive to a farther gas station just to not get hit with an extra fee for using my credit card rather than cash.  (And I haven’t carried cash with me in over a decade, so I definitely wasn’t going to start.  Plus, with cash the signs say you have to pre-pay for gas which means either overestimating or not getting a full tank.)

Then I started telling DH to just pay the “convenience fee” for electronic tickets at the movie theater rather than having to stand in line to pick them up.

Then I started paying our insurance with a credit card online instead of writing a check. (Though they’ve since dropped that fee. Yay.)

And mailed checks for all our small state taxes like car registration renewal instead of standing in line at the courthouse.  (Though maybe we’ve been dong this one for years…)

I’m not sure how I feel about this.  I mean, from an economics standpoint, they’re chipping away at my customer surplus through price differentiation, but it’s also rationally worth it to me to pay for the privilege of not jumping through their hoops.

And it’s true that these little fees add up.  But they add up to a dollar here or a dollar there.  Far less than the latte factor.

If we were making less money, every dollar would count.  But these dollars just don’t count anymore.  And our time and the hassle factor are just worth so much more to us.  This is another way it’s really nice to be upper-middle class.  A year of these fees is less than an hour of work.  Even saved and invested they’re not going to matter in the long-run.

Do you pay convenience fees?  If so, when did you start?  Do you notice convenience fees?