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?