[Editor's Note: Johanna Fox Turner, CPA, CFP, RLP, is a fee-only financial advisor who sent me a guest post. While I liked some of the ideas in it, I disagreed with others so I offered to run it as part of the always-popular Pro/Con series. Johanna advertises on the site and serves as a moderator on the forums.]
PRO – Johanna Turner
An alternative approach to saving for college
Johanna Fox Turner
While many parents consider 529 plans the default choice when it comes to college savings, they are not a one-size-fits-all solution. You should carefully consider the reasons a 529 may or may not be appropriate, such as:
- New competitors may force the cost of college to decline and you may not need $200k – $300k to educate today’s toddlers. We’re already seeing such a trend in online programs along with the rise in popularity of community colleges and vocational schools.
- Navigating the various 529 options is difficult and investment plans are mostly inflexible.
- Your child may choose not to go to college, may get a scholarship, or may go into a loan forgiveness program.
- You could owe both tax and penalties on growth and earnings not used for college.
If you’re hesitant about building a huge 529 account for your children, consider this alternative plan: earmark your Roth IRA as the primary college savings account, supplement with a Coverdell ESA (Education Savings Account) and then put additional savings in a 529 or taxable investment account. Why does your Roth make sense?
- Many new parents cannot fully fund a Roth IRA, max out 401k(s), and contribute to a 529 and/or Coverdell ESA (Education Savings Account). They may choose to sacrifice retirement savings in favor of college funding.
- You and your spouse can contribute $11,000 annually or $198,000 over 18 years.
- You get 3-way access to a Roth:
- Original contributions can be withdrawn and used for college at any time with no tax or penalty (no 5-year rule),
- The earnings on original contributions can be withdrawn tax- and penalty-free after as little as 3 years and 8.5 months, and
- The principle of Roth conversions can be distributed penalty-free after a 5-year waiting period.
- You are free to invest in a well-diversified equity mutual fund or ETF portfolio according to your investing philosophy (not limited to 529 portfolio choices).
- Even if you need 100% of original contributions for college, you still have the growth in your Roth.
- You’re not penalized if you don’t use your Roth for college. You get to keep your money and continue building for retirement.
- Your Roth’s earning can be used for college expenses without penalty, although you will pay taxes if you’re under age 59.5. (I recommend leaving the growth and earnings alone.)
- Roth IRAs do not count against you for financial aid, unlike 529s and ESAs. Do some physicians get financial aid? You bet they do, especially in today’s environment.
To add a cushion to your Roth, next max out an ESA ($2k per child per year). If your income bracket is too high to contribute, you can gift the money to your child to contribute. ESA benefits:
- Availability – you can tap the ESA as soon as your child starts kindergarten.
- Flexibility – you can invest any way you want,
- Use of money – your ESA can be used for a wider variety of costs than can the proceeds of a 529 plan, including home computers and transportation.
Finally, if you want to save even more for college, then contribute to a 529. I call these “grandparent” accounts because 529s are great use for money from grandparents, aunts, uncles, godparents, etc. Of course, if your state gives you a tax credit or deduction for contributing to a 529 plan, you’ll want to weigh the benefit compared to the quality of the plan. For example, Pennsylvania allows residents a $14k per contributor per beneficiary to any state plan, or up to $860 in tax savings annually on a joint return. (Even then, you should consider whether the tax savings would outweigh long-term returns for a properly invested and managed portfolio.)
Of course, saving for college in a taxable account is also an option. You’ll enjoy most of the benefits of saving in a Roth IRA except the balance will count for FAFSA. You’ll pay tax on growth and dividends at a maximum rate of 20% (today’s rates) but you also may push your income into the Medicare penalty tax bracket and/or AMT.
OK, so it wouldn’t be fair if I didn’t review the disadvantages of tagging your Roth for education savings:
- If you use it for college, you won’t have as much saved for retirement.
- You may not qualify to contribute to a Roth IRA due to income limitations. You can contribute to a Backdoor Roth IRA but it won’t be beneficial if you own pre-tax IRAs.
- You may be horrible at investing, which can easily be remedied with the help of WCI and/or a fee-only financial advisor.
It’s hard to predict how much you’ll need to save, and the best method, for an event that is almost two decades into the future. Unlike retirement, however, there are loans, scholarships, and other options to fund a college education. Fortunately, you have WCI here to help you narrow down your choices and make the best decision possible for your specific situation.
CON – WCI
529 Plans Are The Best Way To Save For College For High Income Professionals
My esteemed opponent has given a lot of great ideas to pay for college, unless you're a doctor, in which case most of them either don't work or are a bad idea. Not so bad as buying a whole life insurance policy to pay for college, but still a less than optimal solution.
Since When Are 529s Bad?
Ms. Turner suggests a few reasons why 529s might be less than ideal. I'd like to look at these one by one. First, she suggests that the cost of college may come down. While I agree that value should be an important factor when choosing a college, and I am a big supporter of both state schools and community colleges (especially for the first two years,) I am highly skeptical that the average price of a college education is ever going to be lower than it is right now. Besides, that really has nothing to do with how you save for college unless she is suggesting that saving only $2K a year (the Coverdell ESA contribution limit) is somehow going to be enough.
Next, she suggests that it is tough to choose a 529. I disagree. It is really a simple process. First, look at your own state 529 website and see if you get a tax break for using it. If you do, put enough into it to max out that tax break, then use a highly rated plan such as Utah, Nevada, or New York for the rest of your savings. If your state offers no benefit, then just go straight on over to the UT, NV, or NY plan. Easy-peasy.
Then she suggests that 529 plans are inflexible. I disagree. Let's take a look at the Utah plan. There are 23 different funds, all excellent from Vanguard or DFA that you can combine in just about any way you like. In addition, there are four “Global Allocations” from DFA, 8 static allocations, and four age-based options. You can change those around frequently (although I don't know why you would want to) and can even change to a different 529 all together once a year. You can spend the money on any qualified education expense. I'm not sure what kind of flexibility Ms. Turner is looking for, but there is more than enough there for my needs. In fact, I wish I could get some of those funds in my Roth IRA at Vanguard!
Next, she suggests that a downside of 529s occurs if your child doesn't go to college, gets a scholarship, or goes into a loan forgiveness program. Yes, there are rules you need to follow if you want the tax-free growth that 529s offer. But most of these issues are addressed by the 529 laws quite well. If your child doesn't go to college, you can use the 529 to pay for the education of your other children, grandchildren, extended family members, or even yourself without penalty or taxes. If the child gets a scholarship, you can take an equivalent amount of money out of the 529 penalty-free (but not tax-free.) And why would I want my kid to have student loans to be forgiven? Isn't that the point of saving for college in the first place? I mean, is that really an argument not to save for college in a 529 just in case someone offers them loan forgiveness later? An ESA, which Ms. Turner is okay with, has basically the same rules and penalties anyway.
Burn Your Valuable Roth on College?
A major portion of Ms. Turner's recommendation is to use Roth IRA money for college. Roth rules state that you can withdraw Roth IRA money tax and penalty-free if used for qualified educational expenses. So it is obviously legal to do so. But that doesn't make it smart, especially for a high income earner. Once you pull that money out, it can't go back in. Roth IRA space is so incredibly valuable for a high-income professional and his family that it shouldn't be wasted on a college education, as valuable as that might be. If you start contributing to a Roth IRA at 30 as a resident, it might enjoy tax-free growth for the next 60 years until you die. Then, as a stretch Roth IRA, it might grow for another 50-100 years tax-free. By spending it after just 10-20 years, you're losing out on over a century of tax-free growth. Seems kind of dumb when you look at it like that, no?
In addition, most high-income professionals (at least those interested in seriously saving for college) are looking for MORE tax-advantaged accounts, not struggling to max out the ones available to them. If you use a Roth IRA for college, then you're forcing yourself to do more of your retirement savings in a taxable account. Meanwhile, you're leaving money on the table by ignoring a 529, which is at worst a double-tax-advantaged account, and in some states, a triple-tax-advantaged account somewhat like a Health Savings Account (not quite as good, as you never get a federal income tax deduction for contributing like with an HSA.) In addition, a Roth IRA is an asset protected account in almost every state. By spending it early, you are exposing more of your assets to creditors. Finally, the Roth IRA withdrawal rules are much more complicated than the 529 withdrawal rules. Put money in there last month? You can still take it out, earnings and all, to pay for an qualified expense this month.
High Income Professionals Aren't Most People
Ms. Turner talks about how many people can't afford to max out their Roth IRAs when their kids are young. But if you're a high-income professional with young kids, if you can't max out your Roth IRAs you have a serious spending problem. It's only $11K per year and should be pretty high on the funding priority list as retirement accounts go. I fund our Roth IRAs (via the backdoor) every January 2nd (along with my HSA and 529s.) Like most doctors, I'm also ineligible to contribute to a Coverdell ESA due to my income (phases out between $95K and $110K for single filers, and $190K and $220K for married filers.) It's not even an option. (Although I really like the sneaky trick to gift it to your kids and let them contribute, but that does come with the downside that it then becomes the kid's money, not yours.)
Besides, $2K a year isn't going to go very far toward a college education. Sure if you put $2K in every year for 18 years and earn 8% on it, that's $81K ($60K real.) But if you're like most, you probably didn't start at birth and missed a few years. It is far easier to lump sum payments into a 529 than an ESA. You can put up to 5 years of $14K/year payments into the 529 all at once. Then your spouse can do the same. As can the grandparents. You get the point, which is that the ESA contribution limit is a serious inconvenience if you really want to save up a large sum.
The children of a high-income professional are far less likely to qualify for any sort of useful need-based aid (I'm not talking about loans, a less than ideal way to pay for college.) If you are the sort who can afford to save up a bunch of money for college, your children aren't going to get much in the way of grants and need-based scholarships. And if they do, it'll be mostly to sucker them into going to an expensive school (where the grants will disappear by Junior year) instead of a local state school.
Perhaps most importantly for a high-income professional, the tax breaks of a 529 are extremely valuable. I get about $750 off my state tax bill every year for contributing money to a 529 instead of an ESA.
ESA vs 529
There is a random wrinkle in the law where some expenses are eligible to be paid from an ESA but not a 529. But they are fairly minor expenses in the grand scheme of things. I mean, 529 money can be used for tuition, fees, room and board, and books. The main items an ESA can cover that a 529 can't are K-12 related expenses. If you're actually using this account to save for college, that's not an issue. The computer exception is for K-12 use, not college use. I suppose you could buy it the week before high school graduation, but that's hardly a reason to use an ESA over a 529.
To sum up, don't get me wrong. I think ESAs are great. I didn't think they were so great a couple of years ago when the contribution limit very nearly went from $2000 a year to $500, but I did use them for the first couple of years I was in the military. But the main reason was a tax arbitrage scheme I had. When I was in the military I was a resident of a state without an income tax. So when I got out of the military and moved to Utah, I moved the money from an ESA to the Utah 529 and claimed the state tax credit I was eligible for by doing so. I also think Roth IRAs are great and have contributed to one every year that I have had income. But I think they're too valuable to burn on college, and I think following Ms. Turner's complicated scheme to save for college instead of just dumping money into a good 529 is probably a mistake for most high-income professionals.
PRO Rebuttal- Johanna Turner
For clarification, the article I submitted was aimed at two groups of readers:
- Residents, fellows, and other parents who have not yet achieved High Income Professional (HIP) status. WCI readers also include medical professionals who are not earning mid-six figures and may not be able to contribute much to 529 accounts.
- HIPs and others who either don’t want to fund a full education for their children or who believe that college costs may not continue on the current glide path.
Complexity
In most parts of the country, 529s are not “…at worst a double-tax-advantaged account”; only in states offering tax breaks. WCI uses Utah as an example so I’ll take my state of Kentucky. Here are the questions parents face: Should I go to another state plan? Which state? Which option(s) to choose? Prepaid tuition or savings? Direct sold or advisor sold? Static or age-based? Will my investment in another state’s plan qualify for the school my kids choose in 5, 10, 15 years? Performance matters, and Utah has great numbers, but finding performance history is not easy for many state plans. Consumers are tempted to buy into an advisor-sold fund, resulting in higher costs and lower returns. As for supplementing with ESAs, have your parent fund your ESAs if you’re concerned your kids will spend the money.
What will you do if your children actually decide college is not for them? Let’s see – you’ve saved $500k for two kids and they have other ideas. Yes, these issues are addressed by 529 laws – simply find another family member who wants access to your money. Easy-peasy, right? Of course, your extended family member may be willing to pay you 50 cents on the dollar or not need that much funding. Use it yourself if you’re in the mood to go back to school, I guess. Otherwise, I can imagine a scenario where you are taxed on the gains and must recapture prior deductions and tax credits. Taxes would be assessed at your highest marginal tax bracket, not the more favorable capital gains rates for taxable accounts. And don’t forget penalties (although there are federal exceptions for death/disability, scholarships, and military). This could get messy…
Will college costs diminish?
Yes, I believe future generations will reap the rewards of competition in education. Do you really believe that college in 15 or 20 years will look and cost the same (inflation-adjusted) as it does today? If you’re not sure, why lock several hundred thousand into a 529? Low-cost community colleges, at $3,300 per year for full-time studies, now account for nearly half of all undergraduates. Other states may follow Tennessee’s initiative in ensuring their residents receive at least some of higher education for free.
Online education is also rising in popularity. Take MOOC programs like MIT-backed edX (over 5M students since inception in 2012) and Coursera. While the courses aren’t accredited – yet – the concept of accreditation itself may become outdated as the education landscape evolves. I believe we are on the cusp of a wave of innovation for higher education opportunities as universities get creative to keep up. Unfortunately, we’ll have to wait years to see who’s right!
Specific rebuttals:
WCI said:
“If you start contributing to a Roth IRA at 30 as a resident, it might enjoy tax-free growth for the next 60 years until you die. Then, as a stretch Roth IRA, it might grow for another 50-100 years tax-free.”
Do you really believe your heirs will live 50 – 100 years after you die at age 90? C’mon, doctor! If you leave your Roth to children that young (great-great grandkids?), don’t count on it remaining intact. (Side note: A taxable account is almost as good to pass value to future generations. They will get basis step-up with no RMD requirements.)
WCI said:
“By spending your Roth IRA early, you are exposing more of it to creditors.”
What would they get – college credits?
WCI said:
“Ms. Turner talks about how many people can't afford to max out their Roth IRAs when their kids are young. But if you're a high-income professional with young kids, if you can't max out your Roth IRAs you have a serious spending problem.”
Actually, I said, “Many new parents cannot fully fund a Roth IRA, max out 401k(s), and contribute to a 529 and/or Coverdell ESA…They may choose to sacrifice retirement savings in favor of college funding.”
WCI said:
“…the Roth IRA withdrawal rules are much more complicated than the 529 withdrawal rules.”
Really? For a med school grad?
WCI said:
“If you are the sort who can afford to save up a bunch of money for college, your children aren't going to get much in the way of grants and need-based scholarships.”
You’re making my point in a roundabout way. Not all physicians and dentists earn in the mid to high six digits. If you earn, say, $200k and have two kids in college at once, you very well could qualify for fin-aid. (btw, there are other reasons to complete the FAFSA, not the least of which is merit-based aid.)
Finally, experience tells me that students with skin in the game value their education and work harder than those who get a free ride. Before deciding how much to contribute to 529s, consider if you are letting the “tax tail” wag the “financial plan” dog. A Roth IRA is a wonderful way to grow your money tax-free but building wealth is only a means to an end. Consider all alternatives when planning for college.
CON Rebuttal- WCI
This post is already getting way too long, so I'll keep this short and just clarify a few things. First, when I say “double tax advantaged” I mean tax-protected growth and tax-free spending of gains. Triple tax advantage would include a state tax break on contributions, similar to (but not quite as good as) an HSA.
Second, those who are saving a lot of money for their kids to go to college will probably save a lot of money for their grandkids to go to college. Changing the beneficiary to pay for them seems far more likely than actually taking the money out and spending it on yourself to me, but I suppose if that's a big concern for you, then perhaps you want less in a 529.
Third, I suppose education could become cheaper. It is cheaper in lots of countries. I wouldn't plan my financial life around that sort of thing however. I would assume your children will be paying AT LEAST what college now costs. I think it is foolhardy not to.
Fourth, if you spend your Roth IRA on college while keeping a taxable account on the side, more of your money will be exposed to creditors, i.e. you will have less asset protection.
Fifth, the only financial aid I care about is need-based grants and scholarships. Don't expect a lot of those if you're making $200K, even if you have two kids in college at once.
Sixth, my children won't be getting any leftover Roth IRAs. They'll go to grandkids or perhaps even great grandkids with specific instructions, which they may or may not follow, to stretch it out as long as possible. Along with the money, they'll get a financial education. I fully expect that money to be stretched for at least 50 years after my death, unless legislation eliminates that possibility. 100? Okay, perhaps not, but it's possible.
What do you think? Would you use a Roth IRA to save for college? Do you use an ESA, a 529, both, or neither? Comment below!
I use 529s, contributing $2000/month for each of my 4 kids (ages 1-9) for the last 5 years since becoming an attending. My original goal was to fully fund 4 years of private college for each assuming a little less than historical inflation ($400,000/child) with any extra for grad school or grandkids. I know many think this is overkill, but odds are good one or two will go to grad school. My amended plan is to leave the fourth child’s 529 significantly underfunded and invest the rest in taxable. The tricky part is knowing when to stop contributing. Glide path of college costs are uncertain, estimating returns particularly on target date funds is tricky. I’ll probably stop contributing in 5 years and put the money into my taxable account. I hope Vanguard will let me create a seperate “earmarked” account as there is psychological benefit to keeping the money seperate.
wow! 8k a month to 529s – that is most impressive! We only do about 1500 a month per kid but we only have two. I am putting all extra in taxable account to have some flexibility in the future for now.
$1500 a month per kid puts me to shame. I’m only doing $4K per kid per year. What’s that, $333 per month per kid? I suppose I could do more, but it seems enough for now as per our plans to help them pay for their education:
https://www.whitecoatinvestor.com/how-my-children-will-pay-for-their-college/
To put things in perspective – we’ve only recently started on this amount. We have gradually increased the amount as my income has increased. We will adjust course as needed going forward. 🙂
I’m with those who think that’s overkill. That’s a massive sum for college. Most docs aren’t saving that much for retirement. But an expensive undergrad plus an expensive grad school could certainly burn through $400K, especially if the kid won’t be working and you don’t want to contribute from then current earnings.
I guess I figure why not frontload now and enjoy more years of tax free growth.
In 2-5 years I’ll cut back or suspend and divert to taxable.
And yes it is my lovely wife and her added salary that makes it possible and keeps us under annual gift tax limits.
If I had my way, we’d live a bit more frugally and I’d max contributions to my defined cash benefit plan (100k) on top of PSP (53k) and save for college later, but my wife will have none of that 🙂
I don’t see an issue with frontloading. But 18 years of $24K a year is a ton of money.
Hi WCI,
I apologize if this is too personal of a question – but why won’t you front-load at birth (or as early as you are able to afford it)? It seems to make mathematical sense to front-load, before investing the excess in taxable accounts, but probably not before using up all the tax-advantaged space.
You only get 5% tax break from Utah state taxes on each $3800 per kid per year per married couple. If you assume 7% average investment return, to front-load 140k at birth will give you a first year return of $9,800 (0.07 * 140k), much higher than the $190 (0.05 * 3.8k) that you get to save on state taxes. Then you can assume same average investment return over the next decade and lower once you become less aggressive as kid gets older (while it would take a long while for the small yearly contributions to catch up the same dollar amount invested). Even if you assume less than 7% growth, even just 1%, that still puts you way ahead of the $190.
Do you just consider the money fungible, and the (140k minus 3.8k) delta that you put into taxable account starts the growth at 7% immediately in there and compensates for not having that money in a 529, while you continue to get state tax discounts for years? In that case you are still possibly foregoing the tax-free growth and miss out on not having tax drag in a front-loaded 529 – or do you have some reasoning that I’m not seeing? I would think even if you are very efficient with taxable investing, you still could not avoid $190/ year of tax drag that you get to save on state taxes… It seems that currently you would have the income to do this for your newborn, or if you won’t need the entire 140k for their educational expenses, then to do a lesser amount, but still with front-loading and then leaving it alone till re-balancing time…
For those readers who are trying to decide between the two ways of doing this, you can look up your state here: http://www.finaid.org/savings/state529deductions.phtml Some states are generous enough to allow full deduction of the entire contribution in the year it was made, some allow continuous carry-forward of the deduction (although most limit it to 5-10 years) of the amount over their yearly deduction limit. West Virginia even allows to carry-forward the amount that was over the income limit in the contribution year. Some states give no tax breaks, and some have no state taxes.
Also, here are some rules for front-loading, along with examples: http://www.savingforcollege.com/articles/10-Rules-for-Superfunding-a-529-Plan-643?page=1 I learned some things I did not know about from this article. Previously I did not know how the 5-year election was made when contributing over 28k per couple, but less than 140k, nor with further contributions during the 5 years if not entire allowance of 140k was used up initially…
Great question and comment that would probably make for a great blog post. My way is not necessarily right, it’s just my way.
My way:
Segregate all savings accounts by their goals. I look at my retirement portfolio as all one portfolio. I look at my college savings as a separate portfolio. I look at savings for other goals as separate portfolios. So right now, I have a retirement portfolio that is 100% in tax-protected accounts. I have a college portfolio that is 100% in 529s. I have a mortgage payoff portfolio that is 100% taxable. That last one is also the account in which I do tax loss harvesting to get that $3K deduction a year and the account which I will eventually use for charitable contributions. I also have some real estate in a taxable portfolio that is a bit play money, a bit pre-retirement income money, and a bit retirement investing. Still trying to sort out what to do with that but it’s relatively tiny so it’s no big deal to ignore it for now. So why would I invest in a taxable account when 529s are not yet maxed out? Because the money is designated for other goals.
A lot of readers also plan to provide a lot more college funding to their kids than I do. I’ve written before about how my children are going to pay for THEIR educations. https://www.whitecoatinvestor.com/how-my-children-will-pay-for-their-college/ Bottom line, my 529 contributions are only going to pay part of the way. Their work and hopefully scholarships will also pay a significant share to keep their skin in the game. I had no help from my parents and my wife had only some help. We both worked as both undergraduates and graduate students. We think that’s important. Also, the best schools in our state are ridiculously cheap compared to other schools. Tuition on the order of $5-8K per year. And those are the flagship schools. Other state universities are even cheaper. So I wouldn’t put $140K into a 529 because I don’t plan on giving them that much money for college. It’ll probably be more like $50-100K. Utah gives me a tax break on $4K per kid per year. $4K*18 years = $72K without any growth at all. I simply don’t need to put some huge lump sum in there to reach my goals for the account. I did front-load the infant’s a bit last year with $10K though. Mostly because it will be harder for me to contribute for her with current earnings than for the older ones who will hit college in my late 40s/early 50s. I don’t know if Utah will allow me to carry forward contributions or not; that’s probably worth looking into. But even so, it probably won’t change what I do because….
I don’t have the money to put $140K into each of my kids’ 529s. That’s over $500K. I don’t know how much you think this site makes, but I’m not quite that rich. At times I prioritize other goals like retirement, paying off the mortgage, buying a boat etc over college funding. Any way you look at it they’re getting way more than I did, and I turned out okay. I also give them money for other goals besides college- I’ve got an UGMA for their 20s and a Roth IRA for each of them. Money going in there doesn’t go into 529s either.
Hope that explains my reasoning, wrong or right.
Ok, thanks for the explanation! Maybe I should start thinking of my accounts similarly – right now I think of all of them as retirement, with “cushion” for supplementing other things if future needs arise (except for emergency fund which stays separate). Other than likely educational expenses, no big purchases like a house or boat are planned. Have house, don’t need boat. 🙂
I didn’t intend to imply that you can do or should do 140k x4 in a single year, but something like the full amount that you would have contributed anyway over years, in the year the child is born – 70k would seem doable, and if kids are also spread out at least a couple of years apart, then it’s putting aside 35k/ year for that purpose – definitely doable for you presently (if you choose to do it that way), or for almost any average-income physician without a spending problem or overwhelming loan burden. This probably would be not doable for someone in residency, fellowship (unless moonlighting a lot), or much lower-paid specialty, if without a high earning spouse.
Our own plan was to do 70k per kid (don’t yet have any) at birth or within couple of years of birth, and then nothing for the remainder of the time. We definitely don’t want to overfund, but we want to front-load. If more than one kid, then biologically they’ll end up spaced out at least a year or more likely two, so there should not be concurrent contributions for the whole bunch of kids. Then the question that we’ll eventually have to figure out is if we want to forego our state tax deduction – 20k yearly contribution per couple, with no carrry-forward, taxed at 4%. 70k could be contributed over 4 calendar years (20 in year1, 20 year2, 20 year3, 10 year4) vs. truly front-loading it in the first year…
We are interested in Coverdell also, and if we don’t drop working to part-time and continue to be over income limit, we’ll nicely ask our retired parents to do this for the hypothetical kid(s). UGMA did not seem as appealing when I skimmed it months ago, but I will have to read up on that one some more.
The problem with the UGMA/UTMA is that, in most states, the account becomes the child’s at age 18 (the age of majority) and the little critter can do whatever he/she wants with it 🙂 No mulligans on an UTMA/UGMA, so tread carefully!
UGMA is useful for money that you want to be spent relatively early in life but not on education. It is the kid’s money though, not yours. Same if you start a Roth IRA or a VA for them. Only the 529 is actually yours.
Put me in the “overkill” camp. I have contributed $1000/month/child. I also have UMTA accounts for both children and have mentally set aside income or taxable assets that can be mobilized, if necessary. I believe that this multi-tiered approach allows for flexibility in case plans change, scholarships are obtained, additional funding is necessary, etc.
TheGipper, have you considered the gift tax limits? Doing this every year could trigger the gift tax on contributions exceeding $14,000 per child.
Also, there are maximum balances that can be reached at which point contributions will no longer be accepted. They vary by plan, but range from $235,000 to $425,000.
If he’s got a spouse, no biggie, right? Then it’s $28K per kid and he’s only giving $24K per kid.
True story. Marriage is a wonderful thing!
A maximum contribution limit ” $235,000 to $425,000 “shouldn’t stop you. You’ll just need another 529 account. 49 other states to choose from.
Wow lots of money you are putting away. We put in 250 per kid per month in the 529’s and sizable amount in a taxable. I plan on pushing state school. If they want something different they will need to make up the difference.
This question is not for me, but I think a question that many physicians will have. Not all physicians are able to maximize their tax advantaged space. What would you recommend to a physician family who has to choose between a 529 in a state that does not give a state tax advantage vs adding more funds to an individual 401K?
Max out the 401K!
Could consider an autopayment of $100/mo to a 529–it is unlikely that will be missed.
The general rules are this:
Retirement before college savings.
Retirement money goes in retirement accounts, college money goes in college accounts.
So if you’re saving enough to meet your retirement goals, even if you’re not maxing out your 401(k), and you want to now save for college, then I think it’s okay to use a 529, whether you get a state tax break or not, without maxing out an i401(k). But there is no doubt that the 401(k) offers more of a tax break. If your goal is just to lower your taxes, then put the money in your 401(k).
Alex, Obviously, I would squeeze the Roth in there somewhere 🙂 At least contribute enough to 401k to get full match, then decide whether the next dollars should go to Roth or 401k given your tax planning results and whether you must have the deduction or can forego. I hate to see anyone pass up a Roth contribution in any year.
Instead of reading War and Peace this morning, I read the blog… 😉
Nice work by both Ms. Turner and WCI.
I am a 50 year old physician with two children approaching college age (17 and 14), both with sizable 529 plan balances (disclosure). I think that it is unrealistic for expenses of college to diminish over time, especially for the children of physicians.
WCI’s arguments work best for physicians and physician families earning more than $300k (arbitrary number), but for a physician family earning less than $150k, Ms. Turner offers some interesting options. Like WCI, I do not like the idea of using valuable Roth space, where I put my most aggressive assets, to fund college savings, which require a less aggressive allocation.
Yes, it was a bit long. The problem with these Pro/Con posts is that if you limit them to just 1000-2000 words total, it really takes a lot of talent to make a complete argument in such few words. I’m not that talented and neither are most of my “opponents.”
I disagree that college “requires” a less aggressive allocation, as I wrote about here:
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
Perhaps “require” is the wrong word choice. My 17 year old will go to college in 2017, probably private, out-of-state, and the marginal utility of additional wealth, for me, is a concern. I would be more upset by a 20% drop in his account than I am buoyed by an additional 10% investment return. I understand that this is a personal choice, but the principle is well-founded in the financial literature.
Indeed, if a 20% drop upsets you at all, there is good reason to be less aggressive.
Having read your position before and again, the disagreement is more philosophical than financial. I live in a world where it is the expectation of the parent to pay for the education of the child, as was done for me, and I embrace that responsibility.
I believe that your position is that you will pay for what you can or wish and the rest is the responsibility of the child (“Consequences of a Small 529 Account” section). You apparently took responsibility for your own education and your vision for your children reflects this. I may be wrong, but this is my interpretation; there is no “contract” in place, as there is for me.
Investing for my situation requires a different approach than for yours
Agreed, unless your income at that point in life is high enough that you can make up the difference from current earnings if the market is down.
If you over-contribute to a 529 for whatever reason, can I sign-up for local community college classes (enroll but don’t actually attend or participate) and pay expenses such as housing, food, new computer…. with the 529? It’s my 529 account, I am enrolled in class so shouldn’t I be able to expense things tax-free from the 529….
You may fail the class. I don’t know if that would bother you, but I wouldn’t want that F on my transcript, even if nobody else ever sees it.
A recently retired physician I know is taking a small engines class at the local CC. I didn’t ask if he’s taking advantage of any 529 funds to do so.
The lifetime learning credit is available if you’re legitimately taking classes and have a MAGI under $130,000 (married, filing jointly). It’s a refund of 20% of your costs up to a $2,000 refund.
I would be age 55-60 and completely done with schooling so I don’t think my ego would be hurt to much to have a transcript at a local CC with a few F’s on it if it meant I am able to pay some living expenses tax free!
wouldn’t***. typo
Interesting scheme. First time I’ve heard that one. You can only use pay for room and board if you are enrolled at least half time. That’s a lot of tuition to pay to avoid taxes and penalties. And the room and board is limited to the “cost of attendance” published by the institution.
Neither of our debaters has mentioned the American Opportunity Tax Credit, which is available to those with a MAGI under $160,000 (married, filing jointly). It is phased out between $160,000 and $180,000.
If you have a dependent working towards a degree at least half-time, you can pay the first $2000 towards tuition, you receive a $2000 tax credit. That’s free money. If you contribute an additional $2000, you get a $500 additional credit, a guaranteed return of 25%. I’d take that any day.
If you qualify, you will want to take advantage of the free $2000 before tapping any 529, ESA, Roth, etc… and strongly consider putting up the first $4000 to get the $2500 credit. Many practicing physicians will have too much income, but I plan to be retired when the kids go off to college, and I hope the credit remains intact.
Hoping for a tax credit to exist 10-20 years in the future? LOL.
No kidding. In last year’s State of the Union address, our President proposed taxing 529 earnings on withdrawal. Thankfully, that gained no traction.
POF – That thought actually crossed my mind while I was writing but, as WCI says, my talents do not include concision, and I promptly forgot it, anyway. Another idea for those who earn too much to qualify for HOPE is to let the child claim him/herself and get the credit. Takes a little planning, but can be done and worthwhile if your income level phases out the dependency exemption. Of course, you may want to direct deposit the refund to your own bank account 😉
In all fairness to you and The WCI, the tax credit isn’t a college savings vehicle, but a college payment strategy to employ. It can actually be used in conjunction with your Roth IRA strategy.
Withdraw $2000 from Roth, pay $2000 in tuition, receive $2000 tax credit.
Personally, I won’t be taking money from the Roth IRA to pay the $2000, but it could be an option.
I just wanted to remind eligible readers to get the tax credit before accessing the 529, ESA, etc…
I began investing in 529’s for our three kids in 2001. One graduated May, 2015. One will this May. One is a freshman in high school. I did not choose our state’s plan because it seemed to be run poorly and was with a fund company I had never heard of. Their prepaid tuition plan ended up going bankrupt. The fund company folded during the Great Recession. So, good decision there. I put one child’s money in Iowa’s Vanguard plan, one in Alaska’s T. Rowe Price Plan, and one in New Hampshire’s Fidelity plan. Fidelity’s returns were poor, so I switched to a Schwab plan. Schwab was using American Funds which had high fees, so I moved to the Iowa plan. With T. Rowe Price I invested aggressively in an age based plan. With Vanguard I played around on my own. Some years I was ahead, others the age based plan was ahead. All in all, by the time I moved our third’s to Iowa I just went with an age based plan for ease. But, I always invested quite aggressively.
In the meantime, my state started a new 529 with a small mom and pop investment shop that did offer Vanguard funds among others. I watched it for a few years. When they decided to allow a state tax deduction (6%) for up to $10,000/year plus no tax on withdrawals, I starting moving money back in state. Since I still don’t trust my state plan, I move the money in that I plan to use soon so I get the tax break without accumulating large amounts in state. Since I’ll likely be moving money in over 10-12 years, it is a nice extra boost to returns that I wasn’t planning on.
Managing the 529 is quite easy. You are now allowed 2 plan changes per year instead of 1 which is useful as your child nears college age and withdrawal time. Transferring plans is allowed once a year. Rolling over funds is allowed once every 12 months to the same beneficiary. But, you can rollover more often if you change beneficiaries. So, my daughter who graduated in 2015 finished with over 50K left in her 529. I am leaving it in her name to make rollovers easier to time and to be sure she doesn’t decide on graduate school.
Hope these thoughts help. Best wishes!
For those physicians and others > 55 years old who want to go back to school, check out auditing classes at a nearby college. Many offer free (or minimal cost) access to undergraduate classes. I’ve been doing this for years, first at Skidmore College (upstate NY) and now at Univ. of Denver. I’m currently auditing “Philosophy of Economics”, and have taken everything from art to zoology; no papers or exams required. And the best advantage: No 529 needed.
I didn’t get the impression anyone was actually interested in learning anything. Rather, they were looking for a loophole to get money out of a 529 without penalty or tax.
Most clever college financing move I’ve ever seen: my ER doc colleague has 3 daughters. One desired our home state school and 2 desired to attend UTexas – Austin. He relocated to TX to work and live during those years, becoming eligible for in- state tuition. Now he has moved back to live on his farm and work in our state.
Yes, the 529 is not a perfect college savings tool, but I think the arguments against it overstate the risks (cost of college going down, loan forgiveness?), while the impact to losing a Roth IRA as a retirement savings vehicle can be pretty substantial. I’d rather see clients take the chance of sub-optimizing a 529 plan (probably by saving less than the actual amount of college), than lose the Roth IRA as a retirement option.
Of course, most fee-only planners aren’t set up to make money managing 529s.
Would love to hear your thoughts on comparing a 529 ( with no tax breaks) to a pre-paid plan. For example, if one is a Texas resident
It depends on the pre-paid plan. Every one of them is different. If the rate of tuition increase is very high, it’s a great option. If not, then you would be better off with a more standard plan. And this assumes the options if your kid doesn’t go where you think he will are okay with you.
To this, there are sometimes little perks for participating. For instance, one of our kids won $5000 from the state because they were in the prepaid plan.
Also, make sure to fully understand the value if your kid goes out-of-state.
TKO victory to WCI here. 529s are so easy to utilize. Johanna seems confused by their “complexity” which is strange since rankings and reviews are readily available by reputable companies.
I think the golden nugget in this discussion is this: Treat Roth IRAs with great care. They are amazing and a pathway to great wealth buildup as a stretch IRA.
ahhh, Joseph, you’re killing me. I agree that 529s are a piece of cake to the regular commentators on this blog and in the forum, but you might be surprised at the questions I get about them…including those in med school/residency, and business professionals. The initial choices are daunting to many – after that, I agree, pretty simple. While I may not be confused, just making a point that most folks don’t choose finance as a hobby.
That said, WCI is truly a formidable opponent. I next hope to tackle a topic he won’t challenge me on, fingers crossed.
My 2 cents on college semesters abroad, which is a waste of time and money. Daughter #1 already had vast travel experience; we had dragged them all over the world. Spending a semester in Paris cost an extra semester at Big Bucks University. She could have otherwise graduated a semester early.
Alternatively, daughter #2 spent a summer working in a lab in Belfast. This satiated her get-out-of-town yearning, without the big tuition fees.
college abroad is a big scam
they need more time in the classroom
I disagree: I participated in the St. Olaf College Global Semester (1969), 6 weeks each in Ethiopia, India, Thailand, and Japan. The experiences changed my life.
Note: The program still exists.
I am happy to have my experiences around the world and I will allow you to have your own.
They are my treasures and to allude to them as a “scam” is insulting.
Study abroad and being “in the classroom” are not mutually exclusive.
To me it’s not really debatable. You need 100% of your Roth for your retirement. If you have more money for a college fund, put it in a 529 plan. If you don’t have any extra money, you skip the college fund.
No kids yet, but the plan for me is to max out all my retirement accounts and then save $25K in the kids account when born. Over the coarse of 1-2 years. Let it grow for the next 18 years. Whatever I have at that point will be used for college if I need more it will come out of my savings or from working.
I sure as hell hope 18 years from now I have enough wealth not to have to worry about some college tuition costs.
Interesting strategy. From zero to all in to nothing. Good luck on building a family!
I have very little interest in over saving, and I am pretty sure I may be retired or ideally working part time by the time they go to college so paying some out of pocket is a good tax break.
My number one goal is for myself to retire comfortably. After that I can think about paying for my kids college. Ideally I should be able to do both.
What I know is that the more I have invested, the more I enjoy work and the less stressful work is.
I think 529 plans are pretty cool up to the state income tax deduction limit. If you want some interesting podcasts that dive pretty deep into the 529 college planning stuff check this one out. He has a few other podcasts as well you can search for on his site. His ideas are a little radical at times (hence radical personal finance) and he mostly argues against a 529. I disagree with some of it, but it’s a fun listen. Cheers.
https://radicalpersonalfinance.com/138-masterclass-on-529-plans-a-k-a-qualified-tuition-programs-part-1/
That was well worth the listen and changed my mind a bit. Bottom line is that if you don’t frontload and use a typical target date glide path, your returns and amount of $ saved from tax free growth is much less most expect and not worth the loss of flexibility especially with the uncertain future cost of college.
But if you carry on 529s for grandkids, 40+ years of tax free growth, now we’re talking….
I’m on team overkill I guess. 140K (taking advantage of the 1 time 5 year gift rule) in each kid’s 529 shortly after birth. College savings done.
Probably not feasible for most, but I was able and after thinking about almost all of the issues in the article, I felt it was the right thing. Still do.
Cruiselines should get in this gig. Offering monthlong Mediterranean educational cruises with credit for those that have overfunded their 529s. Attendance laxly enforced.
Have you taken many CME cruises? Or Semester at Sea?
These things exist…
I’ve seen stuff like this already
First of all, I want to thank Ms. Turner for all her posts and comments in the forum. I find them to be uniformly helpful and accurate.
I treat the 529 like a Roth. However, given that Vanguard charges about 50 basis points in 529 fees, for long term investments that won’t be sold in your lifetime, the 529 and a taxable account come out equal, as the 50 basis points will equal the tax drag on index fund dividends.
However, I’m surprised that no one addressed the best and most unique feature of the 529, which is that 529 money is out of the estate, ie it’s the property of the child, and so not subject to estate taxes. As such, money in the 529 might avoid a 40% tax. So, my strategy is to fill my 401k/ tax deferred space, then Roth space, and finally 529 space. Then, when the kids are ready for college, if you have enough money, pay for college out of income, because college expenses are not subject to gift tax limits, and leave the 529 , if possible, to be used for grandchildren, or even by the kids with a manageable 10% penalty.
The only problem with the 529 is that the rules may change (there was recent talk of that, in fact). Also, while the spouse can be a successor owner on the account, any owner can change the beneficiary, and so you have to be careful about who gets control of the account in the event that both parents die. My estate attorney told me that there was no good way to have our trust become the “owner” of the 529 account , for reasons too complex to go into here, so they get control if the second parent dies and they are over 18.
I guess if you have an estate tax problem that’s a useful feature.
We started EIRAs, then decided the 529s were a better deal when fees rose on EIRAs, then realized what Johanna was saying- that the income is taxed at marginal rates if not used for qualified education purposes. I also thought (incorrectly I gather) that having a scholarship was not an alibi for penalty free withdrawal. Guess I was counting marginal versus capital gain tax rate as a penalty! We also had kid1 take her first board exam and realized she might get scholarships and still had the GI bill in reserve.
So as kid1 went tuition/fees free to State we emptied her EIRA and her and kid2’s 529 to pay her room and board costs (qualified expenses). We had used her EIRA to buy her a high school computer and (thanks for this article!) need to do similar for kid2 with her excess of funds there. GI bill will cover kid2 scholarship or no, even likely so at any private college which honors the GI bill (even for our wealth level? maybe not!) as covering their entire bill.
We are FP/military so less income when working than WCI and have already chosen to retire, and we are not inclined to transfer 529 money from our kids to any cousins (sadly we have no nephews/nieces), so we find 529s and EIRA not so helpful even though other tax deferred funds maxed out. (But we only have 2 kids, and no concerns we’d be paying full fare for both given GI bill.) We had started saving $200/kid/mo when they were born and that was prior to EIRA and 529, just lumped it with our ‘retirement’ savings in taxable accounts (never considered IRAs and work plans enough). As we got closer we laddered CDs so we’d actually have the cash showing up and not need to sell mutual funds perhaps at a bad time when college started.
Just out of fellowship but maxing the 529 for our infant after all retirement accts, Roths and, hsa are filled. Get the state deduction in our state and the 529 is in vanguard index funds so it seems like a no brainer. Load it up the same way I do the retirement accts and let it ride for 18 yrs. wife and I both went to private schools and the likelihood our child does too will be high. Those costs aren’t going down anytime soon.
One downside to front-loading and not making contributions each year, state dependent of course, is you may lose some state tax breaks down the line. Thus my approach-maximum amount I get a state tax break on each year.
I was wondering if any out there use IBonds for potential educational federal tax break. I realize the average physician family will be phased out of this perk by income, but for those planning an early retirement or maybe even for those thinking of using to fund a grandchilds 529, it seems to me a potential strategy that also maintains flexibility and provides a bit of inflation insurance to boot.
I think you can still buy them with a tax refund can’t you?
This is a great debate, and one I’ve been struggling through recently – we have two boys who will be starting college in the next several years. We have a 529 for our older son, and a decent amount of cash waiting for us to figure out where to put it. My wife and I each opened an IRA years ago for college funding, before 529’s existed. Since we opened the 529 (NY plan), we’ve been reluctant to put too much into it, in order to avoid overfunding. That’s why the IRA seemed like a good idea – we could use it for retirement or college, and we generally max out our workplace retirement options already.
One thing about using a Roth IRA for college that I didn’t realize until very recently, and didn’t see discussed above – even though there are no taxes or penalties when withdrawing the money, this money will count as income for financial aid purposes in the following year. This may not be much of an issue if you don’t expect to receive much (or any) financial aid, but worth considering anyway.
The way around this is to take out a loan during college and use the Roth to pay if off at graduation.
Hmm, that’s clever – ideally for a loan that would not require us to start paying until after graduation, right?
Would the Roth distribution still count as paying “qualified education expenses” if it’s used to pay off the loan?
1. Yes
2. No. You would have to use original contributions only if you didn’t qualify for any other exception (age, disability, death, first-time homeowner + 5-yr rule). If you need more than original contributions, you’ll have to balance the value of lost student aid against tax and penalty on the amount of growth/earnings you are distributing.
Just looked at the rules in Pub 590-B – it’s not very clear, but I don’t think paying off a student loan is a qualified higher education expense.
Ok, thanks for clarifying.
Our situation is kind of messy – we originally opened and funded Roth IRAs, but we continued to fund them for a few years after we exceeded the income threshold (by mistake). Once we realized the mistake, we had to recharacterize them as Traditional IRAs. End result is that we actually have nondeductible Traditional IRAs, not Roth IRAs.
We could convert the Traditionals back to Roth, but I’d rather not pay the taxes to do so. I *think* we can roll the taxable portion to another retirement account, and then remove the nondeductible contributions as a return of principal. This is contrary to what I usually see about pro-rata rules applying to IRA distributions with taxable and non-taxable amounts, but there is discussion in 590-A (the “special rule”) that implies this can be done.
?
If you can isolate the basis, might as well convert the non-deductible portion to a Roth.
Well, what we’re really trying to do is get the money out of these IRAs and into our college fund, without having to pay tax on the earnings. We opened the IRAs with the primary purpose of using them for college expenses. So, I think we’re going to distribute the earnings to another retirement account and move the contributions to the college fund, then replace the earnings with cashflow into the college fund from reduced contributions to our retirement accounts for a few years.
You opened a retirement account in order to save for college? Interesting. That can’t be very common. The good news is you should be able to avoid having to pay penalties on those withdrawals.
We were already maxing out our work retirement accounts, so we opened the IRAs for college funding with the flexibility to use them for retirement if we somehow didn’t use them up for college. This was before 529’s were invented. Now we’re moving what we can into the 529.
We could convert the IRAs back to Roth, but both my wife and I can do Roth 401Ks, and I could even do a backdoor Roth through the after-tax account in my 401K.
To clarify, I believe the impact on financial aid in the following year applies to any investment that is liquidated to pay college costs in the current year. Our plan is to use the IRA funds at the end of our second son’s college career, when there won’t be a following year to worry about. Of course, once our first son reaches college, we’ll know whether financial aid is an issue for us. We’re not doctors, but we’re above the threshold for direct Roth contributions, and the boys are just far enough part in years that they won’t overlap in college…
If your income is over the Roth contribution limit, you might as well be a doc. Plenty of docs are making less than you.
Why would a Roth IRA withdrawal count as income? That’s not taxable income. Is there a spot on the FAFSA for previous year’s Roth IRA withdrawals?
I haven’t had to actually fill out the FAFSA yet (still a few years in the future…), but the worksheets I’ve seen ask for untaxed portions of IRA distributions. Presumably, any taxable distributions are already included in the income reported on your tax form.
Alternatives to think about:
Pay down your mortgage, take out a ridiculously low rate HELOC and pay tuition when needed.
Start an asset-protected brokerage account, tax loss harvest for 20 years and gift the appreciated shares to your kid at 0% LTCG rate.
Take out loan from 401k.
Hire your kid at a young age for your home based business, pay no FICA until age 18, put half of their (deductible) wages into Roth. Remove appreciated savings as needed. Ask your accountant about sale-leasebacks.
I view 529s as low value savings accounts…low State deduction going in. Relying on massive appreciation to keep up with relentless tuition increases. Do you really want a huge 529 fund in 20 years that can only be used for educational purposes?
Most strategies involve utilizing income shifting, gifting and controlling income to retain the AOTC/LLC.
Two years at State school. Transfer and graduate from Harvard. Are you telling me Sociology 101 is better at Harvard? Most of the education your kids receive is junk. Gives French literature PhD’s a job.
Johanna wrote: “Many new parents cannot fully fund a Roth IRA, max out 401k(s), and contribute to a 529.” She also clarified later that the article was aimed at, in part, “residents, fellows, and other parents who have not yet achieved High Income Professional (HIP) status.”
WCI, for this group of non-HIP parents wouldn’t both you and Johanna agree that maxing out 401k and Roth IRAs come before investing into 529?
I think there are two separate questions: the order of funding and the order of withdrawals.
Unfortunately, https://www.bogleheads.org/wiki/Prioritizing_investments does not address the funding order of 529. I think one should fund it after all the other tax-advantaged accounts are maxed out. So, in the early years non-HIP parents may not get to funding 529 at all. As they grow professionally and acquire HIP status, they may start funding 529 as well.
The way I think about funding order is that 401k to the match and HSA to the max are obvious priorities. After that one should compare the benefits of:
1. 401k – double Fed tax-advantaged (tax-deferred – making it more attractive than Roth 401k) and potentially triple state tax-advantaged (if moving to a no income tax state in retirement).
2. Roth IRA is double Fed and state tax-advantaged (not tax-deferred) with attractive inheritance features.
3. 529 is double Fed tax-advantaged (not tax-deferred) and triple state tax-advantaged in some states (up to a limit).
To me 401k to the max is a clear first choice while Roth IRA vs 529 are not so clear. Considering that Roth IRA can be used for either retirement or college, while 529 can be used for college only, I would max Roth IRA before 529. Would you agree?
As for the order of withdrawals for college expenses, one can decide on that when this question becomes relevant, depending on the financial situation when the kid starts college. Of course, 529 (if any) will be used first, then taxable (reducing some optional expenses for a few years) and Roth IRAs as a last resort. Roth IRA does not need to be earmarked as the primary college savings account as Johanna suggested but, eventually, non-HIP parents may have to resort to dipping into it to pay for college expenses.
Does my line of thinking make sense? (Sorry for the long post.)
I don’t lump 529s in with Roth IRAs and 401(k)s because they’re for different goals. If you’re saving enough for retirement and you now plan to save for college, I think a 529 is a good choice even if you haven’t maxed out your 401(k). If you’ve saved enough for college, I wouldn’t then put retirement money in the 529 before a taxable account.
So I think “order of funding” questions only make sense when all the money is aimed at the same goal. Now, some might argue that you should look at everything together, even if it is for different goals, but I disagree with that. I think it makes sense to divide your portfolio up by goals and have a different AA and even different accounts for each goal. For me, that means:
Retirement: 401(k)s, Roth IRAs, DBP, taxable 75/25 portfolio
College: 529s Very aggressive portfolio
House pay off fund: Taxable Very aggressive portfolio
Kid’s Retirement: Roth IRAs Very aggressive portfolio
Kid’s 20s fund: UGMAs Very aggressive portfolio
You can do it differently if you prefer, but then you’ll need to wrestle with the order of funding issue.