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529 question

  • Avatar sebBo13 
    Participant
    Status: Physician
    Posts: 27
    Joined: 05/16/2019

    Dear WCI community,

    I am a typical “late to the game” physician with one kid starting college in the fall and another one starting college next year (likely also private or out of state). Tuition for the older one will be 42K, the younger one will be around the same or a bit higher.

    We have a total of 100K in their 529 (66 and 34 respectively). Our current household income is around 650K and we have a what I think modest life style with about 160K in living expenses. Anyhow, I can max out all 401a/403b/457, backdoor IRA x2 and solo 401K for a total of around 100K and still save about 20K per month. My wife and I were thinking of investing in a few Airbnb properties but are both concerned with tuition costs and would like to have that money in the bank before starting our real estate project. So my idea was to just let the money accumulate in our 2.1% Ally account until we have about 250K which should take about a year and cover all expenses. Living expenses/room and board will be payed on a monthly basis as part of our regular expenses.

    My questions is this – is there any upside in continuing  to contribute to their 529 during the next 4 years as opposed to using the savings account? Our state has no state income tax. My understanding is that the capital gains of the 529 will be tax free, but I am not sure if that is enough of an advantage to justify using the 529 given the inherent risks of a possible market decline. Maybe there is something I am missing?

    Thank for your advice in advance.

    #232417 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3517
    Joined: 01/14/2017

    Given the immediacy of your needs I think you could do a very conservative asset allocation in the 529 or just do VMMXX.

    You said you’re late to the game. Just re: college or retirement as well? If retirement as well, given your college spending needs, I’d clamp down on the spending a bit.

    #232445 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1799
    Joined: 01/08/2016

    The safest thing to do would be vmmxx. If you put it in 529, the interest would be tax free.

    Personally, I would superfund @150 ×2 and be done with it. Until grad school….

    #232451 Reply
    Avatar ZZZ 
    Participant
    Status: Spouse
    Posts: 702
    Joined: 06/18/2018

    Most 529s have a ‘guaranteed return’ option, which is basically a money market. Since you know you’ll be spending the $, see how the ‘guaranteed’ tax free return compares to your Ally taxable interest rate and proceed accordingly.

    #232458 Reply
    Liked by ENT Doc
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1860
    Joined: 02/11/2019

    The nice thing is you know almost exactly how much you need. The not nice thing is it does not have time to grow. The benefit of a 529 is tax free growth and maybe a state discount. Since you do not get the latter and the former would likely only save you at most a couple hundred bucks in gains I think it is too late and you should just use a high yield savings account or mmf.

    “Never let your sense of morals prevent you from doing what is right.”

    #232460 Reply
    Liked by jz, Infinity
    Avatar sebBo13 
    Participant
    Status: Physician
    Posts: 27
    Joined: 05/16/2019

    Thanks for the replies, looks like I will keep it in the Ally or do VMMXX or similar.

    I did 2 residencies and did not make real money until my early 40’s (45 now) so I am also late to the retirement. As soon as the college is payed for (which should be in a year) we should be able to save 100K 401K plus an additional 250K per year. Should be able to catch up quick. Re cutting spending, its mostly a large mortgage, so not a whole lot of ways to cut down. At some point I will post a separate “critique my finances” post.

    #232462 Reply
    Liked by EndoRobert
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 3517
    Joined: 01/14/2017

    Thanks for the replies, looks like I will keep it in the Ally or do VMMXX or similar.

    I did 2 residencies and did not make real money until my early 40’s (45 now) so I am also late to the retirement. As soon as the college is payed for (which should be in a year) we should be able to save 100K 401K plus an additional 250K per year. Should be able to catch up quick. Re cutting spending, its mostly a large mortgage, so not a whole lot of ways to cut down. At some point I will post a separate “critique my finances” post.

    Click to expand…

    Right on.  We are happy to help.  Wasn’t trying to pile it on there.  Just wanted to make sure you weren’t a 59 year old doc with 200k in retirement savings.

    #232464 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1860
    Joined: 02/11/2019

    You seem to understand the pickle you are in. As long as you have reasonable expectations on the length of your career and you can save like you describe you should be fine. We would be happy to help fine tune if you need it. But I can tell you the answer from most people is going to be to save a ton of money as soon as possible.

    “Never let your sense of morals prevent you from doing what is right.”

    #232494 Reply
    Liked by EndoRobert
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
    Posts: 1195
    Joined: 01/26/2017

    Thanks for the replies, looks like I will keep it in the Ally or do VMMXX or similar.

    I did 2 residencies and did not make real money until my early 40’s (45 now) so I am also late to the retirement. As soon as the college is payed for (which should be in a year) we should be able to save 100K 401K plus an additional 250K per year. Should be able to catch up quick. Re cutting spending, its mostly a large mortgage, so not a whole lot of ways to cut down. At some point I will post a separate “critique my finances” post.

    Click to expand…

    You’re starting late to the game, have minimal college savings, large mortgage and you now want to start a real estate empire? Forget the real estate and stick with saving and investing.

    FLP

    #232521 Reply
    q-school q-school 
    Participant
    Status: Physician
    Posts: 2629
    Joined: 05/07/2017

    i’m sorry, i know it’s monday morning but are you asking whether to put money in to 529 versus just ally for purposes of education or are you talking about using money to purchase real estate for investment properties?  or both?

    it seems like you have plenty of income and don’t spend that much relative to your income.  you have to decide whether priority is education or retirement and proceed accordingly.  remember investing in property is not all passive and may require periodic capital injections.  what is your reason for selecting airbnb as opposed to index funds?

    20k per month will take 1 year to get to 250k.  i assume you already have an emergency fund?  you don’t need that 250k if you decide to use index fund investing for retirement and you can cash flow the tuition.

    sorry if i’m confused.

     

    #232529 Reply
    Avatar sebBo13 
    Participant
    Status: Physician
    Posts: 27
    Joined: 05/16/2019

    i’m sorry, i know it’s monday morning but are you asking whether to put money in to 529 versus just ally for purposes of education or are you talking about using money to purchase real estate for investment properties?  or both?

    it seems like you have plenty of income and don’t spend that much relative to your income.  you have to decide whether priority is education or retirement and proceed accordingly.  remember investing in property is not all passive and may require periodic capital injections.  what is your reason for selecting airbnb as opposed to index funds?

    20k per month will take 1 year to get to 250k.  i assume you already have an emergency fund?  you don’t need that 250k if you decide to use index fund investing for retirement and you can cash flow the tuition.

    sorry if i’m confused.

     

    Click to expand…

    The question was where to put the money for my kids education. I did not think that funding the 529 during the time the kids are actually in college would be really beneficial and I got that confirmed by the replies.

    No emergency fund per see but always 50K ish in checking account and Ally.

    Beyond that, I am in the lucky position that I like my job so have no problem working until 55-60. Also I have a very flexible and profitable side gig that will allow me to gradually “slide” into retirement. Mortgage by the way is about 1 year gross income, so by WCI orthodoxy probably not too bad.

    In regards to our “real estate empire” we were actually looking for some active involvement as my wife was a stay at home mom and has the right temperament and skills to run a AirBnB. We will try one and see how it goes. We live near the beach, so there is a pretty good market for upscale AirBnB places. Will have to do some more research but I don’t think that any index fund will be able to match the returns of a decent AirBnB even with conservative estimates.

    #232533 Reply
    Liked by q-school
    q-school q-school 
    Participant
    Status: Physician
    Posts: 2629
    Joined: 05/07/2017

    rule of thumb: if you need the money in five years or less, don’t invest it in stock market.  i personally think it can be different if you can cash flow things and it is possible you might use the money down the road.  i’m not sure i agree that 529 is not in play at all however.  depends.

    this is definitely in the category of overthinking it.

    if you want to save some for grad school.  if you think college may take five years.  if i read correctly, your second child is one year away, so you have at least five years of college expenses for undergrad, three of which are at the same time.  there is no state tax benefit for you.  unless you plan on paying for grad school, it seems the 529 has limited benefits for you.  except the money will grow tax free.  so why not compare what the internal rate of return is on their money market?  that ally is going to be heavily taxed at your income bracket.  even so, the difference in your overall expenses is likely going to be negligible, but over five years if you have 200k in there, it might be worth it.

    good luck

     

     

     

     

    #232543 Reply
    fatlittlepig fatlittlepig 
    Participant
    Status: Physician
    Posts: 1195
    Joined: 01/26/2017

    i’m sorry, i know it’s monday morning but are you asking whether to put money in to 529 versus just ally for purposes of education or are you talking about using money to purchase real estate for investment properties?  or both?

    it seems like you have plenty of income and don’t spend that much relative to your income.  you have to decide whether priority is education or retirement and proceed accordingly.  remember investing in property is not all passive and may require periodic capital injections.  what is your reason for selecting airbnb as opposed to index funds?

    20k per month will take 1 year to get to 250k.  i assume you already have an emergency fund?  you don’t need that 250k if you decide to use index fund investing for retirement and you can cash flow the tuition.

    sorry if i’m confused.

     

    Click to expand…

    The question was where to put the money for my kids education. I did not think that funding the 529 during the time the kids are actually in college would be really beneficial and I got that confirmed by the replies.

    No emergency fund per see but always 50K ish in checking account and Ally.

    Beyond that, I am in the lucky position that I like my job so have no problem working until 55-60. Also I have a very flexible and profitable side gig that will allow me to gradually “slide” into retirement. Mortgage by the way is about 1 year gross income, so by WCI orthodoxy probably not too bad.

    In regards to our “real estate empire” we were actually looking for some active involvement as my wife was a stay at home mom and has the right temperament and skills to run a AirBnB. We will try one and see how it goes. We live near the beach, so there is a pretty good market for upscale AirBnB places. Will have to do some more research but I don’t think that any index fund will be able to match the returns of a decent AirBnB even with conservative estimates.

    Click to expand…

    No Airbnb property will ever be able to match up with the ease of stock market investing. And no index fund will ever match up with the headache and work of managing an Airbnb property.

    #232675 Reply

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