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529 vs 401k for college saving

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  • Avatar familymedicineresident 
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    Earnest refinancing bonus

    Through my job I have access to a profit sharing plan and can save ~50k pretax. Through my calculations for retirement I only need to save about 30k.

    I might be wrong about this but I think I have read you can use distributions from a 401k and avoid the penalty if they are for qualified higher education expenses. Since I have about 20k left of savings in the profit sharing plan would it be better to put the college savings in there instead of 529?

    #213696 Reply
    Avatar Insurancepro 
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    401k would be penalized before 59.5. IRA would not, assuming you can show a hardship, meaning all other funding source have been exhausted.

    #213699 Reply
    Andrew Musbach Andrew Musbach 
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    Technically, yes, but you would have to prove a hardship and your plan would need to allow for it (clarifying that still subject to 10% penalty though). If your plan allowed loans, you could do that as well. You’re likely thinking of IRAs, which you can take out for higher education expenses without the 10% penalty if under 59 1/2.

    However, I would not recommend someone try to pay for college using their retirement accounts. A 529 plan is the best way to go to save for college – you may get a state tax deduction up front depending on where you live, the account grows tax deferred and if you take it out for qualified expenses then the distribution is tax free.

    I would run college projections to see what the expected costs will be and how much you should roughly save for college. If that’s your highest priority, and you need to save $20k/yr to fund the costs, then you can save that all in a 529. If it’s less than that, then you could put whatever is roughly required into a 529 plan and the rest into your retirement plan. You will be giving up tax benefits today by not maximizing the savings to your profit sharing plan though. The trade-offs are personal, but I wouldn’t rely too heavily on your retirement calculations being “precise” at only needing to save $30k. Giving yourself a little more cushion with retirement savings never hurts.

    Andrew Musbach, CFP® | [email protected]
    MD Wealth Management, LLC | http://www.mdwmllc.com

    #213701 Reply
    Avatar Peds 
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    How do you figure 30K?

    #213708 Reply
    Avatar Financial Naive MD 
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    I don’t think $50k per year in 401k is enough for retirement.

    #213771 Reply
    Avatar JBME 
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    The OP didn’t say how much they were putting away for retirement though…they were only talking about a 401k. There might be a roth ira. there might be a taxable account. There might be a 457 or 401a. And if the OP is a resident, $50k actually might be enough right now, considering OP is a resident. That’s close to 100% of salary (of course based on those #s I have to assume OP is married and hope SO is also saving for retirement)

    #213823 Reply
    Avatar familymedicineresident 
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    Sorry the site won’t let me reply for some reason.

    #214118 Reply
    Avatar familymedicineresident 
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    Now it is. Sorry for the delay.

    I got to 30k using an article by WCI. My family lives a modest life style currently on about 70k as a resident. We will have some increase in our spending as an attending but honestly not much. We aren’t planning to move or upgrade our cars. Our major expenses come from having children which will not be the case in retirement. Thus for retirement yearly income I assumed needing 100k yearly. I used the formula provided in the WCI article and it pointed me toward needing to save 30k yearly to meet a goal of 3million at retirement.

    I am also going to max out an HSA which should overshoot.

    #214119 Reply
    Avatar G 
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    Now it is. Sorry for the delay.

    I got to 30k using an article by WCI. My family lives a modest life style currently on about 70k as a resident. We will have some increase in our spending as an attending but honestly not much. We aren’t planning to move or upgrade our cars. Our major expenses come from having children which will not be the case in retirement. Thus for retirement yearly income I assumed needing 100k yearly. I used the formula provided in the WCI article and it pointed me toward needing to save 30k yearly to meet a goal of 3million at retirement.

    I am also going to max out an HSA which should overshoot.

    Click to expand…

    Huh?

    Look, max out your 401k, max out your HSA.  If you have money left over, put it into a 529, although as has been discussed on this forum (ad nauseam) you’ll have more flexibility by putting it in taxable.

    #214121 Reply
    Liked by okayplayer
    CordMcNally CordMcNally 
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    Now it is. Sorry for the delay. I got to 30k using an article by WCI. My family lives a modest life style currently on about 70k as a resident. We will have some increase in our spending as an attending but honestly not much. We aren’t planning to move or upgrade our cars. Our major expenses come from having children which will not be the case in retirement. Thus for retirement yearly income I assumed needing 100k yearly. I used the formula provided in the WCI article and it pointed me toward needing to save 30k yearly to meet a goal of 3million at retirement. I am also going to max out an HSA which should overshoot.

    Click to expand…

    Your plans now probably won’t be the same plans you have in the future. Also keep in mind that $100k today isn’t going to be the same as $100k in 2049. Every physician should be maxing out all available pre-tax retirement space. If your lifestyle is modest then that will still leave you with plenty of money to do whatever you want to do.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #214128 Reply
    Avatar Tim 
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    Use a free retirement planner like Fidelity or Vanguard or different ones. It’s a combination of SO MANY factors, use them simply to crunch the math.

    Any projections are simply probabilities. WCI nor anyone can tell you the “”right number”.

    The balance between spending and saving is personal. The higher the percentage saved, the better your chances. Rule of thumb is at least 20% up to 35%. You sound frugal. But is $30k the answer? It’s a start.
    It’s better to over shoot the savings than be short.
    Good luck, 30 years from now hindsight is great!

    #214132 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
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    Now it is. Sorry for the delay.

    I got to 30k using an article by WCI. My family lives a modest life style currently on about 70k as a resident. We will have some increase in our spending as an attending but honestly not much. We aren’t planning to move or upgrade our cars. Our major expenses come from having children which will not be the case in retirement. Thus for retirement yearly income I assumed needing 100k yearly. I used the formula provided in the WCI article and it pointed me toward needing to save 30k yearly to meet a goal of 3million at retirement.

    I am also going to max out an HSA which should overshoot.

    Click to expand…

    I’m not sure you used the calculator correctly.

    Never assume that you will have a 30+ year career. I can guarantee both your job and you will be very different in 10 years. Priorities change, people change, and jobs can disappear.

    To answer the question, max out all tax-advantaged accounts including 401(k), backdoor Roth, possibly HSA & 457(b), etc… Save and invest half of your take home pay and you’ll have financial independence in about 15 years, give or take.

    529 Plans serve a different purpose; I’d put in enough annually to get your max state tax break if one exists where you live.

    Cheers!
    -PoF

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #214144 Reply
    Liked by Lordosis

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