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Planning for baby: College Savings

September 12, 2018

We have not figured out all of the near-term logistics, such as what the heck are we doing for child care?  Still, we’ve started thinking about some bigger picture items. One of these is college savings.

What is the goal?

If we have one kid, $200k saved for college by 2036 is my strawman goal. My “research” to come up this is only slightly more thoughtful than googling “college cost for a kid born today” and dividing the number by two. I really dislike pinning specific numbers on very long term goals, and  we will adjust as time goes on.  If you have a target, how did you set it?

How will we do it?

My calculations show that the only way for us to get there is to reduce our pretax retirement savings in favor of accounts we can access for college. This is painful because our taxes on the last dollar we earn are pretty high.  That said, we have access to put away lots pre-tax retirement money each year – way more than needed.  In 2018, we are maxing out all of the pre-tax space. A modest portion of this money is in a 457b (accessible at any age if no longer at employer), but the bulk of it is in 401k (or similar) accounts. I convinced myself that we can use an IRA conversion ladder to get some 401k money out early if we end up wanting to retire early.

Aside from the pre-tax savings, we have access to a mega-backdoor Roth IRA. I’ve not explored this in depth, because I prefer to take the tax break today. Still, this could be a useful way to dovetail college savings with retirement savings. It has a lot of the benefits of a 529, but you aren’t limited to using it for education. (In California, we don’t get a state tax deductions for contributing to a 529.) Having the money in a Roth vs a 529 also will help in financial aid calculations, assuming they don’t change in the next 18 years (haha).  I can’t think of a good reason why having it in a 529 is better.

For some, using a Roth for college savings is not advised because they need that savings room for retirement.  We have enough savings and enough yearly room to save more for retirement that this is a non-issue.  For our situation, the primary disadvantage of using a Roth for college savings is that we can’t take any growth out until I’m 59, so we don’t benefit from investment growth until college of offspring is over. Instead of assuming growth, we would want to save about $12k/year every year.  This seems mostly fine, except I also have an idea in the back of my head to use Roth principle if we wanted to retire early. But do we? When? And how much principle do we need in a Roth space to both fund college and an early retirement? And what is the best way to get it there?

Maybe we need to answer some of these question.  My general approach has been to just save as much as we can, however we can, and maximize future options and mitigate against uncertainty.  I think once we’ve had the baby a while and we find out about T’s tenure, we’ll have a clearer picture of how we want to steer our lives. The most likely case is we want to stay and retire here, but we’ll see. In the meantime, I’m planning to shuffle the order of our savings priorities, moving Roth IRA contributions from the bottom of the list to the middle.

Savings Priorities:

  1. Mandatory pensions savings (pre-tax) that we can’t opt out of
  2. 457b pre-tax retirement savings ($37,000)
  3. $11k/year in college savings via backdoor Roth ($5.5k each).  I’m happy for this to be our “minimum” savings bar.
  4. Mega backdoor Roth IRA up to some TBD amount (on the order of $5-$10k), then 403b up to some other TBD amount.  This is where we balance tax savings now with accessibility of principal and tax savings later.
  5. Mortgage prepayment, although it is almost impossible that we’ll get this far down the list.

For those who have kids, did your savings priorities change when you had them? Not only does it get harder to save (child care!), but there are suddenly different things to save for!

14 Comments leave one →
  1. September 12, 2018 8:17 am

    We have 529 accounts set up for both of our kids college education. However, I’ll admit that we are not saving anywhere near the amount based on projections. I don’t want to put too much into a 529 account when the college landscape could look much different in 15 years. I just can’t see college tuition continue to rise at the level that it is today. It feels like a bubble that will pop before then. I’m sure some higher level education will still be required for employment but I just feel like it will look different in 15 years.

    Part of me doesn’t think it’s a bad thing for my kids to have some accountability in paying their own college tuition. I don’t want them to leave college with massive student loans, but having some loans may not be the worst situation either. Hopefully we can pay for as much as possible, but I don’t want them to be entitled either. It’s a tough balance.

    • September 12, 2018 8:35 am

      I’d honestly feel a bit uncomfortable with a very large sum in a 529. This is another reason why I’m thinking using a roth for this purpose might be a better option for our situation.

  2. September 12, 2018 9:04 am

    If I had a crystal ball, I would go back and maximize our retirement savings first instead of saving in a 529. Back when we were both in academia we both had access to 457 and 403(b), but didn’t max out either until a few years in, and didn’t max out both until DH left. Only after that was maxed out and we still had extra would I direct money towards a 529.

    I absolutely believe that my kids will use all that 529 money that we have saved and continue to save, but financial aid does count taxable wealth and does not count retirement money. And with higher incomes we can cash flow more college costs.

    So… hindsight.

    Your priorities list looks great!

    • September 16, 2018 9:10 pm

      Thanks for sharing your hindsight – it is helpful!

      The only thing that I don’t like about my priorities is the annoyance of having to puzzle out how the mega backdoor Roth IRA works for us. It can’t be that hard, but ugh, annoying paper work desk errand.

  3. September 15, 2018 9:40 am

    I don’t have kids, but my parents saved very little for my college before I went other than some money I got from a relative. They did, however, pay off their mortgage when I was in high school, which I believe helped them cash flow my college costs. So I’m generally in favor of retirement and mortgage first. Plus, a lot can change over the next 18 years. Maxing our your retirement accounts might become easier and then you can save more too. How much time is left on your mortgage now? You could try to time it to when your first kid is 18 to help with college.

    • September 16, 2018 9:04 pm

      Since a Roth can work for either goal, it seems to be the most optimal and will give us the most options.

      I’m trying to wrestle the idea of BOTH paying for some part of college and retiring early. Paying off the mortgage to enable cash flowing college implies working to a normal retirement age, so I don’t love the idea. But we wouldn’t retire with a mortgage anyway, so it is a moot point! We’ll just have to figure it out as we go.

      We don’t need to save anything more in retirement accounts if we just want to retire at 65 or so, but of course we want to keep saving. Filling the pre-tax space is easy without childcare costs, but will be harder when we have to pay $$$$ for daycare. DINK life has been great – I’m going to miss it!

  4. September 18, 2018 4:27 am

    My wife and I decided to focus on real estate and retirement rather than save for college. Given the long term horizon before college, there are several different ways you can use investment properties to pay for college. Also, you can borrow for college but you cannot borrow for retirement. We wrote more about it here –

    • September 18, 2018 7:40 am

      That’s an idea i haven’t heard much about – thanks for sharing!

  5. September 26, 2018 10:41 am

    We inserted college savings around number 3, too, and dropped mortgage prepayment down a few rungs. First: Max out 401K. Second: Max out IRAs since I don’t get tax-favored investments. :/ Third: $14K a year in college savings. Daycare is a second line expense in our budget after mortgage, in descending order of cost. :/

    Then we have all kinds of insurances in case something terrible happens and incapacitates or kills one or both of us, and that’s a lot more than it would have been without children.

    I’m not sure if I’m aiming for $200k, maybe more like $150k. I worry a bit about oversaving in the 529 and then having to take the money out with a penalty later.

    Reading the comments, though, there is an argument to be made for prioritizing the college savings a little lower so we can cash flow college. I would feel more comfortable with that, at a certain point, truth be told.


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