In 2016, we had a baby, DPR. We expect that DPR will go to college one day, largely because we are over-educated and we expect her to follow in our footsteps to some extent. We want to contribute some money to said college education, although not necessarily pay for all of it. Our parents paid for most of our college educations, which was a great leg up financially as young adults. Funding some of DPR’s college education is paying that forward.
Given this amorphous goal, we initially thought we would open a 529 (in one of our names) and invest a bit of money for DPR’s future college expenses. We researched in which state to open the account (Washington has no state income tax and therefore no 529 benefit) and what investments we would choose for this two-decade goal. We started setting money aside in a savings account in anticipation of contributing it to a 529.
But as we deliberated, we began to see the advantage of keeping our funds in a more flexible vehicle. While we have always intended our Roth IRA money to be used for retirement, we can use our contributions for any purpose and some of our gains for higher education without penalty. If we decide to pivot at a later date, the Roth IRAs can serve as an alternative 529. (Of course, we would only use a fraction of the funds for higher education, preserving enough for our own retirement primarily.)
We have contribution room available in our Roth IRAs and Roth 401(k) above what we want to save for our retirement (18% of Kyle’s income). (Plus, we haven’t contributed any money to Kyle’s terrible 401(k).) Instead of contributing to a 529, we could contribute additional money to the retirement accounts. We don’t need the 529 account at this point as an additional tax-advantaged account.
The big upside to staying more flexible is that if DPR doesn’t need lots of money for college, the money can stay invested and tax-advantaged for our retirement. While I’m not counting on DPR getting a massive scholarship, I am curious to see how higher education costs change over the next couple decades. I’m hopeful that higher education will be disrupted and costs won’t continue to inflate at their recent rate.
As of now, the way 529 assets and retirement account assets are considered for financial aid for college are different. If we use money from a Roth IRA for college expenses, it counts as income and might decrease any financial aid awarded in the subsequent year. But if we sufficiently over-save inside our retirement accounts, we will have the option of decreasing or forgoing retirement savings during the college years in favor of cash flowing the college expenses.
Given that first choice of the type of tax-advantaged account to use for DPR’s college savings, there is still the question of how to invest it. We are fairly risk-tolerant, so we want an aggressive asset allocation for at least the first decade of DPR’s life. We can use our existing choice for our retirement savings (a Vanguard Target Date 2050 fund) for the next few years until we decide to change the allocation. (We will probably depart from the Target Date asset allocation in 2020.)
So basically, we are contributing a bit more to our retirement accounts at their same allocation with the expectation that we will help DPR with her college expenses flexibly when the time comes. We’ll re-evaluate the asset allocation as the date for drawing on the finds grows nearer. As we run out of contribution room in our retirement accounts, we will reconsider diverting savings into a 529.
Are you using your Roth IRA for any savings other than retirement? What’s your plan for helping your kids with college?