529 vs. Roth IRA

[olderpapa]

I will be 59 1/2 at time of withdrawals. Isn't the control (low cost ETF) and flexibility (retirement or college) of Roth IRAs compelling? My state (CA) offers no tax breaks. I plan on using some combo of the two, but for those of us upper 30s and above parents it seems a great option. When the time comes, I would actually look to draw from outside the Roth inorder to preserve it. I'm I missing something

[tjkohler]

So you think you'll have enough for retirement so that you won't need the money in your Roth? That's what it basically comes down to right. Take me for instance.

I put in $15K into my companies 401K
My company puts in $4.8K into my 401K
Thus I have just under $20K / year going into a 401K
I put in $4K into each of my Roth and my wife's Roth each year. For a total of $8K per year.
I'm 33 and she is 32.

In the end, that won't be enough for retirement, so if I'm raiding it for my kids education ... then I'm screwed. What is it that you are doing that will make it ok for you to raid your retirement?

[tss4]

If you have allready funded your retirement wihtout the Roth, then using it as a college savings tool may make sense in your case. If not, then it may be unwise to use a great retirement savings tool for college. You need to sit down and make sure you will have plenty of money for retirement before making this decision. You only get one shot at saving for retirement.

No one can tell you the better choice without knowing the specifics of your financial situation.

The only part that I think me and tjkohler disagree on is that just because you aren't using the Roth money for retirement, doesn't mean you aren't saving enough. There are other retirement vehicles (Pensions) etc and the amount of time you have been saving in a 401K makes a lot of difference. So look at your own situation.

[This message has been edited by tss4 (edited May 13, 2006).]

[agalkin]

It also depends much on what your expectations are for retirement and college educations. If you want to retire at 50 and travel around the world or going to space as tourist you may need to fully fund your 401(k), your wife 401(k), yours and your wife's Roth IRA and an addition put around a 1 mil. In taxable account and still come short. If on other hand you plan on taking early retirement at 75 and live in some rural low cost area you may not need to fully fund even 401(k). If setting aside these extremes you plan something in the middle you may want to balance your retirement savings with your college savings. If you expect to pay $100K for your kids' college it does not matter whether you will have to withdraw funds from 529 or Roth, amount will be the same. At the end both Roth IRA and 529 are similar from taxable point provided Roth IRA withdrawals start at 59 1/2. Moreover as I understand it withdrawal from Roth IRA after 59 1/2 can be used for any purpose while qualified withdrawals from 529 can be used only for a single goal. Roth is also more flexible as you have much more choices. So if you cannot fully fund both Roth IRA and 529 you may want to choose Roth. I also believe that Roth IRA assets do not count at least now as assets by majority of colleges.

[user_6787]

I think the only thing "missing" is that the Roth withdrawals will show up on your FASFA / CSA forms as income and therefore increase your dreaded EFC. My hope is that if the kids have loans after graduation I can pull out the Roth money at that point.

tjkohler - If your saved amount rises 3% per year and you earn 7%, at 63 you'll have $4.3 Mil. I know there will be inflation between now and then but I hope you can live on 5% of that per year. Am I wrong?

[rsinj]

>
Of course, I can't speak for TJ, but if one needs money to last for 30+ years, they can only safely take out 4% of the initial need and increase that with inflation. 4% of 4.3 million is $160,000. The present value at 3% is around $70,000. If TJ is doing financially well today, there is a great chance that this in not enough money.

Sorry - but, I am laughing wildly. $4.3 million is not enough to retire on in 30 years? I suppose in 30 years, wages will also have gone up a corresponding amount - so I guess the average salary will be somewhere around $500,000 a year. Gasoline will be up in the $10 to $15 per gallon range. The government wll be collecting about $200,000 income tax on that $500,000 salary. Health insurance will be somewhere between $50,000 and $75,000 a year for a family. And, since we have these average salaries of $500,000, a heck of a lot more people will be topping out on their Social Security taxes - which by then will have a salary cap at $300,000 (and at 7.5% times two, you can figure what that means they're going to be having flowing in to the system).

Now, let's get real. Tell me - how many people do you know that have this kind of money? Even in todays dollars? Small wonder that anyone can retire.

Also, in your calculations, you seem to have applied inflation, and increasing your withdrawal with inflation, where are the annual earnings on the $4.3 million? CDs today are pushing up against 5% - that alone would be over $200,000 a year in earnings with no risk.

[This message has been edited by rsinj (edited May 14, 2006).]

[rsinj]

a number of points:

1. I am certain that it will not be difficult to live in retirement off of $200,000 income - even accounting for the taxes due, and the fact everyone will get something from all they've contributed in to Social Security.

2. I think that increasing the amount needed automatically by 3% every year to account for inflation is not necessary. Yes, it looks good on paper so you have all these nice little equations, but, that is not how things work in reality. Let's look at the past 5 years. Has everyone's needs gone up by 3% a year? And how many people have gotten at least an average 3% annual raise over the past 5 years? The fact is, this is not how things work in reality. You have a certain amount of income, and you make do with it. If that means tightening your belt or living a a little lower standard of living, you do it.

In our example with TJ, if, after taxes, he'll have $120,000 a year, well, he'll manage - and I doubt there will be a need to dip in to take much more out of principle that his $4 million would dwindle to zero in 30 years.

Let's be realistic - how many of us are even going to earn close to $4 million in our working lives of more than 30 years? Somehow, we're all managing. So, how can you say you won't be able to make $4 million last 30 years? Again, I think that the assumptions being made are unrealistic.

[This message has been edited by rsinj (edited May 14, 2006).]

[tjkohler]

I agree 100% with anonymous.

Assumptions:
1) Will retire in 30 years
2) Will live an additional 30-40 years
3) Inflation at 3.5% a year
4) Someone put out $4 million so I'll say in 30 years I'll have 4 million.

If I want $120K a year (before taxes) in todays money then in 30 years I'll want $337K a year then. And more realistically I'll be wanting a little more since I'll be retired. So if we were to round that up a little you can see that I need 10% of my total retirement every year. Assume I can get even a 6% guarenteed return, that leaves me 7.5% lose on my retirement money every year. 6% - (10% + 3.5%) = -7.5%. I'll be lucky to have money for 10 years.

No I don't think 4 million is enough to retire on in 30 years if you retire at 30 and are healthy. Not even close. Unless you want to sit at home waiting to die. I myself plan on going on a few vacations and not driving a rusted out chevy. $4 million in 30 years is about equavilent to $1.3 million now. Could you live for the next 30 to 40 years if I say here's $1.3 million now and you can't even have anything else other then what that money can do for you (ie investments, but no working)? Heck no.

[user_660]

HMMMM... any one recall the days when the price of a brand new car was around $2000??? or a brand new single family home for $30,000????

NOW, you MAY get a brand new car for $30,000...and that brand new single family home?...hundreds of thousands of dollars!

I wonder how many people, in say 1950, who bought a home for $30,000 though 50+ years later that home would be $300,000+?

[jeffh]

rs,
I have to agree with you.
So you have 4 million in the year 2036 and if you could retire today, you could live on 70k.
The 70k would have to be 170k in future value dollars in year 2036 for you to live comfortably.
And each year that 170k gets bumped up 3% for inflation or just to splurge (you are old after all).
That 4 million at 6% throws off 240k (lets say it is tax free because you transfered your 401k into an ira and then converted to a Roth when you quit your job).
These Roth withdrawals are free , or how about just taking out a home equity line of credit on your fully paid off house worth (at 3% inflation) that current 300k house is worth 2.3 million.
I think I might let my 4 mill portfolio grow a bit more in my tax free roth fund.

Ok, lets say you don't even own the house. The 6% return on your 4 mill portfolio is making you money after taking out the 3% for comfortable living.

After 30 years of payouts you still have 3 mill.

I think I can be happy with that.

[This message has been edited by JeffH (edited May 16, 2006).]

[tjkohler]

"Ok, lets say you don't even own the house. The 6% return on your 4 mill portfolio is making you money after taking out the 3% for comfortable living."
Could you live off of $39,000 / year BEFORE taxes today? That's what the equivalent of what you just said is. $1.3 mill today is $4 mill then. 3% of 1.3 mill is $39K. then take out taxes. Lucky making that little money you are in a low bracket, but they will still be taking about 15% from you leaving you with $33K. No way in hell I could live off that, let alone enjoy retirement.

And what's this about you ignoring taxes? Please tell me how I could do that.

Seriously. I would really like to know how to retire on $1.3 million (in todays money, meaning $4 million in 30 year). I'd be able to relax my savings then. As it is, I see ZERO way of doing that, and all your math supports that.

[morganpartyof4]

I thought the topic was Roth Vs 529! So is Roth better or 529. I have been told that you could pull out coollege cost from the Roth without penalties. Is there a difference in putting money into two seperate accounts vs all of it into one, as long as that one is diversified. I am considering just putting everything into a Roth and applying for loans which after the 1st year my son can claim himself as the provider and be eligible for more grants. Am I wrong

[tjkohler]

"I thought the topic was Roth Vs 529! So is Roth better or 529."

That's been the entire point of the conversation. Don't use your Roth money for college. Fund your Roth fully first, for retirement. Then fund your 529 plan. That's the point of the whole debate above.

[tss4]

See, I still don't believe its always wise to say that you should ALWAYS fund the roth fully before a 529.

Lets take my case for example and feel free to analyze my numbers and tell me where you think I'm wrong. Better to get all sides of the arguement.

Amyway. I'm 28. Me and my wife currently have about 125k in a 401K. I put 10% of my pay plus a 5% match in the 401K. My wife puts 10% of her pay plus a 10% match. I make 70k and she makes about 70k. We average about 4 to 5% pay raises per year, but I would expect to top off at about 100k in todays money. So anyway, by my calculations assuming 8% return and retiring in 35 years (63, which is pretty early), I should have about 6 million. Plus I get a pension worth 60% of my income at the time of retirement. If I remember correctly, 6 million is about 1.7 million today. SO I have that plus my 60% of 100k, plus what evers left over of social security. In todays money, that equates to better than a 150k a year (before taxes). That aint bad. I should be able to go on many trips with that money and live quite a nice lifestyle. Especially, since at some point, I should have my house paid off.

So, I don't see why, I wouldn't now save for my kids college instead of retirement, since that seems to be under control.

[This message has been edited by tss4 (edited May 19, 2006).]

[tjkohler]

tss4
You seriously want to work for money till 63? I want to be done working for money by 50-55, there is no way in heck that I want to be working for money at 60. At that point I want to be 'retired' and any work I do will be for things like the Humane Society, Explorer Scouts, etc. Or simply be selfish and retire completely, though I can't see myself doing that. Priorities change and preperation brings opportunity.

Sure you'll have your main house paid for, but what about the summer cabin that you want for the grand kids? It might be paid for, but as your kids have more kids you might want to expand.

I will not be trapped like my parents are in that they can retire, but they can't enjoy retirement, it's more simply 'surviving' until you depart. I want to have month long trips to places like Australia, Hawaii, Red Sea (assuming it's safe then), etc.

At your income levels you and your wife should be able to max your 401Ks ($15K/year/person), your Roths ($8K/year ... while you are elligable, because in a couple years you'll make to much), and still be able to put a few $K a year into college education.

Obviously you want kids ... so what happens to your jobs when you have them? Are you both going to be working full time still? Do you think you'll want to? Heck I don't. Kids are way to much fun. So it's nice to see you assuming that you'll have both salaries at full, I'm not sure how realistic that is.

[tss4]

Its completely realistic. We currently have a child and we both work full time. I will admit that unlike most people, both me and my wife really enjoy our jobs. I have no problems with the thought of working till 63. I like what I do. And I agree that children are tons of fun. My child is one of the two best things that ever happened to me (my wife being the other). But, I think its unfair to imply that we can't be great parents and both work. But it does require a more equitable distribution of child rearing responsiblities than what is traditionally accepted.

Like I said, depending on ones financial situation, it isn't always a requirement that you fully fund your roth IRA. I will readily admit that my situation is better than most and that those with less retirement savings opportunties, should probably make use of the roth IRA... but there are exceptions.

And you can't tell me that based on the savings I outlined, I won't be able to travel all over the world. I could do it now from a financial perspective (the realities of raising a young child are the limiting factor for travel). And I'll be making just as muh in retirement even after adjusting for inflation.

[tjkohler]

"But, I think its unfair to imply that we can't be great parents and both work. "
I'm sorry I never meant to even come close to saying that. I simply said that you may decide that your work should be put aside more. I love what I do, but I would not love to do it for a long time. I also would love to spend more time with my kids.

No I don't think you could travel around the world with your income. You only make 20K more then my wife and I and we couldn't even come close to vacationing and volunteering like we'd want to ... even if you take off our house payment. I figure I'll need at least 40-50% more money in retirement then I make now. Again, I don't plan on doing what my parents are doing ... work till 60, then sit around and wait to die because they can't afford to live and/or sponsor charities.

If you are comfortable knowing that you'll be doing the same work for 40 years at the same job then great for you.

[tss4]

Well, you can do a lot with just 20k extra (and that was a conservative estimate on my part for retirement income). But I think it comes down to how lavish you want to live. You CAN do a lot with our income right now. It only gets better when the house payment disappears. I will certainly agree that I won't be doing nothing but traveling on that income. But there's a huge gulf between the lifestyle I think you and I can both admit I'd be living and being trapped at home merely living, like it sounds like your parents are doing. Again, I think its great your saving so effectively. It can't hurt and its much better than not saving enough. I'm just saying that what is best for your personal goals and finances is not neccesarily best for others. You can't say a person should ALWAYS fully fund thier Roth before a 529.

I fully respect your opinion, but it seems like we're going around in circles now.

[This message has been edited by tss4 (edited May 20, 2006).]

[tss4]

anonymous,
Good point about job stability sometimes contributing to a lack of certainty over future retirement plans. My pension and 401k would take an act of congress to remove. So I'm feeling pretty sure about my retirement. However, I will concede that my wife's 401k could be affected by the whims of private business.

On a side note. How can you say that you could see advantages to funding a 529 before a 401k but not a 529 before a roth? 30% tax taken at the beginning is mathematically the same at 30% tax taken at the end. What else are you taking into consideration?

[tss4]

I certainly believe that a 28 year has much to learn, but I don't believe that this conversation is fundamentally flawed because I am 28. A 28 year old can access their financial future in the face of possible problems like changing jobs.

I think your point on saving 30% to pay 50% tomorrow is a good one.