Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

First some background:
I'm a new parent and I live in Nevada, a state with no state income tax. I'm 26 and my wife is 29. She's finishing her PhD (to hopefully become a professor) and I'm an engineer. We're homeowners. I'm a strong earner but I expect our household income to increase nearly 70% within 3 years when she starts working. My current income is about $95,000.

I have set up a 529 for my child's college fund but the more I look at it the less useful it seems compared to alternatives. The 529 is quite restricted -- What if she doesn't go to college? What if she gets a full scholarship? What tuition benefits will my wife get as a professor?

I will keep the fund if people want to give her gifts, but I think I have a better alternative.

My wife and I fully fund both our Roth IRAs. My employer also offers a 401k plan, and I contribute up to their match, which ends up about $6500 401K contribution annually and $10k to the IRAs (increasing annually).

However, it seems to me like the major value in the Roth 401K offering is that it can be rolled into a Roth IRA when I change jobs. Children's education expenses are not qualified distributions from 401K but they are from a Roth IRA if you've passed the 5-year threshold (and you take only contribution, not earnings)

I'm planning on saving more into my Roth 401K under the assumption that I'm not going to be at this job in 18 years. As such, I will be able to roll the entire Roth 401K into my Roth IRA.

In this way, I can transfer the funds, without penalty, into my personally directed account which has much fewer restrictions on distributions.

EDIT: There seems to be some confusion about my strategy here. I hope this clarifies.

We currently max out the contributions in both Roth IRAs, we will continue doing this. This amounted to $10,000 in 2012 and will be $11,000 for 2013
We currently contribute to the Roth 401K up to my employer's match, we will continue doing this. This amounts to $7500 for 2013.
The contribution limit for a 401K in 2013 is $17,500... so we can contribute roughly $10,000 more in 2013.

This, separately from mortgages etc our retirement contributions for 2013 will be $18,500, leaving $10,000 additional capacity in the 401K.

In addition, we want to start contribution to a college fund. Instead of contributing to the 529, we would contribute more to the Roth 401k. Eventually we can roll the Roth 401K into the Roth IRA. So let's say I want to save $6000 for my daughter's college this year... I think it's advantageous for me to invest it into the Roth 401K rather than the 529

share|improve this question
Regarding the full scholarship issue: You can take money out of the account equal to the scholarship without penalty, though you will still owe taxes. Or you can transfer the money to a sibling or other family member. The money can be used for room and board, which might not included in scholarships. –  mhoran_psprep Feb 24 '13 at 18:29
@mhoran_psprep I understand this, but it still seems that the Roth IRA is a better account for the purpose. –  Matthew Feb 25 '13 at 16:36
If you use your IRA for college, where will you keep your retirement money? You don't see it mentioned. –  MrChrister Feb 25 '13 at 18:22
@MrChrister I can use the Roth IRA for both. The point is that I will continue to fully fund the Roth IRAs but will contribute to the Roth 401k instead of the 529 because the Roth 401k will roll into the Roth IRA. -- I edited the question to clarify. –  Matthew Feb 25 '13 at 18:36
Well, then I worry if you will have enough for both. I cannot do the math for you (perhaps at all), but when you retire you will need a pretty big pile of money. If you subtract the very large cost of college from that pile, will you have enough? The contribution limits might make it more difficult. I am not answering because I don't know, but that is my first fear. –  MrChrister Feb 25 '13 at 18:44

1 Answer 1

up vote 2 down vote accepted

Yes, your plan makes sense for the reasons you cite. The 529 has limited investment choices, along with fees that are often higher than an exact ETF equivalent. A .5% annual expense, even just .4% higher than the ETF, still will cost you an average 4% over the 2 decades of savings.

You currently seems to be saving enough, but once your wife's income starts rising, I might have some concerns. The current dollar limit on the 401(k) may not be as high a percent as you'd like. But, for now, it looks fine.

You should also note that at higher incomes, you might not be permitted to deposit to a Roth IRA, and might have to go the 'back door' route, depositing to a traditional IRA and converting to Roth each year.

Also - you seem focused on Roth. I'd suggest that leaning toward Roth is fine, 100% Roth, not so much. Consider, a retired couple today has $12,200 standard deduction, and a combined $7800 in exemptions, for a very round $20,000 in income that has zero tax in retirement. Even a couple in the 15% bracket benefits by some pretax savings that's withdrawn at zero. In your case, I don't know the rest of your details, just offering something now that you might be missing. $500K pretax funds to generate the $20K/yr withdrawal. Less than that, and you've missed an opportunity.

share|improve this answer

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.