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My take home pay essentially covers my living expenses, but I am only contributing enough to my 401(k) to get the match from my employer and I am not contributing to a 529 plan for my son. In otherwords, I can pay my mortgage, credit card bills, taxes and everything else from my pay check, but I am not saving anything.

In terms of long term planning, I currently have enough invested, along with my current 401(k) contributions, to cover my retirement and my son's education. I also have a 6+ month emergency fund. I am not worried about living pay check to pay check in this way.

My question is should I draw down from my investments, or maybe more accurately from the returns on my investments, so I can take advantage of the tax savings by maxing out my 401k and make 529 contributions? Would there be big advantages to moving some of the investments into a rental property that would generate monthly income (this is more hassle then I would like)

The idea would be to sell some of my long term capital gains investments every month, or couple of months, to pay my monthly expenses. I would then offset the lost investment value by increased payroll deductions for the 401k and 529 plan.

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    You're "not contributing to a 529k[sic] plan", but you "currently have enough invested ... to cover my retirement and my son's education." That's confusing. Is that money from an inheritance or something? Is that what you're asking about moving into 401k and 529 plans? – RonJohn Sep 27 '17 at 0:02
  • @RonJohn mostly past earnings prior to thinking about saving for education. – StrongBad Sep 27 '17 at 0:29
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I assume you have some investments that are not in a tax favored account, that is above and beyond your 401K and 529.

Once you take the returns on your investments, you are eliminating the compounding nature of that account. That might make very good sense, for example if your emergency fund account is paying 1%, and you have a bond fund in a taxable brokerage account earning 3%, then it might be a good idea to transfer the interest earned from the efund account to the bond fund. Another idea would be to apply the interest earned toward your mortgage balance where it would likely return a higher amount.

It is really difficult to tell from the level of information your question provided what is the best strategy is for you. One thing, however, is that it is really difficult to move investment income earned to 401K given the payroll deduction nature of that kind of account.

One thing that struck me is the way you describe your expenses. They are not that static. Unless you have a very large taxable account (like over 100K), it is likely easier to find money in your budget for further investments.

  • I edited the question to include that I would sell some of my investments monthly to pay my bills and then use my salary to make 401k/529 contributions. I have well over 100K in taxable accounts. – StrongBad Sep 27 '17 at 12:50
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You'd be funding the 529 plan -- which, like Roth IRAs, aren't tax deductible, but they do grow tax free -- from existing taxable accounts, which you'd have to sell a bit of and pay (presumably long-term 15%) capital gains taxes on the sales.

You'd be in a similar situation for the 401(k): upping your contribution level means having to sell some taxable investments every month to make up the difference.

You need to run the numbers yourself, based on your current salary, income bracket, deductions, and how many years until your son goes to college.

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