Savings - Pay taxes now or later??

[janette]

I'm working on getting some additional funds saved for my girls education. Oldest is 11 and we have 7 more years before college We have some money saved but of course I don't think it is ever enough.

The 2 options I'm considering are:

1) Max out our pre-tax contributions to our 401k, the laws have changed some this year and we can save much more this way pre-tax. This saves about 30% off the top of what we save so for every $100 its really only $70. I do have to find out what the new limits are, says $12,000 per person but will have to contact my HR and DH's HR to see if we can save that much each without going over some other limits. When it is withdrawn for education we would have to pay taxes on the income at our rates.

2) Increase contributions to 529 plans. I want to add another plan, Texas now offers a plan for the state so thought I'd do that plus the one we have already. That way all the money isn't in the same funds. This is after tax money but the income isn't taxable or will be at the child's rate so will pay very little taxes when withdrawn.

Would you max out your 401k before any other savings or put money somewhere else and not do as much into 401k?

 

[adamak]

I'm no expert, but I would maxed out the 401k first. Esp if your employer does matching of what you put in your 401k. That's extra cash to you. Do you know your tax bracket? See if your taxable income is on the border line of the brackets. If contributing more to 401K will push your bracket lower, then it'll worth the effort.

I believe next year's limit is $12,000. This year is $11K.

A good saving site is www.FOOL.com It gives you lots of basic investment tips.

 

[janette]

Changing the 401k will not effect the employer contribution, already maxed that out. Raising the contribution will only effect the pre-tax benefit. There was a disclaimer on the papers about the $12,000 that leads me to believe there are some additional requirements to be able to max it out. Tax bracket is between 25% - 30% effective rate hopefully will be down some this year. My DH was pretty limited in the past on his 401k some additional restrictions that kept his contributions low but those have also changed so trying to look at all the options.

 

[NancyIL]

The "experts" seem to say that if you will qualify for financial aid, save the money in your name rather than your child's. Money saved in Coverdell and 529 accounts are considered your childrens' assets, and hurt you in financial aid formulas.

Our oldest is a college freshman, and I'm not even going to bother filling out the FAFSA this year. I already know that we don't qualify for financial aid, based on last year's FAFSA, so I'm glad the money we saved for our kids was in their names or in education savings accounts.

I'm also REALLY glad I moved money from DD's mutual funds to CD's about 4 years ago - even though we missed out on the tail end of the stock market's climb. I'd much rather earn 4-5% per year in a CD than lose 20% each year for the past 3 years in a mutual fund! I just hope the market rebounds soon for the NEXT child - who will be in college in 2-1/2 years!

 

[janette]

Don't have any hope of financial aid, I have heard though that there are some no interest loans that don't start interest until after they are out of school. Those are more available and might be an option to help out some and at least put it off for a few more years.

 

[NancyIL]

Wow, Janette...I've heard education loans had a low interest rate - but didn't know there were any with NO interest! Between what we've saved over the years, the amount that we can contribute from current income, and DD's scholarship - we're hoping she won't have to take out loans for her undergraduate education. (And they would be HER loans, not ours!) BTW - she attends the University of Dallas.

 

[Dan Murphy]

Originally posted by janette
.....There was a disclaimer on the papers about the $12,000 that leads me to believe there are some additional requirements to be able to max it out. Tax bracket is between 25% - 30% effective rate hopefully will be down some this year. My DH was pretty limited in the past on his 401k some additional restrictions that kept his contributions low but those have also changed so trying to look at all the options.

Highly compenstaed employee income was for '02 and is for '03, $90,000 and above W2. '03 marginal federal tax rates are 27% $46,700 - $112,850, 30% $112,850 - $171,950, 35% $171,950 - $307,050.

No interest loans are considered part of financial aid. It is always worthwhile to fill out FAFSA and try. The primary inputs taken into consideration for aid are:

Parents' income
Student's income
Parents' assets
Student's assets
Number of family members in college
Age of oldest parent

 

[janette]

So Nancy when are you going to visit???

I do think it would be worth filling out the forms. The income levels for loans are different from grants etc and if you can get 0% while she is in school that is more of your money you can keep earning on and then use later to pay the loan off. I'll probably try at least.

Thanks Dan for the information, I have to look at DH's stuff, maybe they have changed because of the higher percentage available. I was suprised to see that you can go as high as 25% instead of the previous 15%. That might be what is making the difference in what we can do.

 

[NancyIL]

Janette - I was planning on driving down in mid-May to bring her home for the summer. However - my DH thinks it will cost less money if DD rents a storage space for the summer and flies home - using FF miles.

I already know from last year's FAFSA that our expected family contribution was some ridiculously high amount - more than what UD even costs - so I don't expect things will have changed this year. When I have 2 kids in college at the same time, I will probably fill out the FAFSA then. But as I said...so far we are getting by without taking out loans, and I'd prefer to keep it that way.

 

[janette]

Tell your DH that you could go to a DIS-meet while here and that would make it worth the drive

I saw one of my sister's and her college DD over the holidays and they said the new tax credits are pretty great. Hopefully they'll still be around when we need them

 

[Dan Murphy]

The limits for 401(k) are now (last year also) 100% of income to $12K this year ($11K last year), with the additional limitation still there for highly compensateds.