401k for Child’s Higher Education
Potential new clients. Husband is 64 and has 401k with $167,000. Currently contributing $8,500. $36k in IRA’s. Plans to work 4 more years.
Wife is 58 and has IRA’s with $121k. Not contributing. Plans to work 12 more years.
Combined income is $150kper year. (He=$120k She=$30k)
Son (youngest child) entering college at about $48k per year. $17,700 in 529 plan and $57k savings account set aside for tuition (which Mom and Dad will pay in full 4 years.)
$288k in savings (The bulk of it recently inherited from sale of wife’s father’s home upon his passing. Sold in low market for less than stepped up basis.)
Debt = $33k 1st mortgage (4.74% fixed) and $148k home equity line (2.5% variable) (This was used for 1st child’s education.)
I’ve never posted before, but I just finished Ed’s training, loved it… but on this one I’m getting paralysis by analysis. There’s obviously a Roth conversion opportunity here. But does it make any sense to use some of those qualified assets to pay some of the tuition? They appear (until I see their tax return) to be in the 28% Federal bracket, and have approximately $59k of “income room” before they hit 33%. Any feedback would be mucho appreciado!
Thanks
Pilot
Permalink Submitted by Alan Spross on Thu, 2009-11-19 03:58
A comprehensive approach with all these variables is too much detail for this forum, but I have some general comments that might be considered here:
1) There is no tax or penalty relief for distributions from QRPs (401k) for higher education.
2) IRA distributions for higher education avoid the early withdrawal penalty, but there is no other benefit for tapping them for education. He is already past the penalty age.
3) At their ages, the retirement plan balances are not particularly adequate for long term security.
4) Any chances of financial education aid should be carefully investigated
5) All higher education tax credits such as the Hope credit should be investigated. There are some newer credits recently available. Qualified payments much be carefully coordinated with 529 plan distributions and the tax credits to take full advantage of the benefits.
6) Since they plan to work several more years, doing a large Roth conversion in 2010 would not result in the income being taxed in a low income year. In fact, they might be hit with a tax rate increase on the 2011 share. If they have no Roth assets whatsoever now, doing a small 2010 conversion would at least get the 5 year clock started for the earnings to become qualified. Since both will be over 59.5 very soon, the 5 year conversion holding requirement ceases to be an issue.
7) She should contribute to any available retirement plan. They need to concentrate on accumulation for their own retirement accounts at this stage of life unless there are lush DB pension benefits available for them. Also need to pay down the mortgage debt to some extent.