<p>I will have to eliminate 401k contributions for the next few years in order to pay for tuition (1 HS Snr and 2 Juniors). I will obviously lose the tax benefit of that $ since it will no longer be considered pre-tax earnings.</p>
<p>What is the best strategy from a tax perspective? Open 529s and funnel the $ through there? I understand that is not pre-tax, but there are some tax benefits, mostly at the state level (I am in NYS).</p>
<p>I appreciate any advice or insights.
Nick</p>
<p>If your state 529 provides in-state tax benefits, you can definitely put money in 529 and then take it out to save the state tax. If no in-state tax benefits, it does not save your anything if you just put it in and take it out in the same year, unless you are so lucky the the investment value increases during the short period of time.</p>
<p>Also some states 529 tax benefits have age limit, check it out in your state’s 529.</p>
<p>Thanks Tx!</p>
<p>You are not only giving up the tax benefit of saving pre-tax dollars, you are giving up any employer matching and any growth to the fund. There is a reason 401k funds receive such a generous tax break - the government WANTS you to save in a retirement fund. I get a 10% match, plus the tax savings, so there is no way I could give it up.</p>
<p>If you get a great state tax break then use the 529, but otherwise you are just putting money in it and withdrawing it a short time later. There won’t be much of a federal tax break on the principal, just a small one on any interest earned in the accounts. </p>
<p>If you have match in 401k, you should contribute enough to get the match. It is free money.</p>
<p><<<<<
You are not only giving up the tax benefit of saving pre-tax dollars, you are giving up any employer matching and any growth to the fund. There is a reason 401k funds receive such a generous tax break - the government WANTS you to save in a retirement fund. I get a 10% match, plus the tax savings, so there is no way I could give it up.
<<<<<<<</p>
<p>also strongly agree with txhandan.</p>
<p>Nick…are you doing this to afford OOS publics or pricey privates for your kids, when you have affordable SUNYs that they could attend? You have $25k per kid. You could have each child take out full Stafford Direct Loans. With $8k per year from their savings, $5k+ from loan, $2k from summer earnings, $2k from part-time during the school year, you’d only have to contribute a few thousand more per kid. Can you do that without stopping the 401k?</p>
<p>I know that your kids want an OOS public or pricey public and you want to make them happy. But are you short-changing you and your wife by stopping your funds to your retirement? Dont you have 4 kids to put thru? If so, you may be talking about not-funding retirement for the next 6-8 years. That is a LOT of money.</p>
<p>Thanks Tx and Two. Yes, I’ll contribute enough for the modest match I do get.
I did wonder if it would be worth the effort to set up the accounts on a short term basis. With the associated expenses it may not be worth it.</p>
<p>
Regardless elimination 401k contributions or not, you could contribute to NYS 529 and use it immediately for education expenses and still claim the state tax benefits. See <a href=“A Tax Trick for 529 College Savings Accounts - The New York Times”>A Tax Trick for 529 College Savings Accounts - The New York Times;
<p>What kind of expenses does NY’s 529 have? At least you can claim the state tax benefits. Is the expense more than the tax benefits?</p>
<p>Looks like we (filing jointly) can deduct up to $10k/yr from my NYS taxable income. Can’t find a lot on costs. Some funds are Vanguard – very low cost.</p>
<p>You will just put money and take it out, so I bet there is a money market account with minimum fees in the mix.</p>
<p>I think you have to put the money in to the 529 and then not withdraw for a certain number of years.</p>
<p>^^ Not in my state’s 529 plan. </p>
<p>
</p>
<p>This is not accurate.</p>
<p>in our state, funds only have to be in the account for ten days before they can be withdrawn.</p>
<p>A friend brought up the option of borrowing against my 401k.<br>
Thoughts on this approach?</p>
<p>is your job 100% secure during your children’s college years? One big disadvantage/requirement of 401k loan is that you must pay it back immediately if you leave your job, otherwise, it will count as early withdraw which will be hit by not only tax, but also 10% penalty.</p>
<p>You can borrow against a 401k as long as you are still working for that employer and that employer has a lending program. I think you can borrow up to 40% of the amount in your account? The down sides are that your retirement funds are not growing during this period and if you leave that employer, you have 60 days to repay the account or it is considered a distribution.</p>
<p>I don’t think it’s a good idea, but others do.</p>
<p>
If you are going to borrow, and have equity in your house, consider a Home Equity line of credit or loan. HELOC rates at many places are 3% or lower. It’s the cheapest money around.</p>
<p>The interest is likely tax deductible as well.</p>
<p>If you’d really rather take a loan from your 401k, set up the HELOC now while you are employed (it is often free or very low cost). Then if you leave you job, you can tap the HELOC to pay back the 401 loan and avoid the taxes and penalty, which will probably be more than 40% of the loan balance. You probably won’t be able to get a HELOC if you are out of work, which is why it is necessary to set it up ahead of time.</p>
<p>^^ Good strategy!</p>