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8 Responses
  • Ann Welton
    January 8, 2018

    WOW – excellent info!! Can you recommend any better vehicles for grandparents to invest in college, tax free?

    • JoJoBoBo
      January 8, 2018

      The only account better than a 529 for college savings is an after tax retirement account (like a Roth IRA) or a Heath Savings Account. But it would have to be owned by the parents or the student. The grandparents would lose control. Otherwise any time a grandparent pays for school, it is counted as income for the student. Also a student owned IRA requires the student (child) to have earned income from a job. So that doesn’t work for everyone. -JB

  • james
    January 11, 2018

    This is really well done series. Thanks for keeping me up every night for a week now.

    This makes me really rethink my FI strategy. I’m generally a “pay the minimums on low-interest debt and invest the difference” kind of guy, but this post in conjunction with the new federal tax laws makes me reconsider some alternative options… If we look in the crystal ball and assume I’m stuck in the 22% bracket until my mortgage is paid off, I’m now really tempted to aggressively pay it off to be completed approximately one year before my oldest would attend college. This would allow me to drastically reduce my expenses and, consequently, EFC right before they ship off.

    My thinking is with the Shiller PE Ratio currently: above the Black Tuesday peak before the Great Depression, at 2x all-time mean, and at 75% of the all-time peak in 1999 (http://www.multpl.com/shiller-pe), maybe I only do pretax savings enough to keep AGI at preferred level and aggressively pay down debt (regardless of the EFC optimization). Later, after the market correction(s) happen maybe toggle back and forth over time. I hate to make all the effort and still not reach the goal before college, but one option might be to refinance the much smaller balance at that time to drastically bring down the monthly expenses for those ~4 years. A better option (but not yet preapproved by the other stakeholders) would be to downsize. With the child tax credit phaseout limit being raised, I don’t really have any other negative consequences until the student loan interest deduction starts being phased out at 130k Total Income which gives us quite a bit of headroom… but I’m not sure if I’m thinking about the tax bracket current and future tradeoffs correctly just yet.

    Specifically, with regard to the EFC optimization, I will also have to figure out what to do with our rental property. I may have the tax tail wagging the dog here.
    My wheels are still spinning…

    • james
      January 12, 2018

      I think I found the flaw in my logic. I may currently be stuck in the 22% bracket, but only by about 10k. So, if my mortgage P&I is 20k per year, then I’m paying the first 10k after 12% fed taxes and ONLY the last 10k at 22%. Additional amounts paid toward the note would of course be after 22% taxes. Effectively, I’m trading a 10% tax difference in this example on some amount of the P&I for whatever potential savings in college plus the invested difference in the stock market.

      We’re still paying for daycare and our early childhood center, so that soon-to-be change alone might get us down into the 12% bracket. I had intended on starting my conversion ladder once our expenses dropped – maybe now I toggle between the two depending on the stock market P/E.

      My gut instinct is I should 1) Use this as incentive to lower my damn expenses and figure out how to get back into lower bracket again regardless of other decisions 2) Start building the case around downsizing the house at T-1.5 years to college and prepare for trial which would drastically reduce my taxable income 3) Crunch the damn numbers to get some actual quantitative estimate of the difference.

      We had already stopped funding our 529 since we weren’t already maxing out pretax accounts, but were still sending family gifts for the kids to it. I think you’ve convinced me to put it elsewhere and just track it in a spreadsheet so we make sure the kiddos still get Uncle Jim’s college money.

      • JoJoBoBo
        January 12, 2018

        Hi James,
        I’m not sure I follow, but let me say that 529s are not that bad – if your alternative is a taxable investment account, then 529s are better – especially if you get a state deduction. But if your retirement accounts are not maxed, then it’s usually better to put extra funds towards retirement than a 529. You can use retirement funds to pay for college too. -JB

    • JoJoBoBo
      January 12, 2018

      I don’t put much credence in the case-schiller PE ratio. It’s still a PE ratio, which means assumptions about the time-value of money are over-simplified. I think it’s possible that technology and globalization have essentially killed inflation for the foreseeable future. It seems none of the experts can otherwise explain why inflation has been so low for so long. If inflation stays low, then PE ratios should rise structurally, and comparing current ratios to the past is not a fair comparison. I could be wrong about inflation – but I don’t think anyone really knows. Only time will tell. My point is don’t try to time the market. Things may not be overvalued like you think. I personally don’t see the frothiness and unrestrained optimism that was so obvious in the dot.com days yet. -JB

      • james
        January 12, 2018

        I totally agree. But I’m not holding cash on the side waiting for a correction. I agree that guy will lose in the long run. I’m basically just considering doing a little card counting to see if the deck might be getting hot and temporarily diverting excess free cash to a known mortgage rate. I think it could potentially help swing make paying off the mortgage the best economic decision (in additional to the psychological benefits). To be sure, if and when stock prices come down I’ll be scraping all available cash to scoop up the sales.

        • JoJoBoBo
          January 12, 2018

          I hear you. It’s always good to have cash ready for a downturn. – JB

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