[USER]

Question: Why would I invest in 529 when we have mega backdoor roth available?

Context: My spouse and I live in California (so no tax deduction on 529) and we already max out 401K pretax, backdoor IRA.

Our knowledge of 529 is that that money can only be used or education related expenses, it has a one time cap of 35K to take money out and 529 money can reduce the amount of scholarship that our child may qualify for.

Whereas we can take out Roth IRA contributions (not growth) in as little as 5 yrs for any purpose, if we need it.

[Sandy]

The $35k cap you mentioned is the maximum amount that can be rolled to a Roth IRA for the child if the funds aren’t used for college.

If the money is used for education related expenses (and that category is very broad), there is no limit.

Future 529 withdrawals should only reduce need based scholarships.

Given the info you noted about your savings ability, it doesn’t seem likely your child would ever be eligible for these types of scholarships.

And future Roth contribution withdrawals reduce the base on which you will accumulate tax free growth.

If you think it’s very likely that your child will have future education expenses, then contributing to a 529 is generally the best option.

[Kathy]

I started a 529 when mine was born. Even through the. 2008-2009 lean years the value increase tremendously and for the account and growth gave me a free year of college and 2500 left over that I will eventually convert to a Roth

[Matt]

The 529 is a great wealth transfer tool which is why there is a cap in most states as to how much you can put in to avoid estate taxes etc.

(California is $529,000).

One of its biggest advantages is you can reassign the beneficiary to another family member(including cousins, nephews/nieces etc) without any penalty.

Essentially you can set up your future generations to get higher education with serious tax advantages.

[Ben]

Well you still have the federal income tax deductions if that means anything to you.

I guess all things considered if you wanted to invest more then your Roth IRA contribution you can contribute to a 529.

On the scholarship manner I don’t think that is accurate.

It may reduce how much you can receive in financial aid with Pell Grant but not merit based scholarships.

To determine whether that is relevant you should assess your income and just determine whether your child or someone else’s parents income would even qualify for Pell grant to begin with.

So, I guess overall what I am saying there is a bit more to consider not doing 529.

I personally don’t use it but I don’t have the extra disposable income to do it I just invest for FIRE right now.

[Ben]

The $35K cap is for rolling to a roth ira. You can take all of the money out, but if it’s not for education there is a penalty and taxes due.

[Author]

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