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A question about 401Ks, HSA's and college savings
Old 01-19-2012, 07:45 AM   #1
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A question about 401Ks, HSA's and college savings

Wife and I Fire'd a while ago, and we are currently both just under 50. My wife has over the years kept a very part-time job (about 6 hours week) in order to stay licensed in her field (health care).

As I have posted in bits and pieces on other threads, after having done the exotic travel, living overseas, homeschooling thing with 4 kids, as they have gotten closer to high school age, we have settle back to our homebase so they can attend 'regular' school. We'll need to do that for ten more years before the last one goes away to college, that is be tied down to school calendar etc.

As such, my wife is going to pickup a few more hours at work on a regular basis, which will make her eligible to contribute to the 401K again (no employer match, except sporadically when they can afford it).

We don't actually need to month-to-month income from her job, as we have plenty of after-tax money that we can draw from, so I was wondering if this makes sense:

Since we have a lot of of after-tax money sitting in various accounts, its going to be visible and available for college costs. The bulk of our money is already in IRA's/Keoughs, 401K etc, so won't be counted when calculating EFC (effective family contribution).

Does it seem reasonable to max our donations to our HSA (and still pay for all medical costs out of pocket, i.e. just let it build at $4k/year)), max donations to wife's 401K (we could put in about 50% of her salary up to about $17K/year) and then just draw on our after-tax money to 'fill-the-gap', i.e. meet day-to-day expenses? Essentially directing almost 70% of her income into various tax-advanted accounts?

Seems to me this saves us some on current taxes (though with 4 kids we are already in a very low tax bracket), and effectively transfers money from our after-tax accounts into tax-deferred accounts (the 401k) and the HSA.

Any holes in this logic, or other things we should be thinking about or are missing?
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Old 01-19-2012, 08:41 AM   #2
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Quote:
Originally Posted by farmerEd View Post
Since we have a lot of of after-tax money sitting in various accounts, its going to be visible and available for college costs. The bulk of our money is already in IRA's/Keoughs, 401K etc, so won't be counted when calculating EFC (effective family contribution).

Does it seem reasonable to max our donations to our HSA (and still pay for all medical costs out of pocket, i.e. just let it build at $4k/year)), max donations to wife's 401K (we could put in about 50% of her salary up to about $17K/year) and then just draw on our after-tax money to 'fill-the-gap', i.e. meet day-to-day expenses? Essentially directing almost 70% of her income into various tax-advanted accounts?

Seems to me this saves us some on current taxes (though with 4 kids we are already in a very low tax bracket), and effectively transfers money from our after-tax accounts into tax-deferred accounts (the 401k) and the HSA.

Any holes in this logic, or other things we should be thinking about or are missing?
The HSA is always makes a great tax-advantaged savings plan- like a pre-tax Roth IRA. I think the max this year is over $6,000 for a married couple though so I'd kick it up and not touch the account. However, I think I'd avoid the 401(k) since there's no match, you're in a very low tax bracket and may need cash to help pay for college. A better alternative might be to max your Roth IRAs ($5,000 each now and $6,000 each the year you turn 50) and simply put aside the remainder in a regular after-tax brokerage account. This also allows you to pick any low cost investment you want. Or if the 401k plan is really good and you wanted to diversify tax strategies, you could divide savings between the 401k and after-tax accounts. Just some of my thoughts.
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Old 01-19-2012, 12:21 PM   #3
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Originally Posted by farmerEd View Post
...<snip>
Since we have a lot of of after-tax money sitting in various accounts, its going to be visible and available for college costs. The bulk of our money is already in IRA's/Keoughs, 401K etc, so won't be counted when calculating EFC (effective family contribution).... <snip>

Are you trying to spend-down your taxable $ over the next few years in order to qualify for financial aid down the road (on basis of no/low income and no assets other than home/401k/IRA)?

If so (and I will not get into whether this is gaming the system or not), by all means make sure you: (1) pay of your home (if you carry a mortgage), (2) contribute to HSA/401k and (3) do IRA to ROTH conversions (since your have 4 kids and little income, it is possible for some of them to even be tax free conversion, otherwise, use taxable funds to pay the tax)
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