Pillow Talk

David Byron  |  February 14, 2017

AS MY WIFE AND I ATTAIN a certain age, financial questions are taking an unprecedented top spot in our conversations. Gazing into one another’s eyes over Cabernet Sauvignon at our local inn, we as often coo about jobs, savings, taxes and car payments as about romance.

This New Year’s Eve, we cooed about hopes, regrets, fears—and a college bill.

We began saving for our two kids’ educations when they were very young. But with one of us working fulltime and the other only halftime, their 529 accounts have proven too small to cover all expenses at the private colleges they chose, so we’ve also had to dip into other savings. Our daughter recently graduated, while our son is a freshman. He has a merit scholarship covering 30% of his costs, and the combined total of several financial accounts—a 529, a custodial account and a regular taxable account—should cover much of the remainder.

The question we mulled over fizzed-out Korbel Brut: In what order do we spend down our accounts to cover our son’s college costs? Here’s what we’ve come up with:

1. First, we’re emptying his 529. The target-date fund it’s invested in has made some gains, which we can withdraw tax-free. But the bulk of the remainder is in bonds and cash investments that have limited upside potential, the money can’t be used tax-free for any other purpose and, with very little left in the account, the monthly fee no longer seems justified.

2. Next, we’ll turn to our son’s custodial account, which my wife’s folks generously started years back and contributed to until they died six years ago. This account mixes cash, mutual funds and laddered zero-coupon bonds that mature between now and 2018, so only some of that money is available today. We will pull out cash for tuition payments, as the zero-coupon bonds come due, and turn next to selling the funds.

3. We can also begin selling off the S&P 500 index fund in our joint taxable account. We think stock valuations are high and the large run-up over the last eight years may be nearing its end. We’ll owe capital-gains taxes, but we may be able to offset part of those taxes with charitable donations.

4. We will continue our monthly college savings, albeit not into the 529.

5. Finally, loans are always a possibility, though one we’d like to postpone as long as possible to avoid saddling our young fellow with debt.

What do you think of this approach? Let me (and your fellow readers) know your thoughts by commenting below.

David Byron—a pseudonym necessitated by the industry in which he works—is an IT project manager in financial services.

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