Traditional vs Roth 401(k): How to Choose the Right Contribution Strategy

The Simple Framework for 401(k) Contributions

Not to sandbag our version of this question right out of the gate, but this blog/article/education exists on every personal finance resource on the interwebs. Yet, it’s still one of the most common questions that people standing around at a bar, looking for free financial advice clients ask us. 

The math is really quite simple. If you’re in a lower tax bracket when making withdrawals in retirement, you’d want to make Pre-Tax Contributions now. If your funds are subject to a higher tax rate later, you’d be thankful you made Roth contributions now. But that’s where the simplicity ends. You might not even know what you’re having for dinner, let alone what life might look like in 40 years. And even if you had that crystal ball, there’s no telling what federal and state tax rates might be. If you’re an actual wizard and do know what the tax brackets will be, there are still scenarios where having access to both Traditional (Pre-Tax) and Roth buckets would be beneficial. 

And I won’t bury the lede any further: Here’s a simple way to view the timing of Traditional and Roth contributions. 

  • Early Career: Roth 

  • Mid Career: 50/50 Split

  • Peak Earning Years: Traditional

But if you want some additional guidance on the full considerations between the two, keep reading!
Because, as mentioned, you are probably somewhat uncertain about:

  • Retirement Age
  • Reduced Income Prior to Retirement (Back to School, Sabbatical) 
  • State of Residence
  • Expected Federal Tax Brackets
  • If You’ll Need a Large Sum of Money Suddenly (Home, Health, Grandkid’s Education)
  • Tax Brackets for Your Kids Upon Inheriting Money
  • If You’ll Inherit Money and If That Will Be Pre-Tax or Roth
  • Needing Health Insurance Before Medicare-eligibility

Explain 401(k) Contributions To Me Like I’m Five

401(k) plans are employer-sponsored retirement accounts that enable employees to contribute through automatic payroll deductions. You might hear a 401(k) called a “Traditional 401(k)” or a “Roth 401(k),” but they are the same employer-sponsored plan. It’s a single 401(k) that accepts two different contribution types. Also, “Traditional” Contributions refer to Pre-Tax Contributions, and these terms can be used interchangeably. Some 401(k) plans even offer a third type of 401(k) contribution known as After-Tax Contributions, which should not be confused with Roth contributions. We’ll skip the After-Tax Contribution bucket for the purposes of this blog.

Understanding How 401(k) Contributions Are Taxed

The key difference between Traditional and Roth contributions is the timing of taxation.

  • Traditional 401(k) Contributions: Defer tax now, pay taxes later

  • Roth 401(k) Contributions: Pay tax now, withdraw tax-free later

A popular metaphor is “the seed vs. the harvest.” The seed is taxed when you make Roth Contributions. The harvest is taxed when you make Traditional or Pre-Tax Contributions. Mathematically, if you’re subject to the same tax rate on contributions and withdrawals, it doesn’t matter whether you’re taxed today (the seed) or in the future (the harvest). 

An example:

When the tax rate is flat, the math – maths. Even though you paid more in cumulative taxes by deferring them, your net distribution remains unchanged.

Won’t My Tax Rate Always Be Lower In Retirement?

“I’m not making any money, so why would I be paying more in taxes?” right? RIGHT!? It certainly makes sense, but it’s not that straightforward. Here are some reasons you might end up subject to a higher tax rate or face higher costs later on, even without any earnings. 

Future Federal Marginal Tax Rates and Brackets

When it comes to future tax rates, we are purely speculating. Here is a chart of the historical highest and lowest marginal tax rates since its inception. 

And this chart doesn’t even fully capture how difficult it is to predict how future rates may move across different income levels. The highest marginal rate may apply to only a small number of taxpayers. More specifically, it will come down to how each income threshold is taxed at what rate and where you will fall in comparison. However, if you were to speculate that our low maximum marginal tax rate, combined with increasing national debt, might result in higher future tax rates, I certainly wouldn’t stop you! But note that’s been a popular thesis for decades, and current tax rates have actually decreased relative to certain periods.  

State Tax Rates

The next biggest reason your tax rate may increase is a change in your state of residence. See how your state or desired home in retirement stacks up!

Thinking about retiring in California after working in Louisiana? That’s a big jump in state taxes paid on distributions. Therefore, you might think twice about making traditional contributions today, since you’ll pay a good bit extra at the state level later. But then you might hit your 50s, and your entire personality could be honoring the late, great Jimmy Buffett. So now you’re riding motorcycles and drinking pina coladas (not at the same time, of course!) and eyeing a move to Florida. Well, then you might be kicking yourself a little for not saving pre-tax in Louisiana, since Florida has no income tax. 

Obscure Taxes, Penalties, and Costs

Based on current tax rules, there are additional financial *consequences* such as the Net Investment Income Tax (NIIT), the Medicare Income-Related Monthly Adjustment Amount (IRMAA), and how health insurance premiums are determined if you go through the Healthcare.gov exchange without access to an employer-sponsored plan or Medicare and have too much income to qualify for Medicaid. Being forced to make a large amount of pre-tax distributions within a calendar year could result in additional money owed, even if it’s not directly tied to the tax rate on the retirement income itself. 

Required Minimum Distributions (RMDs)

Some people are naturally great savers. And if you’re great at saving, you might have a hard time spending money, too. Therefore, you may build a substantial pre-tax nest egg. Based on your birthdate, the government says you must start taking withdrawals from this money between the ages of 70.5 and 75. These mandatory Required Minimum Distributions could exceed what you were earning while working. 

You Inherit Money, or Your Kids Inherit Your Money

If you are around my age or most of our clients’ ages, you have boomer parents. And if you have boomer parents, you know they just don’t talk about money. It’s not in their DNA. You’ll get what you get when you get it. But if you are fortunate enough to get *something* and it’s pre-tax money, you’ll have ten (10) years to empty the account to $0. It’s a GOOD problem to have, but it still affects how much you get to keep. There’s a lot of tax planning involved. And if your money is already tied up in 100% pre-tax accounts and the government is forcing you to take distributions, you might find yourself with very little flexibility on what tax rate it’s subject to. You’ll just owe what you owe. 

Or, if you are the one saving now and building a 100% pre-tax allocation with the goal of passing money to your own kids, they might actually be fulfilling the American dream of doing better than you! And now you have deferred taxes on money your kids will realize at a higher rate. 

That’s A Lot of *Stuff*

That’s not even an all-encompassing list. But it’s worth listing some of the main reasons it’s never as simple as anyone wants to make it. A lot of these things, we just don’t know. And that’s okay! A financial planner can certainly help you address some of these blind spots and make educated guesses/assumptions around tax planning. But if you’re doing it yourself, I’d suggest focusing on what seems best now rather than overthinking every future multiverse scenario. 

Emotional Benefits of Roth vs Traditional Contributions

Traditional (Pre-Tax) Contributions Provide CONTROL

I’ll start with pre-tax contributions because I just spent the last couple of minutes of your time making you second-guess whether you should even make pre-tax contributions at all. While we’ll give further financial guidance on when you should consider making pre-tax contributions later in this article, here’s a softer reason. For the most part, you maintain control over your tax consequences. By deferring taxes now, you have control over when you make distributions based on your tax rate at that time. While the government tries to force your hand with RMDs, that may be decades away. 

But aren’t there rules and penalties that prevent you from making distributions before Age 59.5? Yes, but you could do what’s known as Roth Conversions. As the name suggests, Roth Conversions allow you to convert Pre-Tax funds to Roth funds beforehand and avoid the 10% early withdrawal penalty. There are a few other considerations and *gotchas* that I won’t go into here, but you should definitely look into them if you’re considering making Roth Conversions. Here’s an educational piece from Schwab that outlines them. I mention Roth Conversions because they are a great tax-planning tool for those who are going back to school, taking a sabbatical, on track for early retirement, or have an opportunity to fill lower tax-rate thresholds before RMDs.

Roth Contributions Provide Peace of Mind

While you lose control over how your money is taxed, the good news is you don’t have to worry about it anymore! Assuming certain holding periods and age thresholds are met, the money in this bucket is 100% unequivocally yours! Taxes have already been paid at the time of contribution, and distributions are not included in your gross income. Therefore, you don’t have to worry about obscure tax laws or rules that tax you more, reduce certain credits, or penalize you as your Adjusted Gross Income or Modified Adjusted Gross Income increases.

Even if you don’t end up with the highest tax-adjusted balance, understanding how much money truly belongs to you can make retirement planning easier.

How Life Events Can Influence Contribution Strategy

There isn’t a better graphic to illustrate this than the one in this Kitces.com article, which I’ve included below.

Above, you’ll see reasons you may contribute to a Traditional IRA, split contributions 50/50, or contribute to a Roth IRA, based on life events that affect your tax rate. Here’s the synopsis:

Contributions by Tax Rate

  • 12% or Lower: Roth Contributions

  • 22% – 24%: 50/50 Split

  • 32%+: Pre-Tax Contributions

While the future is important, it’s often more practical to concentrate on today’s events and adjust accordingly. As your life changes, so should your 401(k) contribution method. This approach helps you systematically build your allocations across different tax buckets, offering you maximum control and flexibility when taking distributions before retirement, during retirement, or passing on an inheritance to your family. 

Ultimately, a balanced approach to your 401(k) contributions will help you make the most of your funds as you near or enter retirement.

Frequently Asked Questions About 401(k) Contributions

Q1: Should I choose Roth or Traditional 401(k) contributions?
Choose Roth contributions if you expect your tax rate to be higher in retirement. Choose Traditional contributions if you expect your tax rate to be lower later. Many investors benefit from using both to create tax flexibility.
Q2: Is it better to pay taxes now or in retirement?
It depends on your future tax bracket. Paying taxes now (Roth) is better if tax rates rise or your income increases later. Deferring taxes (Traditional) is better if you expect lower income in retirement.
Q3: Can I make both Roth and Traditional 401(k) contributions?
Yes. Most employer plans allow you to split contributions between both types, helping create tax diversification for retirement withdrawals.
Q4: Why should I have both Roth and Traditional retirement savings?
Having both creates flexibility. You can withdraw from different accounts strategically to manage taxes, avoid Medicare premium increases, and reduce required minimum distribution impacts.
Q5: Can Roth conversions help later?
Yes. Roth conversions allow you to move Traditional savings into Roth accounts during low-income years, helping manage taxes before retirement or RMD age.

Great Day Louisiana: Setting Up Your 401k For Your Retirement (originally aired on February 19th, 2026)

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Fiduciary, fee-only, Certified Financial Planner, Mike Turi

Mike Turi, CFP® APMA™ is the Founder and a Lead Financial Planner at Upbeat Wealth, a fee-only firm based in New Orleans and serving clients virtually across the country. He specializes in providing straightforward financial guidance to ambitious young families as they navigate life’s many milestones.

Do you have questions about what we shared in this post, or anything else in general? Feel free to schedule a free consultation or drop us a line!

Sign up for our newsletter (at the bottom of this page) to stay up to speed on our Upbeat Insight.

Disclaimer: All content in this article is provided for educational, general information, and illustration purposes only. None of the information is intended as investment, tax, accounting, or legal advice. Nor is it a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult with a financial planner, accountant, and/or legal professional for advice on your specific situation. Read our full disclaimer here.

Preparing for Movement in the Markets

When Do We Officially Enter a Recession?

Recessions are tough to measure definitively, but as the famous saying goes, you know it when you see it. They are typically defined as two consecutive quarters of negative growth in Gross Domestic Product (GDP), a term used to measure a country’s total output of goods and services. As GDP grows, companies hire to meet demand, productivity increases, and laborers earn more money. As GDP shrinks, we will likely see a spike in unemployment, a decrease in asset values, and a reduction in consumer spending. Let’s face it, though. No one thinks of GDP when considering the threat of a recession. It’s… am I going to lose my job? Will my 401k recover?

Lessons from History on Bear Markets

Bear markets (when the market declines by 20%) often coincide with recessions, but accurately timing the market recovery would require a time machine. If this isn’t an impossible task for you, congratulations! You’re the best investor in the world. The challenge, especially for the general public, is that market recoveries historically happen swiftly and at a moment when consumer sentiment is at an all-time low. Here’s a chart from J.P. Morgan showing sentiment cycle lows and subsequent 12-month S&P 500 returns.

J.P. Morgan Guide to the Markets

You’ll notice the disconnect between present fear and future returns. Things will never have felt worse right before the market pushes higher.

Historical Performances of Bull + Bear Markets

Bear markets are typically measured in months, while bull markets are measured in years. Since 1957, the S&P 500 Index has returned an annualized 10%, yet there are very few years when the return actually fell between 8% and 12%. In fact, across this 67-year period, it has only happened on 7 occasions. Markets tend to have bigger calendar year swings that, historically, have netted out favorably. Here’s a chart presented by First Trust displaying the importance of staying disciplined as a long-term investor.

And to beat this point with a stick (iykyk), here’s another illustration showing how costly it would be if you were caught up in the negative consumer sentiment, sold to cash, and ended up missing the best days as the market recovered!

Hartford Funds: Timing the Market Is Impossible

Compared to a portfolio that remained fully invested, if you were caught in cash during the best days for returns, you’d be kicking yourself!

Missed the 10 Best Days → 54% Less Money

Missed the 20 Best Days → 73% Less Money

Missed the 30 Best Days → 83% Less Money

And as noted by the above graphic’s pie chart, these best days are likely to occur during a bear market. While the COVID-19 pandemic initiated an economic shutdown that resulted in GDP decline and peak unemployment in line with the Recession of 1937, the losses in the markets were a blip. If you hadn’t logged into your investment accounts for a couple of months, you would have never known it even happened. So, setting COVID-19 aside, we haven’t seen an extended contraction of the economy since the financial crisis of 2008. This means that we have twenty-somethings who were barely aware, along with individuals in their thirties who lack perspective on the mental toll of watching their portfolio decline. We even have people in their 40s who probably weren’t investors yet themselves and were just starting their careers. That’s a significant portion of the investing population entering their peak earning years without any first-hand experience on how to prepare for a recession. 

Prepare for Economic Downturns, But Don’t Panic

If you’re anxious right now, you’re not alone. According to the March results of the Harvard Harris Poll, the two biggest concerns for voters right now are price increases/inflation and the economy/jobs. Inflation continues to be the top issue for voters across party lines. Although we are not currently in a recession, we are nearing the definition of one, along with a bear market. However, we cannot predict what will happen next. We haven’t experienced a global trade war for almost a century. And after an emotionally tolling election and with the 24/7 news cycle, it’s difficult to allow yourself the space to step back from making an emotional decision. But as a local advisor and friend, Jude Boudreaux, would say, respond, don’t react. 

Now is a time for focus and introspection. What opportunities do you have to save more or spend less, and what are your household’s biggest threats?

I’m Already Struggling to Make Ends Meet, How Will I Prepare For An Economic Downturn?

Households have two options for saving more money in preparation for a financial crisis:

  1. Reducing Expenses

  2. Earning More

If you are already living paycheck to paycheck with limited discretionary income, the possibility of losing your income or the rapidly rising cost of goods is a frightening prospect. Reducing expenses is already a finite solution, and if you’re living paycheck to paycheck, your ability to do so is severely diminished. 

Additionally, if your household’s income comes from a single source, you are at greater risk of needing to withdraw from your savings or rely on credit if the economy experiences a downturn. Income preservation, similar to asset protection, is most effective through diversification. It’s easier said than done, but do you have a path toward increasing or diversifying your income? Can you pivot and further your education on a clearly defined path that leads to career advancement? Can you add extra income to, at the very least, build an emergency fund, perhaps through seasonal employment or gig work? While recessions are undeniably bad, opportunities can emerge. Be realistic about your current situation and how it will project into the future. Don’t be afraid to invest in yourself or leverage your connections toward a brighter future. Nothing worth doing is easy.

Reducing Discretionary Expenses

There’s no time like the present to reevaluate your discretionary spending habits. It’s better to act before a crisis takes hold, but you certainly would not be alone if you delayed this difficult internal evaluation upon reaching an inflection point. As a financial planning note, we hope that you completely avoid being between a rock and a hard place by practicing what we preach regarding cash flow flexibility:

Building a proper Emergency Fund (discussed in the February 2025 Newsletter)

Keeping fixed expenses like home and auto at a conservative percentage of household income, rather than borrowing the maximum a lender permits. (discussed on Great Day Louisiana)

Successfully benchmarking your salary and negotiating a raise (discussed in the March 2025 Newsletter and on Great Day Louisiana)

However, if those opportunities have passed, we also have a great guide on taking control of your cash flow.

To quickly reduce spending, here are four key categories to explore for opportunities to make immediate adjustments. 

Dining Out: Meal prep at home is always cheaper than dining out and healthier. 

Travel: Experiences can add up quickly if you’re not careful. 

Impulse Purchases: Create some framework around necessities vs. nice-to-haves. 

On-Demand Services: Are you paying a hefty surcharge for convenience services such as same-day shipping, meal delivery, and rideshares?

The Moral Of The Story

As of this writing, we aren’t in a recession or a bear market, and attempting to predict one or how long it will last isn’t worth your energy. I would even go so far as to say that if you have a financial advisor who is making market timing predictions with your money, you may want to reevaluate that service or at least question the methodology of when their crystal ball indicates to reenter the market. Especially considering what you know now about consumer sentiment and diminished returns from missing the best days. 

History is a cycle. On a timeline long enough, we wouldn’t be surprised by much. Unfortunately, our moment happens in a blink of the universe’s eye. It’s difficult to stay disciplined when times are uncertain. In today’s world, it’s crucial to uphold your values and what matters to YOU, rather than succumbing to peer influence or the blatant deception found on social media. Life is too short to confine oneself to someone else’s definition of success.

Great Day Louisiana: How Movement in the Markets Impact You (originally aired on April 21st, 2025)

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Fiduciary, fee-only, Certified Financial Planner, Mike Turi

Mike Turi, CFP® APMA™ is the Founder and a Lead Financial Planner at Upbeat Wealth, a fee-only firm based in New Orleans and serving clients virtually across the country. He specializes in providing straightforward financial guidance to ambitious young families as they navigate life’s many milestones.

Do you have questions about what we shared in this post, or anything else in general? Feel free to schedule a free consultation or drop us a line!

Sign up for our newsletter (at the bottom of this page) to stay up to speed on our Upbeat Insight.

Disclaimer: All content in this article is provided for educational, general information, and illustration purposes only. None of the information is intended as investment, tax, accounting, or legal advice. Nor is it a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult with a financial planner, accountant, and/or legal professional for advice on your specific situation. Read our full disclaimer here.

Presidential Inauguration and Your 401k

Inauguration, 401k, investments

Presidential Elections vs. the Stock Market

New President = New Investment Strategy? Not so fast! 

Historically speaking, there is nothing red or blue about the United States stock market. It’s green (see below). Regardless of who is leading the administration, the stock market and your 401k has consistently moved up and to the right. 

And look, there are many reasons each election can be conceived as the most important in our lifetime. Indeed, the presidential and congressional election winners affect our geopolitical and economic outlook. Our debt is soaring. Instability is rising across the globe. There’s much work to be done on issues surrounding inequality and human rights at home. However, it pays to zoom out when it comes to the stock market and your 401k + investment portfolios.

S&P index, Presidencies, Investment Management

Source: YCHARTS

THE Reason Against Changing Your Investment Strategy. Spoiler Alert: It’s Your Money.

If you had only remained invested when your preferred candidate was in office, you would have missed out on some significant opportunities and cost yourself a fortune. Check out the graphic below created by YCHARTS! Assuming an initial investment of $10,000 starting in January of 1950, here’s how your portfolio would have performed if you had only remained invested under a Democrat or Republican.

  • During Democratic Presidencies Only: $444,760
  • During Republican Presidencies Only: $77,770

And here comes the big BUT. If you had remained invested regardless of who was in the White House, that $10,000 would have grown to $3.49 Million by September of 2024.

Portfolio Performance, Investing, Politics

Source: YCHARTS

Allowing your political beliefs to influence your portfolio can lead to disastrous outcomes.

Attempting to time the market is a fool’s errand! Just turn on the TV. No matter if the market is rising or falling, everyone always has an explanation. Although they may act as if they possess one, there is no crystal ball. Not even when it comes to explaining intraday market swings.

Uncertainty is a certainty, which is why I love this Vanguard article and its principle: TUNING OUT THE NOISE NEEDS TO BE YOUR SUPERPOWER.

Now That I’m Thinking About My Portfolio, Are There Any Practical Adjustments I Can Make?

Risk Capacity: Are your investments appropriately aligned with the level of risk you can afford to take? e.g., Do you already have an emergency fund? Could you experience a loss of income, a medical emergency, car trouble, or a home repair without having to withdraw from your investment accounts at an unfavorable time? Depending on the account type, untimely withdraws could lead to penalties and tax issues in addition to loss of principal. 

Check out the graphic below compiled by Lincoln Financial Group. From 1976 to 2022, in any given 12-month period, your investment in the S&P 500 (the 500 largest companies in America) may have gained 61.2% at the peak or lost 43.3% at the trough. 

Is that a gamble that you want to take if there’s a chance you might need your money in the interim (less than 15 years)? Feel free to check out a quick risk checklist in a previous Upbeat Wealth blog post.

S&P 500 index, Investing, Rolling Returns

Source: Advisorpedia via Lincoln Financial Group

Time Horizon: Have you clearly defined your goals and corresponding timelines to achieve them? Are you properly allocated to maximize risk-adjusted returns based on when you expect to need the money? We often receive questions about investment optimization with condensed time horizons. “I want to buy a home in five years; how should I invest the money?” Well, probably not very aggressively. 

Below is our firm’s current general guidance on how to approach short-term time horizon investing, especially given the current high-interest rate environment and the virtually risk-free returns of FDIC-insured high-yield savings accounts and fixed income such as U.S. Treasury bonds, backed by the full faith and credit of the U.S. government. 

One strategy we like to implement with our families is to separate taxable investment accounts into different sleeves or buckets. We assist them in identifying their goals and timelines, and we encourage them to create separate accounts for a clearer allocation and visualization of their objectives for those funds.

investment allocation, equities, fixed income, high-yield savings

Managing Costs: Are you invested in low-cost index funds and effectively tax planning around your contribution and investment strategy? I can’t tell you how often I have reviewed household 401(k) investments and seen selections in the highest-fee mutual funds, which seldom beat their respective benchmarks. 

Rule of thumb: the fancier the name, the higher the fees. If you see a Yellowstone Dutton Ranch New Pioneers Beth is Aggressively Back on The Booze, Psych – She Never Actually Left Portfolio, RUN for the Vanguard or Fidelity Index Funds if they are there, pleeeeease!

Dollar Cost Averaging: Are you already sitting on a heavy concentration of cash or encountering a sudden money event? Consider investing it over time rather than all at once. While it might not be the mathematically preferred approach, taking this route can help minimize your investment timing risk and serve as a portfolio Ambien when it comes to getting your money a better night’s sleep. 

What If This Time is Different?

The U.S. stock market has recently outperformed its average annual returns despite the election, higher interest rates, Russia invading Ukraine, and conflict in the Middle East. When market volatility rears its head, it’s impossible to point to one single factor.

At the beginning of every year, banks and wealth management companies are issuing their annual market forecasts and it’s a whole lot of blah blah blah. Some interesting insights? Maybe. But, ultimately, the themes are indistinguishable and laced with caveats about what the future holds. Because if they knew, they wouldn’t be writing about it. And there are no real consequences because it is all hot air to begin with. Most of the larger well-known wealth management firms conveniently erase their previous year market predictions. Look around, they’re hard to find. That’s because there are no crystal balls, especially during an administration change.

If you make investment decisions solely based on who is in the White House, you might be costing yourself a chance to reach your financial goals. If you’re investing for retirement with 15 years or more ahead of you, embrace a long-term, disciplined strategy. Staying the course now will pay off in the future! It’s important to remember that the market reflects the companies that provide goods and services and drive innovation rather than the actions of any one political party. The only thing we can predict about recessions is that they will occur, but not when. Make sure to have an emergency fund prepared and focus on the things within your control!

“The only president who didn’t complain about the previous administration was George Washington” – like every political speaker or journalist

Great Day Louisiana: Financial Advice Ahead Of Inauguration Day (originally aired on January 16th, 2025)

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Fiduciary, fee-only, Certified Financial Planner, Mike Turi

Mike Turi, CFP® APMA™ is the Founder and a Lead Financial Planner at Upbeat Wealth, a fee-only firm based in New Orleans and serving clients virtually across the country. He specializes in providing straightforward financial guidance to ambitious young families as they navigate life’s many milestones.

Do you have questions about what we shared in this post, or anything else in general? Feel free to schedule a free consultation or drop us a line!

Sign up for our newsletter (at the bottom of this page) to stay up to speed on our Upbeat Insight.

Disclaimer: All content in this article is provided for educational, general information, and illustration purposes only. None of the information is intended as investment, tax, accounting, or legal advice. Nor is it a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult with a financial planner, accountant, and/or legal professional for advice on your specific situation. Read our full disclaimer here.

Upbeat Wealth on the News: Tips for Parents Saving For College

Upbeat Wealth Founder Mike Turi joins Great Day Louisiana’s Malik Mingo to discuss saving tips for education goals and Louisiana’s START 529 Plan.

Great Day Louisiana: Saving Strategies for College

Budgeting for Higher Education Costs

Knowing what it will cost remains the trickiest part of determining how to save for college. You’re simply guessing how much college will cost 10+ years out and how much funding your child will need. Will they go to college? What type of school? Will they receive scholarships and grants? Here’s what the current landscape looks like per CollegeBoard.org: 

2023-24 National On-Campus Average Cost of College (Tuition, Fees, Housing, Food)

  • Public Four-Year In-State: $28,840

  • Public Four-Year Out-of-State: $46,730

  • Private Four-Year: $60,420

Historically, higher education costs have increased faster than other goods and services. If core inflation is running at 2-3%, education inflation is running between 5-8%, depending on what you are measuring. If we adjusted the public four-year in-state tuition of $28,840 for 5% annual inflation over the next 18 years, the cost of college would increase to $69,407. While you will never eliminate sticker shock, this highlights the importance of having an intentional savings + investing plan to keep up with inflation. 

Louisiana’s START 529 Plan

The most tax-efficient college savings vehicle is the 529 plan. In Louisiana, it’s called the START Saving Plan, and there’s a ton of great information on their website, startsaving.la.gov

A 529 plan is a bit like a Roth 401k for higher education costs. Money goes in after-tax, grows tax-free, and is eligible for tax-free withdrawals for qualified expenses such as tuition, fees, books, and room and board. 

Additionally, Louisiana offers the following benefits for residents:

  • State Tax Deduction: Married couples filing jointly may deduct deposits up to $4,800 per year per beneficiary

  • State Match on Contributions: There is an “Earnings Enhancement” based on household income that ranges from 2 – 14%. For example, a household making $70,000 would be eligible for a 6% earnings enhancement. Therefore, if they contributed $10,000 to an LA 529 Plan in 2024, they would receive additional funding of $600. 

  • Low-Cost Investments: Remember to choose your investments when setting up a 529 plan, as LA has a great line-up of low-cost Vanguard funds to choose from, including “age-based” options that will rebalance automatically from aggressive to conservative as your child gets closer to college. 

While I always recommend investing a portion of your savings in a 529 plan for the above reasons, you might consider diversifying your savings toward a boring old taxable brokerage account, especially early on when there is a great certainty of your child’s track. This will allow you added flexibility if there is excess savings relative to your funding needs. 

What happens if my child ends up not needing the money?

Withdrawing funds from a 529 plan for non-qualified educational expenses carries tax consequences and penalties. Generally speaking, you’ll be subject to ordinary income taxes and a 10% withdrawal penalty on the earnings portion. Thankfully, recent legislation has added flexibility to avoid these penalties. To avoid income tax on earnings and penalties, parents have the option to:

  • Change the beneficiary at any time to another child or grandchild for their benefit

  • Rollover funds from a 529 plan to a Roth IRA for a beneficiary. Restrictions apply, such as a minimum holding period, an annual maximum, and a lifetime maximum.

  • Withdraw up to the amount of a tax-free scholarship/grant to avoid penalty but not income tax on the earnings.