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401K vs Stock Purchase

TryingToFigureItOutTryingToFigureItOut Registered User Posts: 5 New Member
Can someone shed some light on financials for Ivys and NESCAC schools in terms of how they view parents putting into a 401K vs purchasing stock (I get a 15% discount and am trying to weigh which is better financially for us in terms of college costs). Will it be more beneficial for us to just put in 401K (meaning less parent contribution)?
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Replies to: 401K vs Stock Purchase

  • BelknapPointBelknapPoint Registered User Posts: 2,451 Senior Member
    Generally, a standard investment non-qualified retirement asset will reduce need-based aid, while a 401(k) account (or any other qualified retirement account) will not.
  • thumper1thumper1 Registered User Posts: 60,805 Senior Member
    @TryingToFigureItOut

    Need based aid is primarily based on family income. Is your income sufficiently low that this will make a difference? It is possible that neither of these things will affect your need based aid...if your income and assets are above a certain amount.
  • SybyllaSybylla Registered User Posts: 715 Member
    edited June 13
    If your 401K isn't maxed then why buy stock? If you make this as a choice, I assume you can't be maxed?
  • twogirlstwogirls Registered User Posts: 5,293 Senior Member
    edited June 13
    As was mentioned, FA will be based primarily on income. Have you used the NPC?

    If your 401K is not maxed ( but is permitted) then I would put the money there. If you don't put it into the 401K then be prepared for the stock to be included every year when they calculate your aid package. I believe that money put into a 401K ( for the aid year) can also be added back in to your income when they calculate aid. If this stock is something that can't be touched until you leave your company or retire, and you have documentation to back this up, then it's possible ( not definite- depends on the school) that the school will view it differently. But again.... your aid is primarily driven by income and number of children in college.
  • blossomblossom Registered User Posts: 7,736 Senior Member
    You need to think about your overall financial planning and put the issue of financial aid aside for now.

    The stories about families who were wiped out when Lehman and Bear Stearns went under are NOT anecdotal- there were a lot of employees whose income went away (the firms went under so they were unemployed) AND lost the bulk of their assets (tied up in Lehman stock which would be the subject of litigation for the next 20 years or so).

    Make sure you've covered all your bases in terms of diversification, liquidity, etc. If buying your company's stock makes sense with the discount, THEN run a few NPC's to see the impact on your aid by having your money sitting in equities vs. sheltered in a 401k.

    If you are making above a certain amount it won't matter either way; if you are on the edge then do the analysis but only if you are adequately diversified as per above. And if it will make a lot of difference in your aid, you are just not earning enough as a family to be putting the money in equities vs. maxing out on your 401k-- you need to do that first.

  • thumper1thumper1 Registered User Posts: 60,805 Senior Member
    What would you be doing with this money if you did NOT have a child going to college?
  • TryingToFigureItOutTryingToFigureItOut Registered User Posts: 5 New Member
    I can afford to put the yearly pretax maximum into our 401k, but started at a new employer that now offers the stock options, so was curious as to the impact on our parent contrution. I feel we are on the edge in terms of the cost of college with our parent contribution being too much, that inbetween place where we probably make too much for decent aid but potentially not enough to fully afford it without making some significant changes.
  • TQfromtheUTQfromtheU Registered User Posts: 542 Member
    Agree with @blossom. Also, what is your plan if your expected parent contribution is higher? Do you have sufficient funds to send your student to your desired school without pulling money out of the 401k or selling some of the stock? Is any of your 401k matched in company stock? That would bring up @blossom's point about diversification again.
  • DadTwoGirlsDadTwoGirls Registered User Posts: 1,154 Senior Member
    edited June 17
    I personally would max out on the 401k first for multiple reasons, FA being not at the top of the list. One reason to do the 401k first is that in the long term there are significant tax advantages (particularly for younger workers, and assuming that the stock market continues to mostly go up over the long term). The 401k in many cases (for many of us) can be put into mutual funds that have professional managers who we can at least hope are competent and knowledgeable in their field. Also, if you put money into an ESPP, then you can end up with a lot of your own company's stock. This means that over time your salary and your investment is tied up with the same company.

    Of course one option is to max out on both the 401k and the ESPP, and then sell the ESPP stock as soon as you have had it long enough to get long term capital gains, or even as soon as you get the stock at all (ie, sell the day after you get the stock, just for the 15%).

    Of course, I and probably most or all of the people here are not financial advisors. Also, as @thumper1 pointed out, "if your income and assets are above a certain amount" then you won't get need based aid anyway.

    I also agree with @blossom that "You need to think about your overall financial planning and put the issue of financial aid aside for now".
  • SybyllaSybylla Registered User Posts: 715 Member
    I can afford to put the yearly pretax maximum into our 401k, but started at a new employer that now offers the stock options<<<

    Is is the 401K matched? This is an either or? (FA aside)
  • thumper1thumper1 Registered User Posts: 60,805 Senior Member
    Ok...if you can afford to contribute the max to your 401k...and you are working for a company that gives stock options...I'm going to guess that you probably have a high enough INCOME that you won't qualify for federally funded grant money (which is for low income earners), and probably not much in institutional need based money.

    How close are you to retirement...and how risk adverse are you?

    If it were me, I would do the 401k max contribution. This will only help you in your retirement years. If your retirement income is sufficiently high...you can pay off loans with it...if needed (I don't suggest this...but it IS possible). In addition, many 401k programs allow you to borrow for educational purposes. Again...I don't recocommend doing this but it's possible.

    And as noted above. If your company does any 401k match...and you don't take it...you are losing that match money.

    Re: stock options...I would have to be 100% or very close to it...sure that this company stock will be worth something when I finally decide I need it. Think about all the companies where folks took stock options...and now have NOTHING to show for them. Enron...great example. When they closed...nada.

    So back to my question. What would you be doing if you were NOT trying to deal college costs? Don't do your major retirement or stock financial planning based on college. Do what you would be doing ANYWAY.

    There are many other ways for families that can't afford to pay their family contribution to reduce costs.

    1. Find an affordable college.

    2. Look for places where your student will garner merit aid.

    In my opinion...no one should but their retirement contributions on hold because a kid is heading off to college. That is money you simply will never be able to replace. And that IS the advice we received from our financial planner.
  • thumper1thumper1 Registered User Posts: 60,805 Senior Member
    And I'm putting this in its own post.

    The VAST MAJORITY of colleges do not guarantee to meet full need for all accepted students. You could be doing all these financial gymnastics for NO financial aid again AT ALL.

    And those colleges that DO meet full need are amongst the most competitive...and expensive in the country. If your student is truly a competitive applicant for one of the meets full need colleges, it is very likely that that student could garner merit aid at many other schools.
  • TQfromtheUTQfromtheU Registered User Posts: 542 Member
    ^^^ Agree. Just make sure you have a plan for what to do if you student doesn't get enough aid, so that you don't have to make tax disadvantaged moves to cover tuition.
  • mamommamom Registered User Posts: 3,201 Senior Member
    I did not see anyone mention this (but I only skimmed thread), but your contributions the year you file FASFA are taken into consideration and fair game. IE- It is money schools consider available to pay for college. Money already in a 401K is usually not. You need to consider return on stock vs how much it effects your EFC.
  • BelknapPointBelknapPoint Registered User Posts: 2,451 Senior Member
    I did not see anyone mention this (but I only skimmed thread), but your contributions the year you file FASFA are taken into consideration and fair game.

    For complete accuracy, it's the contributions during the tax year two years prior to the academic year for which the FAFSA is being filed.
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