“I can’t contribute more to the TSP because I have kids in college.” – Those who urge federal employees to set aside money for retirement have heard this line more times than they can count. It’s true that there are goals other than retirement for which we want to save.
However, we all should consider the following question: Out of the three major savings goals of a home, college for your kids, and your retirement, which one won’t a bank give you a loan for?
We should never throw retirement savings under the bus, even if we do so to fund these other worthy savings goals.
Many people chronologically sequence their major goals. For example, a person might first save exclusively for the down payment for their first home, then start socking money aside for their children’s college education and only lastly start saving for retirement. That will put their retirement savings at a disadvantage due to a late start.
Money has a time value. Mick Jagger, a former student at the London School of Economics, tells us that “time is on (our) side”, and he’s right. The longer we have money invested, the longer the time the money has to grow. To take advantage of the time value of money for our retirement, we should begin saving early.
A FERS employee (or a uniformed services member who is covered by the Blended Retirement System) should always contribute at least 5% of their salary to the Thrift Savings Plan in order to get the full employer match.
Let’s now look at the time value of money when it comes to saving for college. The minute a child is born, it can be reasonably assumed that in eighteen years the child will likely be entering a college or a university. So why not begin saving for the child’s future college from the time they are born? You can do that with a 529 plan.
A 529 plan is legally known as a qualified tuition plan and gets its name because it is authorized by Section 529 of the Internal Revenue Code.
All 50 states and the District of Columbia offer 529 plans. In addition, many colleges and universities sponsor prepaid tuition plans. Check with your state of residence to see what plans are offered.
The two main types of 529 plans are prepaid tuition plans and education savings plans.
An education savings plan is sponsored by a state government and may have residency requirements for savers. The plan is opened by a saver for the benefit of a beneficiary (typically a child or grandchild). In such a plan you would save for the beneficiary’s future qualified higher education expenses (tuition, mandatory fees and room and board). Qualified expenses include up to $10,000 per year at any public, private, or religious elementary or secondary school.
The recently enacted SECURE Act allows up to $10,000 of 529 money (lifetime limit) to be used to pay student debt. Generally, in an education savings plan, the saver can choose from a range of investment options, frequently including target-date funds.
A prepaid tuition plan will let the saver purchase tuition units (or credits) at participating colleges and universities at current prices. Prepaid tuition plans do not allow prepaid tuition at elementary or secondary schools and are generally for in-state and public colleges and universities.
A saver should be aware that there are fees and expenses associated with these investments. Prepaid tuition plans may charge an application fee and ongoing administrative fees. Education savings plans may charge an application fee, account maintenance fees, asset management fees and other fees. If you were to google “529 Plans”, you would find more information than you could need on this topic.
Saving for your child’s education should not derail saving for your retirement. Start early saving for both of these goals. Consider a 529 plan for your child’s education and keep funding the TSP with as much as you can.
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