Why You Should Invest in the TSP

“I have kids in college, so I can’t give more to the TSP.” Advocates for federal workers to save for retirement have heard this phrase more times than we can count. We indeed desire to save for things other than retirement. But we risk losing out if we put off saving for retirement.

Many people will approach their financial objectives in order of importance. For instance, a parent might put money aside just for their children’s college tuition and delay saving for retirement until they fully cover their children’s college expenses. This impacts their retirement funds due to a delayed start.

You should take advantage of the “time worth of money” for all of your savings objectives. It’s essential to start saving as soon as possible to benefit from the time value of money.

A FERS employee (or a member of the uniformed forces covered by the Blended Retirement System) must always contribute to the Thrift Savings Plan at least 5% of their pay to get the full employer match. This great beginning step will give you a substantial nest egg to add to our FERS annuity and Social Security over a full career.

Let’s now examine the time value of money in terms of college savings. When a child is born, it is reasonable to predict that they will likely enroll in a college or university within 18 years. So why not save for the child’s education expenses as soon as they are born? A Coverdell ESA and a 529 plan both allow you to do that.

A qualifying tuition plan, also known as a 529 plan, is permitted by Internal Revenue Code Section 529. These plans are available in all 50 states and the District of Columbia. Additionally, many schools and institutions offer prepaid tuition programs. Check with your state of residency to find out what options are available.

Prepaid tuition programs and education savings plans are the two main categories of 529 plans.

State governments may impose residence requirements on participants in college savings plans. A saver opens the plan on behalf of a beneficiary (typically a child or grandchild). You would put money down in such a plan for the beneficiary’s future higher education costs (tuition, mandatory fees, and room and board). Any elementary or secondary school, whether public, private, or religious, may claim up to $10,000 in eligible costs each year. The SECURE Act permits the lifetime use of up to $10,000 of 529 funds for school debt repayment. Typically, the saver has a variety of investment alternatives in an education savings plan, frequently including target-date funds.

With a prepaid tuition plan, the saver can pay current prices for tuition units (or credits) at participating schools and universities. Plans for prepaid tuition are mostly for in-state and public colleges and universities; they do not provide prepaid tuition in primary or secondary schools.

529 plans

A saver should know that 529 plans have fees and expenditures, just like any investment. An application fee and continuing administrative costs are possible with prepaid tuition plans. Application costs, account maintenance fees, asset management fees, and other expenses are all possible with education savings plans. You might learn all there is to know about 529 plans by searching the term on Google.

Coverdell ESAs

Similar to 529s, Coverdell ESAs (education savings accounts) have an annual contribution cap of $2,000 that is applied to all Coverdell accounts. Like 529s, Coverdell ESA funds may be used for qualified K-12 and college costs.

Who can open a Coverdell ESA is subject to income restrictions. You can contribute the whole amount for single filers if your MAGI (modified adjusted gross income) is under $95,000, but not at all if it is over $110,000. The figures are $190,000 and $220,000 for joint filers.

Coverdells have age limits, in contrast to 529s. The account must be fully distributed to the selected beneficiary by the time they turn 30, and they must be under 18.

Your retirement savings shouldn’t be put on hold to save for your child’s schooling. Save money for both of these objectives in advance. While contributing as much as possible to the TSP, consider a 529 plan for your child’s education. 

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Bio:
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementiong a sound plan for your retirement. We are commited to helping you achieve your goals. Visit us at M. Dutton and Assoiciates.COM. Tel. 212-951-7376: email: [email protected].