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Many federal workers borrow from their Thrift Savings Plan accounts to help pay college tuition. Others have discovered the 529 programs to pre-fund tuition costs.
But financial planner Rebecca Schreiber (CFP) says the rule of thumb is to fund your retirement first. She says there are things people should know, and do, first before tapping their TSP for college or almost any other reason.
“With swiftly rising college costs many parents are looking to education savings programs to stay ahead of the curve. 529 plans have grown in popularity as all-in-one college savings plans with tax deductions to boot. In their eagerness to get a jump on education savings, some parents may be overlooking other critical financial steps that also contribute to their family’s well-being. Before jumping on the 529 bandwagon make sure these other financial bases are covered in the slight chance your financial future doesn’t play out exactly as planned:
A well-funded emergency fund. Depending on how many people are depending on your income this may range from 6 months of debt payments to 6 months of living expenses. Debt payments consist of minimum payments for student loan, car loan, mortgage and credit card balances. In the event you need to take a leave of absence or leave federal service entirely, having debt payments saved in advance will enable you to keep your lenders happy and your credit score healthy. A healthy credit score is critical to getting rehired or borrowing what you may need once the emergency fund is exhausted.
A 5% annual contribution rate to a retirement account or enough to receive the full employer match, whichever is greater. When it comes to college savings the mantra is “Retirement First.” There will always be student loans available for kids to get through college. It’s a profitable business model recognized by public and private entities alike – lend students money for college, let them stretch out the payments for decades and collect interest for the rest of their professional lives. However no one is standing in line to finance your retirement – there is no time or income to pay back the money. For this reason parents need to be sure their retirement accounts and goals are well underway before locking money up in education savings accounts.” R.S.
Tomorrow in this space, Rebecca will talk about why (and how much) you should have in emergency funds, paying down credit card debt and how and when to fund a college 529 plan.
I’m still in Phoenix at the FDR conference. If you’re in the area, or at the conference, stop by and say hello!
The phrase “Dog Days” refers to the hottest days of summer. The Old Farmer’s Almanac lists the traditional timing of the Dog Days: the 40 days beginning July 3 and ending August 11, coinciding with the rising of the Dog Star, Sirius.