Grad School Saving Strategy

[kelcells]

First off I thought this post was different enough from BeltwayExplorer's https://saverocity.com/forum/threads/payments-to-make-before-contributing-to-a-529.335623/ to warrant its own thread but we can merge them if y'all want.

I am currently applying and anticipate going to business school this upcoming August to earn my MBA, however I won't know for certain until March if/where I'll be admitted. It's probably a whole different discussion, but any Saverocity members with a strong MBA opinion feel free to send me a PM as I am looking for all the advice I can get.

If accepted to a school in March, what would be my best savings strategy to minimize student loan debt?

I plan to work until July at my current job (leaving about a month before school starts to hang at the beach / burn some AA miles). I understand this is obviously not the most efficient way to save as I'll be missing out on a month's worth of paychecks but it'll be nice to have a break after working 5 years.

My job matches contributions up to 5% to my TSP (currently contributing significantly more) but after that I have a good bit of income, both from my job and MS, to allocate to other savings instruments.

I could up my TSP contributions up to my intended savings level. I have read those funds can be used to pay college education expenses under certain circumstances I believe would apply to me.

I could open a 529 savings account (live in VA, would know beforehand if attending a VA business school) and contribute all savings into that.

I could invest my savings in another instrument, maybe Betterment?

I could simply stockpile after tax savings into an interest earning account such as Alliant or a combination of accounts like Mango.

I have no other debts beside a few thousand in student loans that I would pay today if not for a 2.5% interest rate.

Note I do plan to use MS cashback (less than my yearly W-2 income) to majorly supplement my savings contributions if that factors into any of these instruments.

What do y'all think is the best plan of action?

 

[Hutch]

Stay working and get your employer to pay. If your employer doesn't pay for school find a new job. IRS enables them to write off just under 10k for graduate education so most employers provide it as a benefit.

 

[kelcells]

Stay working and get your employer to pay. If your employer doesn't pay for school find a new job. IRS enables them to write off just under 10k for graduate education so most employers provide it as a benefit.

That would definitely be the ideal situation, but for this scenario let's assume that isn't an option

 

[Tom Capone]

When discussing a 529 you mention you live in Virginia and would know before hand that you are attending a VA school. For the record, your state of residence and school doesn't matter for a 529. You are still eligible and can actually invest in a plan from any state, doesn't have to be yours.

There is not much of a short term benefit from investing through a 529. With your time horizon, you don't want to be in the stock market. The one benefit you may find is a state tax deduction. I don't know VA, but NY provides a NYS income tax credit for contributions to a NY plan. If VA has a similar benefit, I would invest up to the max benefit amount, but keep the funds in a low risk/cash investment. If there is such a benefit you should always flow funds through the account to get the benefit. There generally is no holding period requirement. In other words if you deposit $5K and turn around the next day to use the $5K to pay for education you would still get the deduction (if VA has a deduction)

I'm not familiar with TSP (Thrift Savings Plan according to Google), but assume they are similar to 403(b)/401(k). I would consider rolling some or all into a Roth IRA (may need to roll to Traditional first, then Roth) while your income is very low when you're in grad school.

 

[kelcells]

I'm not familiar with TSP (Thrift Savings Plan according to Google), but assume they are similar to 403(b)/401(k). I would consider rolling some or all into a Roth IRA (may need to roll to Traditional first, then Roth) while your income is very low when you're in grad school.

You are correct, the TSP is essentially a 401k run by the federal government. I actually read about 401k rollover during graduate school and switched my paycheck allocation from Roth to 401k about a month ago.

Thanks for the advice, keeping the risk low investment-wise is probably the better idea. I'll read further about VA tax benefit limits for a 529, looks like it's limited to a max $4,000 deduction per savings account. I'm still unsure if I could open multiple 529's for myself and qualify for multiple deductions (probably need to speak with an accountant).

 

[thelakes77]

have you considered a roth conversion while in grad school?

if you will have an entire calendar year with no income due to being in school full time, you could fill up the 0% tax bracket with roth conversion

 

[Matt]

401k rollover during graduate school and switched my paycheck allocation from Roth to 401k about a month ago.

If I read this correctly, then you've not got a lot in deferred 401k, so the rollover strategy won't be huge for you. Additionally, you should examine the investment choices of the TSP. I've seen these in the past to be far beyond anything you could get elsewhere in terms of quality and cost, so rolling out might not be a good idea. You can post/send me the options if you like and i'll let you know what is good.

tax benefit limits for a 529, looks like it's limited a max $4,000 deduction per savings account. I'm still unsure if I could open multiple 529's for myself and qualify for multiple deductions

Per Person, Per Year. Put $4K in now before 12/31 if you plan to self fund.

 

[skowee]

Fed here that left service for grad school and just recently returned to service. The TSP is a top-notch retirement vehicle. Even if you leave federal service, never roll money out of the TSP and into another employer's 401k or personal IRA. The expense ratios can't be beat by anyone and there are zero miscellaneous admin fees when separated from service (I was separated for just over 3 years). Last time I checked expense ratios were like 0.029%.

Keep in mind if you have less than 3 years of federal service your agency's auto 1% contributions will be forfeited, but you're 100% vested in the other matching 4% from day one.

 

[swonavy]

Join the military. Navy paid for my undergrad and three masters. Thank you to all the tax payers.

 

[kelcells]

Thanks for all the help! I apologize for the delayed response, it's been a busy weekend.

If I read this correctly, then you've not got a lot in deferred 401k, so the rollover strategy won't be huge for you. Additionally, you should examine the investment choices of the TSP. I've seen these in the past to be far beyond anything you could get elsewhere in terms of quality and cost, so rolling out might not be a good idea. You can post/send me the options if you like and i'll let you know what is good.

Actually overall I do not have a "lot" in combined 401k and Roth TSP accounts, been working 4.5yrs and only ramped up contributions in the last year or so (the increase in contributions actually coincides with joining this forum and reading some of your posts Matt). Let's put the number at a little less than $20k, with 2/3 in 401k TSP and 1/3 in Roth TSP.

Since it's probably not a good idea to roll over TSP 401k into a non-TSP Roth once in grad school I have several other options. I can currently allocate my TSP contributions to both 401k and/or Roth accounts - since we decided I won't use the rollover plan in grad school, should I be contributing 100% to Roth? My expected income post grad should be higher than my current income.

Also, back to the original question: After maxing out the $4000/yr in a 529, what is the best plan for the $15,000+ additional money I plan to save? Should I put the rest into the TSP or use other liquid savings accounts? Basically, is it better to increase retirement account funds or to increase savings to decrease the amount of student loans I'll need to take out?


*As far as TSP investment choices, I am currently in an aggressive stock heavy position as recommended by several blogs I read on the internet. It may be a poor economic time to have chosen this strategy so I'm always open to suggestions.

Fed here that left service for grad school and just recently returned to service. The TSP is a top-notch retirement vehicle. Even if you leave federal service, never roll money out of the TSP and into another employer's 401k or personal IRA. The expense ratios can't be beat by anyone and there are zero miscellaneous admin fees when separated from service (I was separated for just over 3 years). Last time I checked expense ratios were like 0.029%.

Thanks all good to know. I'll have 5 years when leave so will be full vested.

 

[Matt]

Thanks for all the help! I apologize for the delayed response, it's been a busy weekend.



Actually overall I do not have a "lot" in combined 401k and Roth TSP accounts, been working 4.5yrs and only ramped up contributions in the last year or so (the increase in contributions actually coincides with joining this forum and reading some of your posts Matt). Let's put the number at a little less than $20k, with 2/3 in 401k TSP and 1/3 in Roth TSP.

Since it's probably not a good idea to roll over TSP 401k into a non-TSP Roth once in grad school I have several other options. I can currently allocate my TSP contributions to both 401k and/or Roth accounts - since we decided I won't use the rollover plan in grad school, should I be contributing 100% to Roth? My expected income post grad should be higher than my current income.

Also, back to the original question: After maxing out the $4000/yr in a 529, what is the best plan for the $15,000+ additional money I plan to save? Should I put the rest into the TSP or use other liquid savings accounts? Basically, is it better to increase retirement account funds or to increase savings to decrease the amount of student loans I'll need to take out?


*As far as TSP investment choices, I am currently in an aggressive stock heavy position as recommended by several blogs I read on the internet. It may be a poor economic time to have chosen this strategy so I'm always open to suggestions.




Thanks all good to know. I'll have 5 years when leave so will be full vested.

I think the key is to think about tax bracket shifts. Will you be not just earning more post grad, but would you be earning more in a higher bracket, or would you be within the same bracket? Note that things like getting married can mean your salary can increase substantially but your tax rate stays the same.

Regarding the where to invest your money question, it depends really on your plan:

• If you plan to borrow money via student loan and therefore invest in the TSP (either Roth or Traditional) you can afford to be more aggressive. This is because if you get a down year next year, it doesn't matter, as you have a long time horizon.
• If you plan to self fund the study, then you can't afford to be as aggressive, because you could lose 50% of the account value and then how can you pay for college?
• You could hedge your bets in the sense that you invest aggressively outside of the TSP in order to fund college, and if you get unlucky with the short term market you use loans to fill the deficit. That could be bad in some ways, as the TSP balance didn't get the extra bump in deposit, but if it is a loss anyway, then selling a loser creates a capital loss that can add value later on, and you cannot get that from the TSP.

So there are 3 routes - and you could mix them up also, EG allocate X to the TSP, Y to a risky investment and use Z loans to cover the gap.

One thing that might be useful is to reverse engineer via the cost of loans. Do you think you could access a portion of loans at a bargain rate? EG could you get something at less than 5% (Perkins)? If you could get say $5K at a nice price, you could use that as a deficit calculation:

EG need $15K, can access $5K cheaply. Equals a scenario where you could afford $5K of loss to your taxable account, which is about 1/3 draw down. You'd be able to consider something like 25/75 (stocks to bonds and I'm just ballparking now) in taxable. If the market crashed, you'd likely (with the $5K) be able to pay the student costs.

Another way to look at it is to think about the amount of tax dollars you could save today by going 401K, would that extra money be worth it? This depends on your tax rate.

There's no simple answer really, other than be aware that if you take on risk in your investment and need the money (short time horizon) then you need to have a way to pay the bill demanded by the college.

 

[kelcells]

There's no simple answer really

Thanks Matt for all the information. I have a lot to digest and calculate but you've given me a great start in figuring what will work best for my financial situation.