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Year-end 529-plan strategies
If last year's market plunge didn't make the owners of 529 accounts ill, this year's stomach-lurching volatility may have done the trick. Some believe it's too early to start pumping money back into their 529 plans, others worry the recent run-up indicates they've already missed the best opportunity for growth.
Mary McConnell, director of college savings products for Charles Schwab in San Francisco, says no matter what's happened to your 529 account balance, now is no time to sound the alarm.
"Panic is not an investment strategy," she says. "If you've got a long-term goal, such as saving for college, you probably shouldn't make major changes." Instead, she advises, re-examine your risk tolerance and make sure you've aligned your investment strategy and goals. That way, no matter what the market does, you know you've done all you can to maximize your investments.
As you examine your options for 2010, consider these age-based strategies to make the most of every dollar that goes into your 529 account.
If you've got children who have a decade or more before they enroll in college, breathe easy, because you've got plenty of time to ride out today's market woes. Focus on the things you can control right now, including the amount of money you deposit into the account each month. By saving in a disciplined fashion, you won't just be adding to the account, you'll take advantage of dollar-cost averaging, which will benefit you no matter what the market is doing, says Ken Nussbaum of Nussbaum & Associates in Richmond, Vt. "It can be hard to put money in an investment when it keeps going down," says Nussbaum. "But people who continued to put the same amount of money in their accounts at the end of 2008 and early 2009 were buying more shares at lower prices. Now, as the market goes up, they are looking at their accounts and realizing that (the strategy) worked out okay." Consider age-based funds that weigh heavily toward stock options in the early years, which are most likely to experience solid growth over time. Even if you have a more cautious financial mindset, you should be able to choose a conservative age-based plan that will still give your money a real chance for substantial growth.
By this time, you should be getting a clearer view of your potential college costs as well as your 529 account's growth and value. As the events of the past 18 months have taught even the savviest investor, it's wise to take a step back, re-evaluate your risk tolerance, and begin ratcheting down your riskiest investments. "It's time to run the numbers again," says McConnell. "Use a college calculator and see if you need to increase your contributions a bit." Begin moving to a more conservative portfolio that has a heavier concentration in low-risk investments such as bonds. If you haven't started a 529 account, it's not too late. There's still an opportunity to reap real gains over the next few years.
Ages 17 and older
Now is the time to dial back on risk by weighing your investments more heavily in bonds, cash and money market options. These tried-and-true choices may not offer much sparkle, but they're safer for a short-term time horizon. Moreover, as anyone who lost big in last year's market plunge can tell you, it's simply not worth losing years' worth of savings right before you need it. Although you may miss growth from stock market rallies, you'll also prevent devastating losses that could affect your ability to pay for your child's education. And while you should move much of your portfolio over to these safer investments, McConnell says, "You want to keep some in investments with potential for upside growth, since you're not going to use that money all at once. Rather than put your entire 529 assets into a money market right when the kid starts college, just put your annual, immediate needs in the money market. Keep the other assets growing in a short-term, conservative portfolio so you can get some additional growth over the next four to six years."
No matter the age of your child or the account balance, be as rational as possible about your investments. "College investing is really emotional," says Nussbaum. "It's one thing to know you may have to delay your own retirement by a few years, but it's another thing to tell your son or daughter that you can't afford to send them to college. You've got to be disciplined and focused." If you do decide to make changes to your investment portfolio, make sure you can stick with them: You can make just one switch per plan per calendar year.
Some investors decided to liquidate their accounts last year after sizeable losses. They incurred no federal taxes or penalties and could claim the loss as a miscellaneous itemized deduction. However, that short-term benefit likely has turned out to be a long-term loss because they may have eked out small gains if they'd stayed put, thanks to recent improvements in the economy. Nussbaum discourages liquidating accounts in almost all circumstances. "You'd be hard-pressed to find a situation where it would make sense to completely liquidate the account to take the tax loss. Not only will you be unlikely to get any kind of significant financial benefit from the tax loss, but you'll probably find (negative) financial aid ramifications." If you do plan to keep your account, be sure to see if your state offers an income tax deduction it can be a nice extra bit of cash, depending on your annual contributions.
Regardless of the bum economy, 529 investments still make a lot of sense. You'll reap the tax-free withdrawals for educational expenses, you may be lucky enough to grab state income-tax deductions now, and you'll have the security of knowing that you can pay for some or all of your child's education when he or she enrolls.
Posted December 25, 2009
Erin Peterson is a freelance writer based in Minneapolis.