6 problems that can derail your 529 plan

http://www.savingforcollege.com/articles/20100416-6-problems-that-can-derail-your-529-plan

You might have started a 529 college savings account with high hopes, but like any ambitious goal, it's easy to get sidetracked. Life changes, a misunderstanding of your goals and even absent-mindedness can cause you to veer off course.

Here are six common problems that arise that can derail your 529 plan and how to get it back on track.

The problem: You don't know your goal. You may not know what school junior is going to attend, but that doesn't mean you can't do some basic calculations based on average costs and price increases for private schools, public universities or community colleges.

"If you've underestimated the cost of college, it's unlikely that you have oversaved for that goal," says Joel Peck, a CPA and owner of Joel Peck & Associates in Pelham, N.Y. Putting away $50 or $100 a month is a good start, but you need to formulate a goal and save enough to meet it.

The fix: Do the math. "You need to sit down no later than your child's freshman or sophomore year in high school to determine where you're at and where you need to go," says Peck. Once you've got the numbers in hand, you can adjust your savings and investing strategy.

The problem: You've gotten a divorce. Picking up the wreckage after a divorce is challenging enough and often, 529 assets aren't factored into the equation. That's a mistake, says Linda Pietroburgo, a Certified Financial Planner and principal of the Moneta Group in Clayton, Mo.

"If the 529 plan hasn't been completely negotiated, your ex might be able to move some of the money into trusts and tell the kids they can't have it unless they do X, Y or Z," she says. "You might not be getting the statements, so you won't know what's going on or even if the ex has taken out the money and squandered it."

The fix: Get the details in writing. "It really needs to be spelled out clearly -- who's the owner, who's the successor owner and how the money can be used," says Pietroburgo. "And that contract needs to have teeth."

The problem: You haven't investigated changes to your state's plan. If you invested in a fund outside of your home state, you may be missing out on some tax breaks, says Joe Orsolini, a Certified Financial Planner with College Aid Planners Inc. in Glen Ellyn, Ill. "Over time, many states have added state income tax breaks on 529 plans," he says. "In some cases, you might not even have to invest in your home state's plan to get the benefit." Depending on your state and your annual savings, you could be leaving hundreds of dollars on the table.

The fix: Visit your state plan's Web site. Check out the details for your state at Savingforcollege.com.

The problem: You haven't been making regular contributions. You may have started your 529 plan with a bang, perhaps with a gift from the grandparents or a stash you had set aside. But a 529 plan doesn't benefit from a set-it-and-forget-it mentality. It needs regular infusions of cash to grow, and if those vague promises you made to yourself about setting aside a portion of your annual bonus or tax refund to boost the account haven't panned out, it's time to take action.

The fix: Automate, automate, automate. "Pay yourself first," says Orsolini. "Every 529 plan has an automatic investment program where you can put in just about any amount you want each month, and you can have it coming right out of your paycheck."

Two important points: There's usually a small minimum of $25 to $50 for automatic investments, and in general, you will have to put in the same amount each month unless you specifically request to change it.

The problem: The volatility of your 529 account scares you. There is no time in recent history that has tested our tolerance for financial risk as much as the past two years. If the economy's highs and lows are giving you sleepless nights, it's time to think about changing the way your funds are allocated, Peck says.

The fix: Ratchet down your risk with more conservative investments. "Time is a cure for volatility, but volatility against a definite-time deadline is a horrible mismatch," says Peck.

For other big savings goals like saving for a house or retirement, you can generally delay using the money. But, your kid is likely to go to college at age 18. Offset the slower growth of conservative investments with additional savings, Peck says.

The problem: You're adding another child to your family. Another child in the family means twice the college costs. You're going to have a lot of decisions to make, including whether to add a second 529 plan, double your savings or split your current savings between the two children, says Pietroburgo.

The fix: Strategize early. Make a plan before the baby is born so you can implement it easily once you've got a new little one. That way, you won't wake up when the child is 10 years old and realize you have nothing saved.

Posted April 16, 2010