Using a 529 Plan for Your “Safe” Money

Facebook icon Twitter icon Print icon Email icon
Joseph Hurley

By Joseph Hurley

October 23, 2020

Parents with children approaching college age may be tempted to park their college savings in a bank certificate of deposit or a high-yielding account and avoid the short-term market risk that comes with stocks and longer-term bonds.

However, before you run down to your local bank branch, consider income taxes. Depending on your federal and state income tax brackets, your after-tax return on a bank CD may be a third lower than the published interest rate.

You may be able to do significantly better than that on an after-tax basis in a 529 plan and still avoid market risks. That’s because more 529 plans with bank products and other principal-protected investment options, and your 529 earnings are 100% federal tax-free.

Here are just a few of the “safe” options you can find in 529 savings plans:

  • Several 529 plans offer FDIC-insured investment options, including high-yield savings accounts with no minimum balance, and certificates of deposits with terms ranging from three months to twelve years with low minimums.
  • College Savings Bank offers FDIC-insured fixed-rate CDs and high-yield savings accounts nationwide through several state 529 plans.
  • TIAA makes a “Guaranteed Option” available in the 529 plans it manages. There is also no minimum holding period so you can put the money in today and take it out again in a month.
  • Stable-value investments are similar to a guaranteed option and are available in many other 529 plans. Money-market options are also prevalent. Be sure you understand the fee structure of any of these investment products as fees can have a significant impact on your net returns.
  • Many prepaid tuition plans also provide protection from market risks.

These examples illustrate the opportunities for putting your safe money into a 529 plan. They are not investment recommendations. To have any chance of keeping up with college inflation, you may have to allocate at least a portion of your savings to higher-risk investment options.

[Editor’s note: This article was originally published on April 13, 2006 and updated on October 23, 2020 by Mark Kantrowitz.]

A good place to start:

See the best 529 plans, personalized for you