Savingforcollege.com - Page 9 of 9 - Guide to 529 Plans, Saving for College and Financial Aid

Is It Safe to Get Back into the Stock Market?

After the stock market started dropping on February 19, 2020 due to the coronavirus pandemic, some investors pulled out of the stock market. Other investors remained invested, but shifted their asset allocations to a more conservative mix of investments. When is it safe for these investors jump back into the stock market?

The stock market is never really “safe,” but the recovery began on March 24, 2020, about a month after the start of the bear market.

Pulling out of the stock market just locks in losses and causes you to miss out on all or part of the recovery. It is better to remain invested than to try to time the market.

If you blink, the recovery will have already happened and you will miss out on the opportunity to regain some of your losses. If current trends continue, the S&P 500 will be fully recovered in two more weeks and the Russell 2000 will have fully recovered in about a month.

It took about a month for the stock market to drop by about a third. It will have taken about three months for the stock market to fully recover from the bear market. It always takes longer to recover from a bear market than it takes for the stock market to drop.

This chart shows the change in investment returns as compared with where the stock market was at the beginning of the year. It graphs the performance of the S&P 500, Russell 2000, the MSCI EAFE Standard Index (Foreign Stock) and the MSCI US REIT Index (Real Estate).

the change in investment returns as compared with where the stock market was at the beginning of the year chart

How do 529 plans work?

Many parents and grandparents are confused about 529 plan rules. A 529 college savings plan is an investment account whereyour money grows tax-free if it’s used to pay for qualified education expenses. This includes college costs, as wellas $10,000 per year in tuition expenses at private, public or religious elementary and secondary schools. Unlike othersavings vehicles, there are no income limits, and no time limits imposed. In our Annual College Savings Survey, we presented six true or false questions about 529 rules to visitors of Savingforcollege.com.Click through the slideshow to see where the biggest misconceptions lie!

1. I must use the 529 plan offered by my state of residence – FALSE

20% of total respondents answered incorrectly
18% of grandparents and 21% of parents answered incorrectly
You can enroll in almost any state’s 529 plan, no matter where you live, but your home state many offer a state tax benefitsfor residents.

2. If my child doesn’t go to college, I’ll lose the money I have saved in my 529 plan – FALSE

17% of total respondents answered incorrectly
10% of grandparents and 18% of parents answered incorrectly
If the beneficiary of a 529 account doesn’t go to college, you canchange the beneficiary or take a non-qualified withdrawal.
If you take a non-qualified withdrawal, you will incur income tax as well as a 10% penalty tax on the earnings portionof the account. You’ll never be taxed or penalized on the principal (the amount you deposited) since it was madewith after-tax money.

3. 529 plan savings must be applied toward colleges in the state where the plan is based – FALSE

16% of total respondents answered incorrectly
12% of grandparents and 17% of parents answered incorrectly
You can use your 529 savings to pay for almost any post-secondary education, including traditional four-year universities, community colleges, trade schools andeven study abroad programs. As of January 1, 2018, families can also take a tax-free withdrawal of up to $10,000per year, per beneficiary to pay for tuition expenses at private, public or religious elementary and high schools.

RELATED: 529 plans and K-12 tuition

4. If my child gets a scholarship, I’ll lose the money I have saved in a 529 plan – FALSE

9% of total respondents answered incorrectly
5% of grandparents and 10% of parents answered incorrectly
If a student gets a scholarship, non-qualified 529 plan withdrawals up to the amount of the tax-free scholarship willnot be subject to the 10% penalty. The earnings portion of the withdrawal, however, will incur income taxes.

5. Savings in a 529 plan are considered when determining financial aid eligibility – TRUE

33% of total respondents answered incorrectly
37% of grandparents and 32% of parents answered incorrectly
Funds saved in a 529 plan owned by a parent or student are considered parental assets. When determining a student’s ExpectedFamily Contribution, a financial aid office will count up to 5.64% of parental assets as funds available to pay forcollege (compared to 20% of student assets).
Assets in a grandparent-owned 529 plan are not reported on the FAFSA, but when the grandparent makes a withdrawal topay tuition the amount will be reported as student income on the following year’s FAFSA. Income is assessed at 50%.Withdrawals from parent- or student-owned 529 plans have no effect on financial aid.

6. My child can never withdraw from the 529 plan without my permission – TRUE

37% of respondents answered incorrectly
39% of grandparents and 37% of parents answered incorrectly
Unlike custodial accounts under UGMA/UTMA, the 529 plan account owner (not the beneficiary) retains control of the fundsthroughout the life of the account. The beneficiary has no legal rights to the assets, regardless of his or her age.