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Switching among 529 investment options
by Joe Hurley, founder, Savingforcollege.com
Wednesday, October 11th 2006
[Updated March 27, 2008]
As a 529 investor you are afforded flexibility when deciding how to allocate your contributions among your plan's investment options. The IRS also allows you to reallocate your investments, but only once in a calendar year. If you haven't already taken advantage of this opportunity in the current year, you have until December 31 to do so. The opportunity refreshes when the calendar turns over to January 1 of the next year.
Although a couple of 529 savings plans consist of only a single investment portfolio, most offer between 3 and 15 options, and some offer more than 20. Your reason for reallocating among those options is no different than your reason for switching investments in your 401(k) plan. A different option, or blend of options, may now fit better with your investment objectives. For example, as your child gets closer to college age, you may want to reduce market risk by switching out of a stock-weighted option and into a fixed-income-weighted option. To make the change, you would simply fill out the necessary form available from your 529 savings plan.
If you originally selected an age-based or matriculation-based investment option—one that automatically reallocates your account into more conservative investments as the account beneficiary grows older—you presumably have little reason to make a change, assuming you continue to subscribe to the reallocation methodology employed by your 529 plan. Still, you are allowed to switch to a different option if you so desire.
Some investors feel that 529 plans should permit investment self-direction that same way that IRAs do. However, others are thankful that the states are willing to assume responsibility for structuring a menu of investment options geared specifically to college savers. (The states typically hire outside investment experts for advice and recommendations.) Whichever camp you are in, realize that the prohibition on investment self-direction in a 529 plan is hardwired in the federal law and is not expected to change anytime soon.
What can you do if you made an investment change earlier in the year and have a strong desire to do so again before next year? There's usually an easy solution: simply change beneficiaries at the same time you change investments. An investment change made as part of the change of beneficiary to another qualifying family member is not counted for purposes of the annual limitation.
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