Monday, June 21, 2010

529 versus cash or bonds? 529 College Savings Answers

When our readers and users of send us questions, we'll post the answers here to help anyone searching for information on the best ways to save for someone's college education.

My child is in high school and her age-based 529 experienced a large decline last year, I am considering moving it to a fixed investment in cash or bonds, what should I do?

There is no one right answer to this question. On the one hand, your need for the funds is coming along shortly and you certainly want to avoid further losses. On the other hand, you give up your opportunity to recoup some of these losses if you change course and reinvest into a fixed or other “low risk” portfolio. When you placed your child’s 529 into an “age-based” account, by the time high school rolled around, the funds really should have been in more conservative investments automatically. That is the idea behind age-based accounts—readjusting on an automatic schedule to conserve funds as the need gets closer. In 2008, however, most typical scenarios went right out the window.

So, with college on the horizon, perhaps the best question to ask is, “What will help me sleep at night?” If you feel you can live with continued risk in an effort to regain some of the losses of the past year, then you can consider staying the course or modifying only a portion of the investments. On the other hand, there is no penalty or taxation issue if you change your investments so long as you stay inside the 529 plan. Many plans allow for only an annual re-allocation of investments. If you are permitted to reallocate, then moving into a more conservative portfolio within your existing plan may be appropriate. A handful of states have 529 plans that invest in CDs or savings accounts. You are allowed to roll your funds into another plan if you so choose. Another alternative some might consider is leaving the current plan alone but creating a second, more conservative, plan for any new dollars added, thereby not putting all your education dollars into the same savings basket. Overall, moving to more conservative investments is a reasonable alternative in the current financial environment if the need is less than three to five years away, as it is if your child is already in high school. A trained financial professional can assist you in evaluating your choices.

Share your thoughts: Are you using the age-weighted portfolio in your 529? Ever re-allocated your assets within your 529?

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