Unintended Consequences Strike 529 College Savings Plans During Current Market Slump

by Hank Coleman

An unintended consequence has hurt 529 College Savings Plan participants.  An IRS rule only allows parents to change investment allocations once per year in many plans.  So, parents who rebalanced their children’s funds earlier this calendar year must ride out the current stock market’s upheaval.

Another negative drawback is also occurring in 529 plans.  Many plans are enrolled into funds that automatically reduce the fund’s stock holdings as the child nears college age.  I have always hated state sponsored plans like this, and I do not recommend them for parents.  These plans are good but ultraconservative for lazy parents who do not want to be bothered by adjusting their 529’s asset allocations.  I want control over a plan’s options and control over my children’s futures as much as possible.  This might very well be one of the worst times to sell stocks in the plans and move towards a heavier allocation of bonds with prices so low.  But, many parents are now hamstrung by the rules of their 529 College Savings Plans.

Ideas for your children at different ages…

16 to 18 year-olds.  Look at asset allocations carefully and be conservative.  New investment dollars may be invested in bonds to help you become more conservative.

1 to 15 year-olds.  Stocks will rebound by the time your kids get to college.  I am personally pumping as much money into stock funds in my kids’ 529 plans.

New Borns.  Pick from the multitude of college savings plans wisely.  The website, Saving For College.com, is the premiere site for investing for your children’s educations.  You should consider a heavy weighted portfolio of stock mutual funds when your children are younger.

It might also be advantageous to consider a prepaid tuition plan.  My wife and I went a small private liberal arts college, and we participate in the Independent 529 Plan which is a prepaid plan.

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