Don’t let Your 529 Savings Slip Away in an Uncertain Market
TULSA, Okla. – PSA – A 529 college savings plan allows you to place money for college costs in an account where it can build profits that are usually exempt from federal, state and local taxes. Until recent stock market declines, the savings plans were a good tool for parents. Many people were surprised to find they had lost some of the money they had in their plans. The Oklahoma Society of Certified Public Accountants offers these guidelines on how to make the best choices when investing in a 529 savings plan in an uncertain market.
Understand the Basics
states offer 529 plans, but the investment side is usually handled by a mutual fund company. As an investor, you typically have numerous choices about how you can allocate your money among different funds with varying investment strategies. Some investments, such as stocks, are considered riskier than others because the value of the investment can decline.
However, higher-risk investments offer the potential for a better return than safer choices. With that in mind, it’s usually a good idea to choose investments with higher earning potential when your children are young and there are many years left to earn back any market losses you experience. Then, choose lower risk investments as they get closer to college.
Define “Risk”
One popular 529 plan choice for many parents is an age-based approach that automatically selects investments based on your child’s age, making more conservative selections as your child nears college. Be sure you are comfortable with your plan’s definition of “conservative.” As seen in the last year, it’s possible to experience steep losses in the stock market, so a 529 portfolio that has 25 percent or more of your money in stocks may be too risky for a student with only two to three years left before college. This doesn’t leave enough time to regain potential losses in possible future stock market rallies. Find out what percentage of an age-based plan is invested in stocks. Consider a more moderate choice if it’s more than you had in mind.
Consider Your Timing
On the other hand, some states have responded to the recent market troubles by creating 529 savings plans that feature very low risk investments. Remember that low risk goes hand in hand with low returns, with some yields as low as the single digits. Once again, timing may be the key factor. If your child is one or two years away from college, a reliable small return — with minimal risks — might be the right choice. You might be better off investing in a plan that includes a higher percentage of stocks if your student has five or more years before college because of their greater earning potential.
Use Your Switch Carefully
Account owners in 529 plans may change the investment strategy of their accounts once per calendar year or upon a change in the designated beneficiary of the account. Rollovers are permitted once per 12-month period to another 529 program for the same beneficiary. There are many reasons you might want to move to another plan, including dissatisfaction with the returns you are getting or the decision to opt for a safer fund or one with higher earning potential. Before you make any change, make sure you believe you will be comfortable with it until the end of the allowable switch period.
Consult Your Local CPA
College planning can be a daunting and confusing task. No matter what financial issues are facing your family, remember that your local CPA can help. He or she can work with you to find the answers to your most pressing financial concerns. Visit www.ok4saving.org for information about Oklahoma 529 college savings plans.
With more than 6,600 members in public practice, industry, government and education, the OSCPA is Oklahoma’s only statewide professional association of CPAs. Since 1918, the organization has continued to provide professional education, conduct quality reviews and promote and maintain high standards of integrity and competence within the accounting profession. Visit www.KnowWhatCounts.org for more business advice and a free CPA referral and free consultation.
Updated 03-31-2010
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