Your child was accepted to college. Protect your 529 savings
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I’m a financial advisor. So I know a thing or two about saving and investing. But I’m also a father to a college-age son, and I’m beginning to realize that this role requires financial literacy more than ever. Saving for college has gotten personal.
My oldest son started his freshman year last fall. As a prudent saver, over the last decade I have been putting money early and regularly into a College 529 savings program in my state of Maryland to help pay for my son’s education.
For those who don’t know much about this type of account, which is usually managed by the state you live in, there are two good reasons why parents use it. The first is the possibility of a small tax break on your deposits. But more importantly, any growth in investment is tax-free when used towards qualifying student expenses.
There’s one more aspect saver parents need to consider: How much risk are you willing to take when investing the money? Spoiler alert: you, like me, might be shocked to discover that the money you’re saving for your kids might be at more risk than you thought.
A typical strategy for parents is to adopt the “set-it-and-forget-it strategy” of an age-based target fund for their 529 investments. Generally, this approach begins with aggressive investing, usually in stocks, when the child is young and the money isn’t needed until the distant future.
Then, as the kid nears college, the plan becomes more conservative, with more bonds and cash. You can make a change yourself up to twice a year. However, if you don’t do this, your plan administrator will redirect your account to less risky investments as the child gets older and nears college.
What has surprised many parents, including myself, lately is the volatility of in-college plans — those with the most conservative investments for college-age students.
By the time a child reaches college age, these accounts should be in principal protection mode. Finally, by the time the child is in college, withdrawals from the account may have already started and have a short and limited lifespan. Unlike retirement, which can begin at an indeterminate point in the future and last a lifetime, most college outputs begin around age 18 and last four years.
But then I got my wake up call.
When I saw the performance of the Maryland college allotment for the age-based plan, I was surprised to see a 7.25% loss for 2022. Put another way, the money we had set aside for my son went down when it should have been invested conservatively.
Search 529 plans, state by state
I was wondering how other states distributed their plans for colleges.
What I found was extensive and diverse. Luckily, some states — including the worst-performing states (Missouri, Iowa, and North Carolina), which lost nearly 14% — had labels like “aggressive” or “growth” on their plans.
These same states tend to have multiple age-based plans to choose from, and their conservative versions fared far better. The average loss in 2022 for all in-college plans was 6.44%.
Other states took a more conservative approach. For example, New York uses a glideslope with three different assignments to choose from, and the state’s conservative stance actually gained 1.56% for the year.
In fairness, 2022 was a terrible year for both stocks and bonds. In fact, it was the worst year for a balanced approach in decades. Taking more risk could have worked in a different market environment, but not last year.
However, I hope 529 Plan Sponsors will consider the volatility experienced by those willing to use the funds. Of course things may be different now that interest rates are higher and stable value funds can offer some return with lower volatility.
The key takeaway for parents is to keep an eye on how your plan is working and, if needed, de-risk your plan as your kids reach college age.
So are there any other myths I often discuss with clients about conservative allocation in college being able to lose money? Absolutely.
For example, you don’t have to use your own state’s plan to save. While you may lose a small tax deduction on contributions, there may be other, more affordable plans.
And if your kid doesn’t go to college, you’re not losing any money. You can put the beneficiaries on a qualified list or withdraw the funds when needed. You may owe a penalty and/or tax on the winnings, but if you really need the funds you may have access to them.
Finally, the 529 plan savings can be used for more than just tuition. You can use the funds for books, board and lodging, and computer technology.
As a father and financial advisor, I intend to stay on the age-based plan for my younger, second son. But I might consider switching to a stable value fund to minimize volatility as we prepare for our first tuition payments.
— By Barry Glassman, Certified Financial Planner and President of Glassman Wealth Services. He is also a member of CNBC FA Council.
https://www.cnbc.com/2023/05/19/op-ed-your-child-got-accepted-to-college-protect-their-529-savings.html Your child was accepted to college. Protect your 529 savings