529 Savings Plan Tips in Uncertain Times

529 college savings plans allow you to set aside funds for tuition costs where they can build up profits that are usually exempt from federal, state and local taxes. They can be a good tool for parents, but after recent stock market declines, many people found they had lost some of the money they had put in these plans. The New Jersey Society of Certified Public Accountants (NJSCPA) offers the following guidelines on how to make the best choices when investing in a 529 savings plan, especially given recent market uncertainties:

Understand the Basics
529 plans are offered by each state, but the investment side is usually handled by a mutual fund company. As an investor, you typically have numerous choices 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. Thus, it’s usually a good idea to choose investments with a higher earning potential when your children are young — when there are many years left to earn back any market losses — and select lower-risk investments as they get closer to college.

Risks
One popular plan for many parents is an age-based approach that bases its investments on your child’s age, making more conservative selections as your child nears college. That’s a good idea, but be sure you’re comfortable with your plan’s definition of conservative. As we’ve seen recently, 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. So, find out what percentage of an age-based plan is invested in stocks. If it’s more than you’d like, consider another more moderate choice.

Consider Your Timing
Some states have responded to the recent market troubles by creating 529 savings plans that feature low-risk investments. That sounds appealing, but remember that low risk goes hand in hand with low returns, with some yields as low as single digits. Timing may be the key factor. If your child is one or two years away from college, a reliable small return with minimal risks may be the right choice. But if your student has five or more years until college, you may be better off investing in a plan that includes a higher percentage of stocks because of their greater earning potential.

Make Your Change Carefully
Account owners in 529 plans may change their investment strategy once per calendar year or upon a change in the account’s designated beneficiary. Rollovers are permitted once per 12-month period to another 529 program for the benefit of the same beneficiary. There are many reasons you may 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. But before you make any change, make sure you will be comfortable with it until the end of the allowable switch period.

Turn to 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. If you don’t have a CPA, you can easily locate one online using the NJSCPA’s free, online Find-A-CPA service. Just go to www.findacpa.org, and in a few clicks you can locate a highly qualified professional who can assist you.



Produced in cooperation with the AICPA
©2009 The American Institute of Certified Public Accountants

October 1, 2009