Families across many states in the US can take advantage of 529 investment plans to sort their children’s tuition fees.
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. It helps families to plan ahead for their children’s tuition in such a way that it will come as yet another financial burden.
Qualified tuition plans which is another name for 529 are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
As of 2018, qualified education costs now include up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
WHAT ARE THE TYPES OF 529 PLANS?
529 plans come in 2 different forms.
- Prepaid Tuition Plans.
This plan allows the saver to buy units or credits at participating colleges, public and in-state universities for future tuition and mandatory fees at current prices for the beneficiary.
This is more like a prepaid tuition arrangement
Some state governments guarantee the money paid into the prepaid tuition plans that they sponsor, but some do not.
Most prepaid tuition plans are sponsored by state governments and are usually not guaranteed by the federal government, which means that you may lose some or all of your money in the plan if the plan’s sponsor has a financial shortfall.
Also, if a 529 beneficiary doesn’t attend a participating college or university, the prepaid tuition plan may pay less than if the beneficiary attended a participating college or university.
- 2. Education Savings Plans.
This plan allows the saver the option of opening an investment account for the beneficiary’s future qualified higher education expenses.
Savings from this plan can be used at any college or university, including sometimes at non-U.S. colleges and universities.
It can also be used to pay up to $10,000 per year per beneficiary for tuition at any public, private, or religious elementary or secondary school.
The 529 college savings plan is widely regarded as one of the most tax-friendly tools available for funding your child’s future tuition but have to be strategic in how you invest within the plan to maximize your returns while reducing risks.
The best 529 investment strategies based on a child’s age.
The 529 investment strategy you select will not only impact the volatility within your portfolio but likely the size of your account in the future.
And whether you choose to be passive or aggressive will determine what type of investments your 529 will be invested in.
Investors need to consider their options with care, educate themselves on the implications of both an age-based and static option, and come to terms with their personal tolerance for risk. A financial professional can help you find a plan that fits your needs.
There are 2 broad 529 Investment options
The possible investment options that one can choose to put his 529 savings will be either the Age-based Investment option or the static 529 investment option.
1. Static 529 investment option. This option ensures that the asset choice of the owner remains the same unless the plan owner decides to reallocate.
If a person selects a static portfolio, the college savings account will remain in that portfolio until the account is closed or the investment portfolios are changed which is allowed to happen twice per calendar year.
You also may change your portfolio selection when there is a change of beneficiary for the account.
The objective of the investment portfolio changes with maturity.
As the student gets older and approaches college age, the objective becomes more about capital preservation rather than growth. This will make the asset mix shift more heavily on conservative vehicles such as bonds and cash.
These reallocations are automatically done at certain ages so the plan owner doesn’t have to worry about steering the portfolio.
Static portfolios put you in the driver’s seat for your account. They offer a fixed-allocation strategy, which means that the amount of stock and bond mutual funds and cash in the portfolios is set and will not change. You decide how long you need or want to stay invested in a static portfolio.
2 Age-based 529 investment option
Because age-based 529 options are ideal for families who do not have the time or tools to monitor their portfolio.
The 529 plan age-based strategy helps to minimize the risk of having to potentially disbalance your portfolio at the wrong time and in the wrong way.
An age-based plan is a great fit for parents who seek to generate modest returns while also managing risk.
the asset mix in an age-based plan starts out more aggressively when the child is younger.
Parents with younger children can focus on growing their college savings by investing more aggressively since they have enough time to absorb risk. As the beneficiary gets closer to college-age, 529 plan investments should steer toward lower-risk investments, such as bonds, CDs, and money market funds.
Best 529 plan investments for beneficiaries newborn through age 5
New parents should also look for 529 plan investments with a low expense ratio
which is an annual fee based on a percentage of the assets in your 529 plan account as these expenses get to significantly add up over the years.
spending less on 529 plan fees will leave you with more money to invest in college.
If you using an advisor-sold 529 plan, the nature of the asset sold to you should also be considered.
For example, if you are sold Class A shares, this will be more for beneficiaries under 12 years old since they have an upfront sales charge with a lower annual expense ratio.
Best 529 plan investments for beneficiaries in elementary and middle school
Once your child enters elementary school, parents who are falling short might need to be more aggressive with their portfolio while those on track are expected to preserve things.
Here is a simple math to help you determine how much you should have saved…
- For an in-state public 4-year college: Multiply your child’s age by $3,000
- for an out-of-state public 4-year college Multiply your child’s age by $5,000
- for a private non-profit 4-year college Multiply your child’s age by $7,000
A 2018 study by Mark Kantrowitz, reveals that increasing the equity allocation from the typical 80% (found at the start of many age-based portfolios) to 100% yields greater returns without adding significant investment risk.
To help you meet up, you might need to switch to a more aggressive mix of investments or consider switching all or part of your investments to a static portfolio that is invested in 100% equities.
Best 529 plan investments for beneficiaries in high school
At this level, parents should become more risk-averse with their 529 investment plans as their horizon has become short.
This could be done by 20/30 by 80/70 safe-risk allocation where 20 or 30% of the portfolio is tilted towards equity while the rest are conserved in Bonds, Cds, and other money market instruments.
It might also make sense to look into plans with FDIC insurance to offer short period protection.
It is important for parents at this level to by all means protect their assets as they might not recover from any sudden negative shift in asset performance.
Regardless of what plan you choose, carefully consider the fees and many other variables that could impact your savings in the long run.
