If you have school-age children, you might greet the arrival of June with some relief — for at least a few months, you don’t have to worry about “encouraging” kids to do their homework and study for tests. But one day, these obligations will give way to a substantially bigger one — paying for college.
One popular college savings vehicle is a 529 plan. When you invest in a 529 plan, your earnings grow tax-free, provided the money is used strictly for qualified higher education expenses. (Withdrawals not used for these expenses will be taxed and may also incur a 10 percent penalty.) Plus, if you invest in your own state’s plan, your contributions may be tax-deductible. In any case, consult with your tax advisor before investing, as tax issues for 529 plans can be complex.
Until this year, you were only allowed to change the investments in your 529 plan once a year. This caused concern among some investors, who wanted the freedom to change their 529 investments in response to movements in the financial markets. But late in 2014, President Obama signed into law the Achieving a Better Life Experience (ABLE) act, the key purpose of which was to create tax-free accounts allowing people to save for disability-related expenses. And one provision of the ABLE act allows 529 plan investors to change their investments twice a year, rather than once.
If you invest in a 529 plan, you might welcome this additional freedom to adjust your investments. Still, keep in mind that a 529 plan is a long-term vehicle that’s not really designed to accommodate frequent “tweaking.” And, as is true with any other investment account, such as your IRA and 401(k), you don’t want to overreact to short-term market fluctuations by making radical changes to your investment mix.
Nonetheless, you will almost certainly want to adjust your 529 plan investments somewhat — at least in the long term. If you’ve opened a 529 plan when your children are young, you have many years until you need to tap into the money — which means your account has more time for growth potential and more time to “smooth out” those periods of market volatility, which will certainly occur. Consequently, you may be able to afford to invest somewhat more aggressively when your children are young.
However, as your kids near college, you will probably want to revisit the level of risk in your 529 plan. During the last couple of years before you need to access your plan, you may want to consider moving some of your investment dollars to more conservative allocations. By doing so, you’ll cut back on your growth potential, but you’ll also help lessen the risk of taking a big hit if you have to start taking withdrawals during a “down” market.
Some 529 plans offer an option that automatically adjusts your investment mix toward a more conservative approach as your children near college age. But you may want to make your own adjustments, possibly with the help of a financial professional, to ensure that your 529 plan accurately reflects your own preferences and risk tolerance.
As you save for your children’s college education, you may find a 529 plan to be a great help. Just be sure to keep a close watch on your plan’s investments as the years go by.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Lori Cannon is a financial advisor with Edward Jones. You may contact her at 419-842-0369.