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Be Careful When Rebalancing Your Kid's 529
Plan Allocation
Market extremes tend to make uninformed people invest at
extremes. As the market has suffered over the past nine months,
families putting their college savings into 529 college savings
plans have watched their stock-based holdings shrink with the
market and many have run for cover.
This has fueled a growing number of states with 529 college
plans to offer accounts that are insured by the FDIC. According
to InvestmentNews, Arizona, Ohio, Montana, Virginia and the
latest state, Utah, have adopted FDIC-insured investment options
such as savings accounts and certificates of deposit. Could your
state's plan be next?
If you're a first-time investor in 529s or are still reeling
from the impact to your current plan results, before you run for
the safe cover of minimum returns, you may want to run for
advice first. A CERTIFIED FINANCIAL PLANNER™ professional can
evaluate not only your 529 investments but your entire
investment and savings situation to make sure you're not only
doing the best for your college student, but for your retirement —
which actually should be your first priority. After one of the
worst market downturns since the Great Depression, now is
actually a great starting point for this kind of advice.
Here are a few things to consider about more conservative
investments in a 529 portfolio:
Is 1 or 2 percent good enough?
Yes, keeping your investment safe is a critical goal during a
downturn, but how long do you have until your child needs the
money and how close are you to your savings target? Investing
for such an expensive goal takes a mixture of risk and caution,
and if you were one of the smart ones who shifted your 529 funds
into conservative investments last summer, bravo. Just make sure
you have the right information so you know when to get out. A
mixture of equities and fixed-income investments are the best
structure for these portfolios, but they bear watching in case
of a downturn.
CD flexibility is limited.
The attraction of investing in CDs is not only safety, but
the ability to "ladder" (buying at regular intervals)
your investment as CDs mature into potentially higher-paying
investments. Here's the problem. Current rules for 529 savings
plans allow investors only one investment change per calendar
year, though in 2009 the IRS made an exception and allowed two
changes. So much for laddering — that means you can't roll over
funds from a matured CD into a new one more than twice, though
some of the plans are devising ways to automatically roll over
mature CDs into shorter-term investments as the funds meet their
target date of use. Yet, it won't be the same as making those
decisions yourself.
Could rolling into more conservative investments now be a
mistake?
Knowing when a market bottoms out would guarantee riches. So
you have to have some exposure in the portfolio to the
possibility of growth, even in these times. Rolling your
investments into conservative waters may actually lock in losses
of as much as 40 percent. It makes sense to get advice with such
a move and keep your ear to the ground with respect to economic
news.
Let the younger child's 529 pay for the older child's
tuition.
If your oldest child is ready to or has started college and
you have more than one child and one 529 plan for each, consider
using the cash in the younger child's plan to pay for the older
child's tuition. This way the equity investments in the older
child's plan have a chance to recoup their losses and pay for
the younger child's tuition in future years.
May 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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