The uncertainty of today's economy, rising interest rates, and market volatility may have you concerned about your 529 plan's performance over the past months. If your child or grandchild has an upcoming tuition bill soon, now may be an appropriate time to review the 529 plan. Here are some tips to help you maintain your 529 plan during periods of uncertainty:
- Check the 529 plan's allocation- About two-thirds of 529 plans are age-based plans, with the remaining one-third of 529 plans having the investment strategies selected by the plan's owner. Here are the two options available when it comes to choosing 529 investment strategies that you need to be aware of:
Aged-based plans are designed to automatically change the allocation as the child ages becoming more conservative in the strategy selection as the child approaches college. For example, a two-year-old's 529 plan may have strategies that have a more aggressive risk profile containing more stocks. A sixteen-year-old child with a 529 plan may have an allocation with more conservative strategies such as index funds or bonds or FDIC-insured investment choices such as CDs.
Independent selection of investment strategies enables the 529 plan owner to select, rebalance, sell and reinvest back into the 529 plan. The 529 plan must continue to be monitored so that as market conditions change and the child ages, the value of the 529 plan covers tuition expenses, even in a down market. If the owner doesn't monitor the plan and make adjustments, the investment strategies may be too aggressive or lose value as the timeline of needing the funds approaches.
- Continue to save- While it may be tempting to stop contributions to the 529 plan during a declining market, continuing enables you to buy shares at a lower price. Use the opportunity of a down market to buy more if you're budget allows, as a strategy to accumulate more value when the market recovers.
- Remain calm- It's important not to make any fear-based decisions as the value of your 529 decreases. Visit with your financial professional to determine a strategy appropriate to your risk tolerance and timeline, and then implement the allocation strategy when the market recovers. Remember, liquidating during a down market may not provide an opportunity to recover your 529 plan losses.
- Use cash- If you have the financial means, pay cash for tuition versus withdrawing from the 529. Using cash from savings enables you to wait until the market recovers, then pay yourself back. Remember that 529 distributions must be used for expenses in the same year you took the distribution to avoid IRS penalties.
- Consider a student loan- Take a student loan now and pay it back with the 529 plan's distribution once the market recovers. This strategy enables your 529 plan's allocations to recover versus liquidating shares at a low market valuation.
Talking to a financial professional about your 529 plan can help determine the appropriate time to change your allocation or update your strategy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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