Investment risk and 529 plan investors (2024)

FAQs

Investment risk and 529 plan investors? ›

529 Education Savings Plans

Investments in TFI-managed 529 college savings plans are neither insured nor guaranteed and there is the risk of investment loss. You may want to consult a qualified advisor before making an investment decision.

Must only be used for education

Only certain education expenses qualify, so you need to make sure you're withdrawing money for qualifying expenses to avoid taxes. If you use 529 savings plan funds for non-qualified withdrawals, they may incur a 10% penalty. And they may be subject to federal income tax.

Dollar cost averaging benefits long-term 529 plan investors

When markets are up and share prices are higher, investors purchase fewer shares per dollar invested, and when markets are down and share prices are lower, investors are able to purchase more shares.

Prepaid Tuition Plan

The value of the investment is guaranteed to at least meet college tuition inflation. This can give you a lot of peace of mind. The plans offer a better rate of return than savings accounts and certificates of deposit, involve no risk to principal, and often are guaranteed or backed by the state.

Families who purchase a 529 plan through a financial advisor often pay a sales charge in addition to the plan's underlying mutual fund fees. The amount of commission an advisor earns depends on the mutual fund share class selected within the 529 plan.

Like a 401(k), your money isn't guaranteed to grow, and your plan's performance depends on your investment selection as well as market conditions. It's important to note that your investments can fluctuate, and you can lose money in a 529 plan.

It's easy to see why Americans don't embrace 529 plans. They often have limited investment options, high fees, complicated rules and anxiety-producing investment risks. All that said, the plans may ultimately be worthwhile for most families, as long as parents choose carefully. Focusing on fees is crucial.

New 529 Contributions

Give yourself a break. If it's doable for you, even just setting aside $5 to $10 a week to invest in your 529 can add up over time. Though no one can guarantee exactly what the market will look like tomorrow, keeping your future goals in mind is important – just as it is with retirement.

Are investments in 529 college savings plans guaranteed? ›

Unlike prepaid tuition plans, 529 savings plan don't lock in tuition prices, nor does the state back or guarantee the investments. There's also the risk with most 529 savings plan investment options that you might lose value or that your investment might not grow enough to pay for college.

Advisor-sold 529 plans may charge commissions, which reduce the value of the 529 plan. It can take several years before enough earnings accumulate to compensate for the cost of the commissions.

529 Cons. If not used for college expenses, there is a 10% additional tax on earnings. If not used for qualified expenses, all earnings are taxed as ordinary income (even if the “actual” earnings were capital gains). The management fees for a 529 account are typically higher than the fees for comparable mutual funds.

An adult individual, usually a parent or grandparent, is the account owner while the student, usually the child or grandchild, is the beneficiary. The account owner makes investment decisions involving the 529 plan.

529 college savings plans do not have contribution deadlines. You may contribute to a 529 plan at any time throughout the year, and you do not have to stop making contributions once the beneficiary reaches a certain age.

Federal bankruptcy law provides protection on contributions into 529 college savings plans depending on circ*mstances (e.g., How long were funds contributed to the plan before bankruptcy?). Additionally, certain states provide protection under state law.

529 Plan Considerations

Susan Bart: Stacy, if you have children or grandchildren or favorite nieces and nephews who will be going to college, a 529 account can really be a great way to save for a college education. There is no federal income tax and usually no state income tax imposed as the funds grow in the account.