Recession-proofing Your 529 Plan

Many Section 529 plans were bruised during the past year. Savings you may have counted on to finance your child's college education may have fallen, leaving you scrambling for alternatives at a time when an economic recession doesn't leave much room to maneuver. A lot depends on how old your children are and what other savings and income you have available. If your children are young, there's a strong chance the markets will rebound, and the years leading up to college enrollment give you more chances to save. On the other hand, if your child is 16 or 17, you're running out of time fast. So what's the best way to preserve the savings that remain and position your family favorably for the college years? It makes sense to assess your situation first and figure out: How much savings you have How your investments have performed What resources you'll need to pay for college. With that information in hand, you can decide how to position your savings going forward. "It's especially important with college because you've got a deadline about when you need to use that money to check up on your plan and dust off your thinking about how you are going to fund college overall," says Rene Kim, senior vice president of Schwab Investor Services and head of the company's college planning initiatives. "Is it all supposed to come out of savings? Do you have some room to take some money out of current income? Are there other potential sources of funds, such as scholarships?" Funding assessment If you've been so worried about the state of your college funding plans that you've left your statements unopened, now is the time to grit your teeth and survey the damage. You may be pleasantly surprised: By mid-April, the Dow Jones Industrial Average had bounced back some 25 percent from lows reached on March 8 of this year. But the Dow is down more than 38 percent off its 52-week high, which it reached May 2, 2008. "Study the performance reports that are usually sent out with the statements to get a sense of the kind of portfolios that are available and how your investments have done," says Kim. Look at what you have saved in a 529 plan right now and add any future contributions you're planning, plus any other funding sources, such as Uniform Gift to Minors, Coverdell Savings Accounts established by grandparents and any other taxable money you've saved. Whatever you do, don't think about raiding your retirement savings or reducing your retirement plan contributions to pay for college, says Jonathan Gassman, CFP, CPA, of Gassman & Golodny a financial planning firm in New York. Compare what you expect to have saved with what the total education bill is likely to be. Our World's Simplest College Cost Calculator will help you determine the expected cost. Don't have a heart attack when you see the potential shortfall. College is so expensive, in many cases you are never going to be able to pay the entire bill, so your goal is to fund part of it and use other sources to make up the balance. "There are other ways to pay for college than using your own money and that is other people's money, which includes Pell Grants, student loans, scholarships, student loans, work-study and employer-funded scholarships," says Gassman. "There is so much out there that can help pay for college." How to make an investment change If you're considering changing investment options, you have a couple of choices. First, you could switch to another investment option within the plan you're in, or you could move your funds to a plan in another state or to an independent plan. In either case, be aware that IRS rules permit only one such switch per year, although Congress has authorized a one-time special exception allowing two changes in 2009. However, if you make a beneficiary change, you can also make an investment option change. A beneficiary change involves moving 529 assets from one child to another -- if the first child decided not to go to college, for example. Changing investment options in your current plan can generally be done online. To move funds from one plan to another, you generally have to fill out paperwork and wait for the transfer to occur. Pay close attention to IRS rules and make sure the transfer occurs within 60 days or you'll trigger more tax consequences. Investment option changes Before you make an investment option change, carefully consider what you're hoping to accomplish and not changing solely for the sake of change. The most legitimate reasons to make an investment option change in a college include preserving principal, increasing the potential for higher future returns or lowering your costs. "When looking at what you're invested in, reconsider your options and think about how you feel about risk, given the economic environment, how much you might be able to contribute going forward and see where that leaves you," Kim says. "Step back, and say to yourself, 'How do I feel about risk, given what's just happened in the markets?'" Seeking safety. If safety is your goal, choose an investment option such as a money market account, stable value plan or certificate of deposit. To Gassman, preserving principal is the most important goal. "This money ï ¿ ½ has to be there when college comes up," he says. "Maybe I won't hit the target of what I need, but this way I will at least not lose any principal. It can make sense to cut your losses on your investments and preserve what you've got left because it is not likely that the market is going to turn around quickly." Even if you have more than a few years before your child or children go to college, there is no guarantee the market will turn around in time for you to meet your financial objectives. In fact, it's always possible that you could lose more money, says Ken Borokhovich an associate professor of finance at Cleveland State University in Ohio. The problem with playing it safe is that it practically guarantees you won't have enough money when it comes time to pay the bills, Borokhovich says. "If you play it too safe and don't end up with enough money to reach whatever goal you had for funding college expenses, you will have failed to do what you set out to do," he says. There are other ways to recession-proof your college saving funds without being overly conservative. You could move your money from an aggressive age-based plan to an age-based plan with more conservative options earlier, such as by the time your child turns 15 or 16, so you won't risk principal when college is only a few years away. Maximizing returns. Maximizing your returns isn't necessarily about seeking the investment with the highest potential return. Your investments may be too conservative, as Borokhovich suggests, in which case you can realize a higher return -- without being too aggressive -- by switching from things like stable value or money market funds or CDs. Even a conservative age-based fund could increase returns over a very conservative option, especially over five or 10 years. You could also use single-purpose mutual funds, either using a financial adviser or by yourself. Cutting costs. Cutting costs is one surefire way to boost your returns. Consider switching from adviser-managed plans to a direct plan. Adviser-managed plans generally charge higher ongoing fees and upfront sales charges, which detract from your returns over time. Another way to cut costs is to switch to a direct plan that features index funds over one that features actively managed funds. Because index funds don't have managers who buy and sell securities according to a particular investment strategy, their costs are usually lower. Your plan may also impose fees, especially if you are investing in a plan outside your own state's plan. Other fees may include an enrollment fee or annual maintenance fees. To get a handle on the fees you are paying and for help finding a lower fee plan, check out the Financial Industry Regulatory Authority's 529 Plan cost calculator. Posted May 16, 2009 Many Section 529 plans were bruised during the past year. Savings you may have counted on to finance your child's college education may have fallen, leaving you scrambling for alternatives at a time when an economic recession doesn't leave much room to maneuver. A lot depends on how old your children are and what other savings and income you have available. If your children are young, there's a strong chance the markets will rebound, and the years leading up to college enrollment give you more chances to save. On the other hand, if your child is 16 or 17, you're running out of time fast. So what's the best way to preserve the savings that remain and position your family favorably for the college years? It makes sense to assess your situation first and figure out: How much savings you have How your investments have performed What resources you'll need to pay for college. With that information in hand, you can decide how to position your savings going forward. "It's especially important with college because you've got a deadline about when you need to use that money to check up on your plan and dust off your thinking about how you are going to fund college overall," says Rene Kim, senior vice president of Schwab Investor Services and head of the company's college planning initiatives. "Is it all supposed to come out of savings? Do you have some room to take some money out of current income? Are there other potential sources of funds, such as scholarships?" Funding assessment If you've been so worried about the state of your college funding plans that you've left your statements unopened, now is the time to grit your teeth and survey the damage. You may be pleasantly surprised: By mid-April, the Dow Jones Industrial Average had bounced back some 25 percent from lows reached on March 8 of this year. But the Dow is down more than 38 percent off its 52-week high, which it reached May 2, 2008. "Study the performance reports that are usually sent out with the statements to get a sense of the kind of portfolios that are available and how your investments have done," says Kim. Look at what you have saved in a 529 plan right now and add any future contributions you're planning, plus any other funding sources, such as Uniform Gift to Minors, Coverdell Savings Accounts established by grandparents and any other taxable money you've saved. Whatever you do, don't think about raiding your retirement savings or reducing your retirement plan contributions to pay for college, says Jonathan Gassman, CFP, CPA, of Gassman & Golodny a financial planning firm in New York. Compare what you expect to have saved with what the total education bill is likely to be. Our World's Simplest College Cost Calculator will help you determine the expected cost. Don't have a heart attack when you see the potential shortfall. College is so expensive, in many cases you are never going to be able to pay the entire bill, so your goal is to fund part of it and use other sources to make up the balance. "There are other ways to pay for college than using your own money and that is other people's money, which includes Pell Grants, student loans, scholarships, student loans, work-study and employer-funded scholarships," says Gassman. "There is so much out there that can help pay for college." How to make an investment change If you're considering changing investment options, you have a couple of choices. First, you could switch to another investment option within the plan you're in, or you could move your funds to a plan in another state or to an independent plan. In either case, be aware that IRS rules permit only one such switch per year, although Congress has authorized a one-time special exception allowing two changes in 2009. However, if you make a beneficiary change, you can also make an investment option change. A beneficiary change involves moving 529 assets from one child to another -- if the first child decided not to go to college, for example. Changing investment options in your current plan can generally be done online. To move funds from one plan to another, you generally have to fill out paperwork and wait for the transfer to occur. Pay close attention to IRS rules and make sure the transfer occurs within 60 days or you'll trigger more tax consequences. Investment option changes Before you make an investment option change, carefully consider what you're hoping to accomplish and not changing solely for the sake of change. The most legitimate reasons to make an investment option change in a college include preserving principal, increasing the potential for higher future returns or lowering your costs. "When looking at what you're invested in, reconsider your options and think about how you feel about risk, given the economic environment, how much you might be able to contribute going forward and see where that leaves you," Kim says. "Step back, and say to yourself, 'How do I feel about risk, given what's just happened in the markets?'" Seeking safety. If safety is your goal, choose an investment option such as a money market account, stable value plan or certificate of deposit. To Gassman, preserving principal is the most important goal. "This money ï ¿ ½ has to be there when college comes up," he says. "Maybe I won't hit the target of what I need, but this way I will at least not lose any principal. It can make sense to cut your losses on your investments and preserve what you've got left because it is not likely that the market is going to turn around quickly." Even if you have more than a few years before your child or children go to college, there is no guarantee the market will turn around in time for you to meet your financial objectives. In fact, it's always possible that you could lose more money, says Ken Borokhovich an associate professor of finance at Cleveland State University in Ohio. The problem with playing it safe is that it practically guarantees you won't have enough money when it comes time to pay the bills, Borokhovich says. "If you play it too safe and don't end up with enough money to reach whatever goal you had for funding college expenses, you will have failed to do what you set out to do," he says. There are other ways to recession-proof your college saving funds without being overly conservative. You could move your money from an aggressive age-based plan to an age-based plan with more conservative options earlier, such as by the time your child turns 15 or 16, so you won't risk principal when college is only a few years away. Maximizing returns. Maximizing your returns isn't necessarily about seeking the investment with the highest potential return. Your investments may be too conservative, as Borokhovich suggests, in which case you can realize a higher return -- without being too aggressive -- by switching from things like stable value or money market funds or CDs. Even a conservative age-based fund could increase returns over a very conservative option, especially over five or 10 years. You could also use single-purpose mutual funds, either using a financial adviser or by yourself. Cutting costs. Cutting costs is one surefire way to boost your returns. Consider switching from adviser-managed plans to a direct plan. Adviser-managed plans generally charge higher ongoing fees and upfront sales charges, which detract from your returns over time. Another way to cut costs is to switch to a direct plan that features index funds over one that features actively managed funds. Because index funds don't have managers who buy and sell securities according to a particular investment strategy, their costs are usually lower. Your plan may also impose fees, especially if you are investing in a plan outside your own state's plan. Other fees may include an enrollment fee or annual maintenance fees. To get a handle on the fees you are paying and for help finding a lower fee plan, check out the Financial Industry Regulatory Authority's 529 Plan cost calculator. Posted May 16, 2009