How to protect your money in a downturn
As college expenses continue to rise, less than half of Americans are confident that they’re currently saving enough for future education expenses, according to a recent report by Edward Jones. Checking your 529 college savings balance may not provide much comfort, either, as these popular savings plans took a hit last year during a prolonged period of market volatility. The average account balance was down from a high of over $30,000 in 2021 to just $25,630 at the end of 2022, according to the College Savings Plans Network (CSPN), a network of state-administered college savings programs. Total investments also fell, to $411 billion in 2022, down nearly 15% from the previous year.
Despite these challenges, there are still many advantages to a 529 plan. In some states, you can get a tax deduction or credit for contributions. Earnings grow on a tax-advantaged basis and, when you withdraw the money, it is tax-free if the funds are used for qualified education expenses such as tuition, fees, books, room and board, or even apprenticeship programs. A few states also offer additional benefits, such as scholarships or matching grants, to their residents if they invest in their home state’s 529 plan.
However, as with any other investment account, 529 plans are susceptible to losses. Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child’s life and then automatically adjust so that as the start of college draws near, the portfolio will be weighted toward more conservative investments, such as bonds. Plan holders have two opportunities a year to change their asset allocation if, for example, they feel that an overly aggressive portfolio is too nerve-wracking in the current climate.
There are still safe investment options for 529 plans that can handle market turbulence and provide peace of mind. Some recommendations include FDIC-insured accounts or stable value funds, a low-risk option that boasts a steady return. Education investment experts also suggest considering an enrollment-based strategy that is designed for market volatility, ensuring that the plan is tailored to the time horizon for college expenses.
FAQs:
1. What is a 529 plan, and what are its advantages?
A 529 plan is an education savings plan that offers tax and financial aid benefits. Some advantages include a tax deduction or credit for contributions in some states, a tax-advantaged basis for earnings, and tax-free funds if used for qualified education expenses such as tuition, fees, books, or even apprenticeship programs.
2. What happened to 529 plans during market volatility?
Last year, these popular savings plans took a hit during a prolonged period of market volatility. The average account balance was down from a high of over $30,000 in 2021 to just $25,630 at the end of 2022, according to the College Savings Plans Network (CSPN), a network of state-administered college savings programs. Total investments also fell, to $411 billion in 2022, down nearly 15% from the previous year.
3. Are 529 plans susceptible to losses?
Like any other investment account, 529 plans are susceptible to losses. Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child’s life and then automatically adjust so that as the start of college draws near, the portfolio will be weighted toward more conservative investments, such as bonds.
4. Are there safe investment options for 529 plans?
Yes, there are still safe investment options for 529 plans that can handle market turbulence and provide peace of mind. Some recommendations include FDIC-insured accounts or stable value funds, a low-risk option that boasts a steady return.
5. Can you change the asset allocation for a 529 plan?
Plan holders have two opportunities a year to change their asset allocation if, for example, they feel that an overly aggressive portfolio is too nerve-wracking in the current climate.
Protecting Your Finances during Economic Downturns: Tips and Strategies
A recent report by Edward Jones shows that less than half of Americans are confident that they’re currently saving enough for future education expenses. With this in mind, many parents may be feeling anxious about the performance of their 529 college savings plan, especially after a difficult 2021. Popular savings plans took a hit during a prolonged period of market volatility, causing the average account balance to drop to $25,630 at the end of 2022 from a high of more than $30,000 in 2021. Total investments in 529s also fell to $411 billion in 2022, down nearly 15% from $480 billion the year before.
Despite these challenges, there are still many advantages to investing in a 529 plan. In some states, you can receive a tax deduction or credit for contributions. Earnings grow on a tax-advantaged basis, and when you withdraw the funds, they are tax-free if used for qualified education expenses such as tuition, fees, books, and room and board. Plus, you can now put some of the funds toward paying off student loans, and starting in 2024, savers can roll money from 529 plans over to Roth individual retirement accounts free of income tax or tax penalties.
Regarding risk, 529 plans are susceptible to losses like any other investment account. However, they generally offer age-based portfolios that adjust automatically as the start of college draws near, with a higher allocation in cash and bonds to mitigate risk. Plan holders have two opportunities a year to change their asset allocation, and some stable investment options, such as FDIC-insured accounts and stable value funds, can handle market turbulence and provide peace of mind. Overall, investing in a 529 plan can be a smart way to save for college, but it’s essential to account for market volatility and risk when making decisions.