Are 529 Savings Plans as Completely Dependable as they Sound?
Investing in age-based 529 savings plans for your child’s college may seem like the ultimate in responsible investing in your child’s future. An age-based 529 plan typically invests your money in high-growth investments – stocks and the like – to begin with. As your child’s college freshman year draws closer, they are supposed to realize that if they lose any money in the stock markets, they don’t have any time to recover; they are then supposed to move your investments to something far safer and more guaranteed. That’s the way they are supposed to work. As lots of families who have invested their money in age-based 529 savings plans for their children discovered in 2008, what these plans actually do happens to be somewhat different from what they promise to do. A lot of people had their college funds wiped out when the market cratered. They might promise to invest in something safe; their definition of what constitutes safety might be radically different from yours though. There are other things you need to know about 529 savings plans too.
The companies that promote 529 savings plans like to tell you about how a rosy it can all be entrusting your child’s college funds to a conservative and caring professionally managed finance company that will invest your money in a way that will beat the stock market. If you choose a good and reputed establishment, you’re likely to actually see those results too. What they don’t tell you in a way you ever notice is that you are likely to lose a lot of what you gain paying them their management fees and annual fees. You pay those even if they don’t actually beat the market. 529 savings plans sold by investment advisers usually have the highest fees attached. Direct sold plans have the lowest ones.
While 529 savings plans can be a great idea, to invest exclusively in them for your child’s college can be risky. You never know when the markets will begin to head south. Diversifying your investments – putting your money in CDs, and saving accounts, may be a good idea too. Choosing a prepaid tuition plan can be a great idea too. That’s when you lock in a couple of years or a couple of semesters for your child’s college at today’s prices. There are private college 529 plans that allow you to do this with private colleges too. There’s just one little problem. If your child doesn’t attend the exact public university or one of the private colleges you are allowed a choice of, you will lose big-time. You no longer have a price guarantee.
What this shows you is that there is no guaranteed easy answer when it comes to investing. Investing always needs your close supervision.