529 Investment Strategy by Age
Tuition fees increase every year, and for many families this poses a financial challenge. Even for students targeting a public institution in the state, fees and tuition average around $10,338. This average rises to $38,185 for private education. One way for American families to prepare for these costs is to open a 529 college savings account. And as a result, these estimated 15 million families have collectively raised about $464 billion, according to Bloomberg and Federal Reserve data.
As an investment vehicle, 529 plans help you build your funds. Here’s an idea of how a person’s investment strategy can be adjusted based on the age of the beneficiary. For more help, consider working with a Financial Advisor.
What is a 529 College Savings Account?
A 529 college savings account, sometimes simply called a 529 plan, is a type of investment account. With it, you can pay eligible expenses related to your education or that of your beneficiary. The account is also tax-efficient. You can withdraw earnings from your account tax-free as long as you use them for eligible expenses. This includes costs such as books, tuition, course fees, and room and board.
If you use income from your 529 plan for expenses outside of this, you may be hit with income tax and a 10% penalty. However, these fees can sometimes be waived, such as in the case of death, disability, or if the student was awarded a non-taxable scholarship.
the fiscal advantages are attractive, but 529 plans have other benefits as well. For example, if the beneficiary chooses not to go to college, you can change the beneficiary or transfer the unused funds to another. However, this money will always be subject to the same rules of use.
Almost every state sponsors its own version of a 529 plan, with some including additional benefits like a tax credit. And you don’t have to stick to your own state’s plan; you can shop.
529 Investment Strategies
These tax-efficient college savings plans typically offer a selection of investment strategies so parents and grandparents can find the one that best suits their goals, time frame, and risk profile. Here are three common 529 investing strategies:
Age Asset Allocation: An investment portfolio that adjusts its asset allocation depending on the beneficiary’s age.
Goal-Based Asset Allocation: A portfolio that reflects the potential return you want and the level of risk you can take.
Personalized allowance: A walletor a combination of portfolios, the strategy of which varies.
Almost every state offers its own 529 plan. Each comes with its own rules regarding tax benefits, minimum contributions, fees and more. here is New York’s age-based plan to give you an idea of how age-based investment options can work with a 529 account.
Example of age-based portfolios for a 529 plan Age Conservative asset allocation based on age Moderate asset allocation based on age Aggressive asset allocation based on age 0-4 62 .5% shares/37.5% bonds 87.5% shares/12.5% bonds 100% shares 5 -6 50% shares/50% bonds 75% shares/25% bonds 87.5% shares/12.5 % bonds 7-8 37.5% stocks/62.5% bonds 62.5% stocks/37.5% bonds 87.5% stocks/12.5% bonds 9-10 25% stocks/75% bonds 50% equities/50% bonds 75% equities/25% bonds 11-12 12.5% equities/87.5% bonds 37.5% equities/62.5% bonds 62.5% equities/37.5% bonds 13- 14 75% bonds/25% short-term reserves 25% stocks/75% bonds 50% stocks/50% bonds 15-16 50% bonds/50% short-term reserves 12.5% stocks/87.5% bonds 37 .5% equities/62.5% bonds 17 -18 25% bonds/75% short-term reserves 75% bonds investments/25% short-term reserves 25% stocks/75% bonds 19 years and over 100% short-term reserves 75% bonds/25% short-term reserves 12.5% stocks/87.5% bonds
Above is an example of an age-based portfolio. In this scenario, your asset allocation automatically adjusts over the life of the child. This is often the best solution for portfolio owners who want modest returns without high risk.
What is a Static 529 savings plan?
With a static 529 plan portfolio, there is a specific investment objective in mind. For example, you might want your portfolio to prioritize aggressive growth. Accordingly, the asset allocation of the portfolio is shaped according to this objective. The allocation of funds then remains the same for the duration of the plan. You can change the allocation of investments; however, this must be done manually. For this reason, a static portfolio may be preferable for experienced investors.
Static portfolios can include target risk portfolios and individual portfolios. The first targets a predetermined number risk levelwhile the latter reflects an underlying investment such as a mutual fund.
How to Compare 529 Plan Options
If you’re considering a 529 plan, you need to find one that suits your financial goals and risk tolerance. For example, a state’s age-based plan may require you to invest a significant portion of the funds in actions while the beneficiary is in college. This might make sense for someone who wants higher returns in exchange for greater risk because they started saving later. But it won’t work for everyone. Each plan can vary greatly, so it’s important to do your research.
One way to compare your 529 plan options is Savingforcollege.com online tool. It helps families review individual plans based on factors such as performance and fees. Vanguard also has a 529 plan comparison tool which allows you to compare up to 3 different plans at once.
Overall, when looking for the right 529 plan, consider a few factors, such as:
Fees (i.e. account maintenance, investment, management)
Accessibility of information
Plans sold directly vs. plans sold through an advisor
Is a 529 investment strategy right for me?
A 529 college savings account can be a smart way to save for college. In particular, its tax benefits give it a leg up on a normal brokerage account. Your money grows tax-deferred and your withdrawals remain tax-free as long as you use the funds for eligible education expenses.
However, this is not a perfect solution. There are penalties if you use your money for ineligible expenses. In addition, there are also fees to pay, which vary depending on the plan. In addition, investment choices are limited. As the account holder, you must choose from the investment options offered by the 529 savings plan you choose.
If you are unsure about how financial aid may factor into your future education costs, consider calculate some estimates. You will need to consider factors such as various types of federal aid, your and your child’s age, tuition, inflation, and more. If you have an idea of how much you will be studying, it can help you decide if a 529 plan is right for you. It can also give you a savings goal to work toward.
529 plans are a solid recommendation for many families as an investment vehicle. There are many options, giving you flexibility, and they come with tax benefits. However, the college experience (and its costs) is different for everyone. You might need a different savings strategy for your prospective student.
If you need help getting started on your savings journey or adjusting your current strategy, consider reaching out to a finance professional. They can help you plan education costs, estimate financial aid, or plan a budget.
Tips for Managing a 529 Plan
The best 529 plan for you will depend on various factors such as your finances, the age of the beneficiary and more. If you need help researching your options, consider checking out a financial advisor. Finding a qualified financial advisor doesn’t have to be difficult. Smart Assets free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
You don’t have to limit yourself. You can invest in more than one type of plan – even out-of-state ones. If you want to see your options, check out our review of the 529 plans across the United States. This can give you an insight into their benefits and features.
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