As of June 2011, there were 8.8 million open 529 college savings plan accounts (Source: College Board, Trends in Student Aid, 2011). If you’re one of the millions of parents or grandparents who’ve invested money in a 529 college savings plan, the arrival of a new academic year may be a good time to see how your plan stacks up against the competition. Mediocre investment returns, higher-than-average fees, limited investment options and flexibility—these are some of the things that might have you thinking you could do better with another plan. If you discover that your 529 plan’s performance has been subpar, what options do you have?
Roll Over Funds to a New 529 Plan
One option is to do a “same beneficiary rollover” to a different 529 plan. Under federal law, you can roll over the funds in your existing 529 plan to a different 529 plan (college savings plan or prepaid tuition plan) once every 12 months without having to change the beneficiary and without triggering a federal penalty.
Of course, you’ll need to research other plans and then choose one, which may take some time. Once you decide on a plan, the rollover process is fairly straightforward. Call your existing 529 plan manager to see what steps are required (some plans may impose a fee for a rollover, so make sure to ask); your new plan should have a system in place to accept rollover funds. You must complete the rollover within 60 days of receiving a distribution to avoid paying a penalty.
If you want to roll over the funds in your 529 college savings plan account more than once in a 12-month period, you’ll need to change the beneficiary to another qualifying family member to avoid paying a federal penalty. As a workaround, you can change the beneficiary back to the original person later.
Change Your Investment Strategy in Your Current 529 Plan
Just because you can switch to a different 529 plan doesn’t necessarily mean you should. If the new plan has roughly the same mix of investment choices and similar fees as your current plan, you might ask yourself if you’d be better off staying put and simply changing your current investment allocations. This is especially true if you have invested in your own state’s 529 plan and the availability of related state tax breaks depends on you remaining in a state plan.
Section 529 college savings plans generally allow you to change the way your future contributions are invested at any time. So, for example, if you originally picked a more aggressive investment option, you can choose a different one (or more than one) for your future contributions.
However, the rules are stricter when it comes to your existing contributions. If you’re unhappy with the performance of your current investment portfolio but don’t want to switch plans completely (using the rollover option described earlier), you may have another option. Specifically, 529 college savings plans are federally authorized (but not required) to let you change the investment option for your existing contributions once per calendar year without having to change the beneficiary. (This is different from a plan allowing you to pick a new investment option for your future contributions.) Before joining a 529 plan, check to see if it offers this flexibility for existing contributions.
Other Options to Consider
Some 529 college savings plan investors may wonder whether they should continue putting money into their accounts if their investment returns have been lackluster, or even in negative territory. Although more 529 plans nowadays are likely to offer more conservative investment options, such as certificates of deposit or money market funds, you still might decide that you’d like to have more control over your college investments. In that case, you might consider a Coverdell education savings account or an UTMA/UGMA custodial account, both of which let you choose your underlying investments.
Finally, keep in mind that any college investment strategy should be reexamined periodically in light of new tax laws and changes in individual circumstances. A financial professional can help you understand your options, compare 529 plans, and select the right investment strategy for your situation.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
If you have 529 questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures.
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
