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College Savings in a Volatile Market

Paying for college is pricey enough. And it’s always a good time to save in a tax-efficient way through a 529 College Savings Plan. But what do you do with college savings in a volatile market? Well, the same advice also applies to another long-term goal: your retirement. So, the first thing is to not panic as I’ve explained in another blog: What to Do When the Sky is Falling?

As noted on SavingForCollege.com, while you may be concerned about stock market volatility, now is not the time to get off track by making any emotional decision.

Age-based investment portfolios were designed to balance risk and return

529 plans are sponsored by various states and come with a range of investing options including statis list of funds or pre-set portfolios that rebalance based on student age . The  most-often recommended choices are these age-based portfolios that automatically dial down the exposure to stocks while increasing the amount invested in bonds and cash as the student approaches the college funding years.

If you own static portfolios of funds, then you should be sure to check your holdings and rebalance. And if your student is nearer to entering college, then consider making some switches between funds, like lightening up on the growth and international stocks and shift money to bond funds.

Dollar cost averaging benefits long-term 529 plan investors

The best way to take the emotion out of investing is to set up some consistent rules and behaviors. One thing that college savers can do is set up a schedule to automatically put money aside into the 529 Plan. This is the same sort of “dollar-cost-average” technique that retirement savers use with their IRAs and 401(k) contributions.

Increasing 529 plan contributions will compensate for losses

Considering that the underlying holdings of 529 plans are companies that make widgets and provide services, you have to remember that these same companies are still doing business even after market volatility begins. But because of the sentiment of investors and the near-term outlook over the next 6 to 12 months looks gloomy, the stock prices of these companies has fallen. But research has shown that stock prices do recover over time. So, now instead of panicking, you can increase your 529 plan contributions and buy these companies that are now “on sale”.

IRS rules for liquidating a 529 plan

Like everything else that has to do with money, there’s always a tax angle. Prior to 2018, certain investors could claim losses on their income tax returns when 529 plan investments soured. But the Tax Cuts and Jobs Act of 2017 what went into effect for TY2018 cancelled any write-offs for miscellaneous itemized deductions for tax years between 2018 and 20255. So, if you panic and liquidate your 529 plan investments, you won’t even have the chance to get a tax deduction now.

If you’re not happy with your 529 plan investment performance, your better bet is to choose other investments in the plan.

You can also benefit by doing the same things that long-term retirement investors should be doing during volatile times: control what you can. This includes reassessing your risk profile, controlling investment expenses by switching out of higher cost or higher commission 529 plans, and, if necessary, switching to a different plan custodian where the choices and costs are more in line with your needs and budget.

Overall, if you’re working with a experienced college planner, you’ll have a plan in place to deal with college savings in a volatile market.