When the economic downturn started in 2008 and caused the stock market to plummet, 529 college savings plans received criticisms from experts.
According to pundits, investing for college in stocks is too risky, particularly when downturns occur. Does this mean that you should no longer invest in a 529 college savings plan?
The answer is “no,” because investing in 529 savings plans can be very advantageous. For instance, you get federal income tax benefits when you withdraw money for a valid education expense. This means that you won’t have to pay for the capital gains and investment income. Some states even provide you with a tax deduction or credit whenever you contribute money to your plan. Therefore, some 529 college plans also provide immediate benefits aside from the long-term ones.
Of course, tax benefits alone don’t justify risky stock investments for the college education of your children. However, 529 plans don’t have to be as risky as some of its detractors make them out to be.
Like all investments, you have to be wise about where you put your money. If you simply put all your money on mutual stock funds until your children reach college, then you are taking an unprecedented risk.
However, 529 plans provide target date funds, where your money will first be put in stocks at the beginning of your investment. As you get closer to the dates when you’ll need to withdraw your savings, your money will gradually be transferred to more conservative asset classes like treasuries and bonds. This will help protect your long-term investment.
In addition, you’ll also have the option to manage the target dates yourself in case you want to be more conservative in your approach.
Depending on how you invest, 529 college savings plans can be a very good option for your children’s college education.
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