Mark Struthers’s clients had a problem. The bill was due for their child’s college tuition, and the 529 account where they’d been stashing money for years was down by nearly a third.
Like most other kinds of securities investments, many 529 college savings plans lost money in 2022, the worst year for the stock market since 2008. The S&P 500, Dow Jones and Nasdaq all saw double-digit losses. Bond funds felt the pain, too, and so did investors — especially those who need to spend invested money soon, like the parents of current or soon-to-be college students.
In that sense, Struthers, who is a financial planner, says his clients faced a scenario that scares many of the investors who comprise the roughly $400-billion college savings market. After saving for years, you might just get unlucky if your child enrolls during a period of turbulent markets.
But fear not, college savers: if your 529 account lost money last year, financial experts say you do have a few options to help your savings recover. The best path forward depends on the features of your particular 529 account and how much time you have before your child needs the money invested there.
Here are four strategies to get your college savings back on track.
1. Understand your 529 plan features
Nearly every state and some financial institutions offer 529 plans, and the overall idea is the same in every account. Families save after-tax dollars. Their contributions grow tax free and stay that way as long as plan owners use the money to pay for a long list of eligible educational expenses for a named beneficiary.
The details, however, vary from plan to plan. No 529 plan lets owners choose individual stocks and bonds, but some of them let owners pick the mutual funds in which their dollars will be invested. Other plans give owners no power to make investment choices. Professional money managers make all the investment decisions, typically moving the money from higher-risk, potentially higher-return investments when a beneficiary is young to lower-risk picks as the child approaches college age.
Plan fees also vary, as do other tax benefits. Some states offer a state income tax deduction for contributions residents make to any 529 plan, or sometimes just for contributions made to their home state’s plan.
Knowing how your plan works will help guide your next steps.
2. Rebalance your account
If you do choose your mutual funds, make sure you’re moving your money into less risky investments, like bonds, as your child approaches college age. That’s the mistake Struthers’s clients made.
“They picked their own funds and didn’t start decreasing risk when they were supposed to,” says the financial planner, who is based in Chanhassen, Minnesota. “They should have been moving into investments that would preserve the gains they already have or know where they would get the money if the account took a downturn.”
If you’re in a similar situation, where your account lost value but you’re already in the throes of paying college bills, you still have options. Try to take withdrawals from the mutual funds that have performed comparatively well. Give the others time to recover.
That’s the path Struthers’s clients are taking, and they may get their wish, he says. They’re waiting to sell off their growth funds — investments that are predicted to outperform the market overall — and those funds could certainly rebound with a sustained market rally.
“Historically, growth stocks might come back in 12 to 18 months,” he says. That means the clients can use those gains to pay for their child’s final years of school, and in the meantime, the family can draw on current income and home equity to pay tuition.
3. Roll over your funds into a new 529 account
Lower fees and state income tax breaks mean higher net returns on your investment. Look at other plan features and fees. You can go to Savingforcollege.com to compare features of different states’ plans, and financial services firm Morningstar publishes an annual rating of 529 plans that highlights plans with low fees, strong oversight and solid asset allocations.
Your current plan’s website can tell you what fees you’re paying, but in general, direct-sold plans, which parents buy and manage directly, have lower all-in fees than advisor-sold plans, which you can only access through a financial advisor who then manages the account for you, ideally based on your personal goals.
If you find one that offers you lower fees or a state income tax deduction that you don’t receive for your current 529 account contributions, roll the money in the account you have now over into a more advantageous choice.
Remember, though, that a 529 plan rollover needs to go from one custodian to another. Don’t take the money as a withdrawal, or you’ll create a taxable event.
Also be careful if you’ve received a state income tax credit on your contributions. If that’s the case, you may be required to repay the tax benefits you’ve received in your rollover. (To find out if that’s a possibility, read the section of your current 529 plan’s web page that talks about tax benefits.) If you’re in that boat, you can leave your current account in place and instead start a new account with lower fees.
4. Do nothing — but keep investing
It’s probably not a good idea to stop saving money in a 529 plan. The chance to spend tax-free money on a child’s college expenses is almost certainly worth more than last year’s market losses. There’s a silver lining, too: A market dip means that your contributions buy more than when market performance is higher.
“You’re buying more and making up for the losses when the market is going down. You’ll be that much better off when the stock market starts going back up again,” says Mark Kantrowitz, a Las Vegas-based expert on college financial aid.
Other than that, the lazy answer — aka doing nothing — may be the correct one in this situation. If your child is still in grade school, you don’t need to get excited about a single year’s return, says Yves-Marc Courtines, a wealth manager in Manhattan Beach, California.
“Leave the money invested long enough and it will work out,” he says. “Long-term investing should be boring because you should be taking a long-term view. Don’t get perturbed by daily movements.”
Even if your child is in college or will be soon, you should still keep the big picture in mind.
“Don’t panic,” Struthers says. “Look at what you’ve actually earned over the life of the fund, not just over the last six months.”
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