Are 529 Plans a Good Idea in This Market?

A 529 Plan is a way to save money for college that can give you some tax breaks. Many people have been worried about investing with the recent market fluctuations. If you already have a 529 plan, you may be worried about your balance dropping with the market. If you are in the process of saving, you may take this time to decide, under the advice of a financial advisor, if you are more comfortable investing in more stable entities or if you are okay with the fluctuations in the long run.

Some people may have been advised to invest in risky stocks because they had a long time to save for college. This is not necessarily bad advice, if you have a high risk tolerance. If it makes you squeamish to see your balance rise and drop dramatically, you may choose to invest in something a little more stable, such as a mutual fund invested in stocks and bonds. This is the area of investing that a lot of long-term investors end up in.

Not many people are willing to watch their investment plummet with the market. Some may have loved being more daring back before 2000, but maybe not so much now. With over 100% returns, many people were just throwing money into risky investments, with wide blind eyes. You have to look at long term results and understand that these results are achieved by fund managers over time. There may have been some major fluctuations up and down during the years that you are looking at. Mutual funds with stocks and bonds give you some risk so that there is potential for faster growth than a bond fund, but that does not necessarily mean that there will be more growth than a bond fund.

If you are getting closer to needing the money in the 529 plan, then you may want to go even more conservative and stick to mutual funds invested in bonds. Bonds can even be backed by the government. Since the government has taxing power, the chance of government bonds losing money is very slim. These types of funds can be fairly stable.

Bond funds offer dividend payments that can be reinvested into your plan. This may or may not be the best thing for you, depending on your tolerance and also your time frame. Generally speaking, if you have many years to save, then some risk can usually be afforded because you have time to wait out the market lows. The fluctuations can be worth it and sometimes really pay off if you have a stomach for your money constantly rising and falling.

Talk with a financial advisor about assessing your risk tolerance before you decide where to invest your money. The 529 plan is a great way to save money and get some tax breaks. You can even get tax breaks if your plan loses money, deducting the loss of principal from your income. These benefits combined with scholarships, grants, student loans and private student loans can help you get your child through college.