No statement or example in this book should be considered a specific recommendation for your personal situation. Investing and tax strategies each carry significant risks. Examples herein may not apply to your situation. Please consult your estate attorney, tax advisor, or financial advisor for personal advice.
Fund selection is likely one of the most difficult decisions of the entire 529 process. Most commonly, a broad-based stock and bond fund mix are desired. Keep in mind that 529 plans are not generally used as first or second tier emergency funds. Hopefully, your family will never need these funds to live on, making this account available for a more aggressive investment allocation (such as a higher stock fund percentage and fewer bonds). Watch for advisor or investment fees, and keep these as low as reasonably possible. Direct-marketed 529 plans should have lower fees, but having a knowledgeable advisor reviewing your plan may at times be worth giving up some costs.
If using a target fund, consider “investing down” an age group or two (ie: if the potential student is 10 years of age, invest as if they are only 8 years). Target funds tend to become quite conservative in the last couple of years (ages 16-18 years), earning less interest. Many students also take a “gap” year, or receive a 1st year scholarship, postponing the need for your funds 1-2 more years.
My personal favorite funds are highly diversified low-cost direct-sold global stock funds which use a mix of US and foreign companies. Within Utah’s my529 plan, consider a customized static plan with mainly my529 Global Equity fund. A smaller percentage (maybe 10-20%) of a diversified low cost bond fund could be used to balance.
A target date fund will change as the child ages. If you decide on any static plan, be sure to update to a lower risk allocation yourself as the child comes closer to needing the funds.
An important feature of 529 allocations is that they may be changed by the owner (maximum 2 times per year) at any time, per federal rules.
Decision tree
- How long until my beneficiary might need these funds? Will this be used only for college or for K-12 as well?
- What are the odds I may have to take out these funds for my use?
- Do I have enough understanding to change fund allocations myself as my student comes closer to using the money? Or should the computerized target fund automatically change them?
The rules in this chapter
- 1You can change your Fund Allocation up to 2 times per year without a fee at any time.Markets and overall net worth situations change.
- 2Your 529 account can lose money. Most fund selections are not FDIC insured.There are funds which are FDIC insured, many of them found in Target fund allocations.
- 3TimeDon’t forget the old adage that “time in the market is better than timing the market”.