Wednesday, August 26, 2009

Congress Allows Extra Changes to 529 Allocations

It's been a rough year for investments everywhere. Okay, duh! But it's sad when those investments hurt kids.

Parents and grandparents who have been investing in their youngsters future through 529 plans got hit just as hard as other investors this year. But Congress is allowing 529 investors an extra change to their allocations to reduce loss. This is the only year Congress has given 529 investors the ability to change up their allocations twice. Normally you can make changes once in a year.

The reason for the modification is that losses among 529's were crazy high. And the reason for that is many investors lost 20-30% through popular age-based plans. These plans use the logical investing strategy of starting out aggressive while the beneficiary (the child) is young and becoming more conservative as the child ages. For a child this is a much shorter spread than an adult would follow. Usually investments will be aggressive for a very young child, about 0-8 years old. From ages 9 to 15 investments might be considered moderate and after that become more conservative. It was those beneficiaries in the aggressive investing years that really got hit hard.

If you have a 529 that falls into that hard-hit group you need to remember that you have two chances this year to save face. If you haven't changed up your allocations yet, now is the time. If you've been using an age-based plan you can change to more a conservative approach. Then when things look up you can take another look, but you may not want to return to the age-based plan. It will depend on the age of your child and the state of the market.

If you want to avoid age-based plans, you might consider managing your own 529 account through either:
  • Asset-allocation portfolios, which blend several mutual funds together to achieve a targeted mix of stocks, bonds and money market funds, or
  • Single-fund options, in which each portfolio is invested in a single mutual fund whether that be a stock fund, bond fund or money market fund.

If you already reviewed and changed your 529 once this year, hold on for your second opportunity. Things have changed much in the investment world so far, but that doesn't mean we won't see an upswing during the last quarter.

We may not see the opportunity to make two allocation changes next year. So, don't pass by your chances this year. Your best bet is to carefully review the performance of your current allocations, take a close look at the funds within your plan to be sure they haven't changed and that you are accomplishing your goals. Consult your financial advisor for assistance with changing allocations.

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