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As we
dash into the year-end holiday crush, many parents
aren't likely to want to sit down and review the
investments in the 529 college savings plans for their
children.
But after
the market meltdown, the
Internal Revenue Service
issued a special rule for 2009 only that allows
investments in 529 plans to be changed twice a year. The
old policy was that savers with 529 plans could change
their investment strategy once a calendar year and in
certain other circumstances, such as a change of
beneficiary or a rollover from one state plan to
another, according to
Mark Kantrowitz
, publisher of FinAid.org and FastWeb.com.
Many
people either don't know about the two-change option for
this year only — or did not want to make such moves.
Terry Stanton
, spokesman for the
Michigan Department of Treasury
, said research indicates that 217 account holders with
money invested in the Michigan Education Savings Program
took advantage of the twice-a-year rebalance option so
far this year.
"With
more than 200,000 accounts, this is a very small
percentage and accounted for only 4 percent of the total
transfers that occurred in 2009," he said.
Unlike a
401(k) plan for retirement, college 529 plans — which
are named for a section of the U.S. tax code — have
limits on how much shifting around you can do with the
money in a given year.
Why would
someone want to make a switch now?
Maybe you
panicked in the spring and shifted all of the money into
a low-rate guaranteed choice in the plan and your child
isn't even in kindergarten.
"If
someone changed their asset allocation earlier this year
because they were worried about the stock market
dropping, they might want to take a fresh look at their
investment strategy and risk tolerance," Kantrowitz
said.
He said
the
IRS
is unlikely to extend the special two-changes-in-a-year
rule into 2010.
The
brutal bear market — which hit a bottom in
March 2009
— may have shone a light on just how much volatility
and risk could be packed into some 529 plans.
Strategies
for some options offered by specific 529 plans are part
of the problem, according to
Jason Zweig
, author of the newly published "The Little Book of
Safe Money" (Wiley,
$19.95
.)
The worst
of the bunch can "offer irresponsibly risky
exposure to stocks and appallingly bad investments that
can blow parents' money and students' dreams to
smithereens," he writes.
Zweig
suggests that by the time a student hits college, less
than 20 percent of the money should be at risk in
stocks. By contrast, he noted one option for a
Utah
plan could have left students already in college with 65
percent in stocks.
Investors
absolutely must research how their plan is investing the
money even with an age-based asset option.
Pay
attention to where you put the money, too.
In
Michigan
, you can go to www.misaves.comv and click on investment
options.
With the
Michigan
plan, investors can choose three types of age-based
mixes — conservative, moderate and aggressive.
For
students age 12 to 14, for example, no money is in a
money market account — one of the least-risky options
— in both the moderate and aggressive options. By
contrast, 25% of the portfolio is in a money market
account at ages 12 to 14 with
Michigan's
conservative age-based option. So the conservative
option has less money at risk.
With the
aggressive option in the
Michigan
plan, no money is in a money market even when the child
is 15 to 17 years old.
For many,
Kantrowitz said,
Michigan's
aggressive age-based portfolio could be too aggressive.
The
college savings 529 plans often suggest that an
age-based option allows a parent to set it and forget
it. But should you be setting it and forgetting it?
And
remember to keep saving.
"It
is difficult to pick a bottom for the market except in
hindsight, so it is better to continue making regular
monthly contributions to your 529 college savings
plan," Kantrowitz said.
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