529 college savings plan tips on the market in 2022

For long term investors, market drop Usually not a big deal. With decades to go before retirement, you’ll have to endure many more peaks and valleys before reaching the finish line.

For college savers, it could be a different story.

If your 529 plan has been a success and your child is going to college this year or next, that could be a huge deal. Perhaps you already have plans to use those funds within the next few years. It doesn’t take long for the market to recover.

In fact, total 529 planned assets fell from $452 billion in December 2021 to $432 billion in March 2022, according to ISS Market Intelligence – all as a result of market performance .

“Market volatility affects people in all sorts of ways, and we experience that in the 529 space,” said Chris Lynch, head of educational savings at the financial giant. TIAA. “That’s a real problem, because even in enrollment day strategies, you can have some equity exposure.”

Sure, the 529 space is a bit different from other investment areas. The majority of college savers around the country are in some version of a target date fund, where allocations automatically shift over time to safer areas like bonds and cash.

Ideally, by the time your child enters college, those assets are not in serious jeopardy. Paul Curley, vice president of 529 solutions at ISS Market Intelligence. Those parents should be “well prepared for the fall semester.”

But savers who don’t fall into age-based options are probably in awe of what’s happened to the stock market right now. After all, the S&P 500 is down about 18% so far, and Nasdaq down more than 26%. For such investors, there is a relatively short way to correct direction or action. The experts have some advice if you’re in that boat:

Defer withdrawals if possible

It’s natural to think that you have to start reducing your 529 assets as soon as your kids set foot on college campus. It doesn’t have to be, says TIAA’s Lynch. “There may be a misconception that the number 529 should be used in your child’s freshman year,” he says. “It’s not.”

You have the flexibility to mine those assets when you want — so, in some cases, it might make sense to start making more distributions in the second half of a student’s college career, after when the market (probably) had more time to recover. But that requires you to cover immediate expenses in other ways, such as beyond your current income, or to let your child shoulder a larger share.

Having more than one child can also affect your decision-making. “If you can avoid withdrawing your 529 plan assets during a bear market, perhaps you can turn around a little more cash from expenses,” said Catherine Valega, a financial planner in Winchester. college and pass those funds on to the next child,” said Catherine Valega, a financial planner in Winchester, Mass.

Consider the total time

Different students will have different visions of how they want their college career to progress. Some may be pursuing a two-year or four-year program, while others may be considering a master’s or even doctoral program. In that case, your timeline can be significantly stretched — and relieve the pressure of making decisions and withdrawing money immediately.

Reallocate if needed

If you don’t have the mood for market volatility, consider dedicating more assets to safer groups — if just to help you sleep at night. For example, the “guaranteed” option on TIAA’s plans will insure your principal and add a stated interest rate of 1% to 1.5%, Lynch said.

“It may be a prudent time to reallocate 529 to add in some cash or shorter-term bonds to prepare for the first year,” said Kyle Newell, a planner in Winter Garden, Fla. or two years of college,” said Kyle Newell, a planner in Winter Garden, Fla. low, but it can be lower from here. ”

Continue to contribute

Most parents are probably not where they want to be about 529 properties. So it might make sense for you to continue participating, even after your kids have started college—at least to take advantage of state tax breaks, which can be substantial. For example, the New York state plan offers a tax deduction of up to $5,000 a year, or $10,000 for married couples filing jointly.

Adjust your college choice

If your college savings really hit it off and the math doesn’t work, you can always change the equation by switching the expected college.

“You have to work with what you have, so it might mean going to a slightly less selective school to maximize,” says David Haas, a financial planner in Franklin Lakes, NJ. rewards and discounts.

A classic way to save money is to attend two years at a community college and then transfer to an in-state university. “It could be a way to save your 529 plan funds over the past two years,” says Haas. “You will get the same degree — but pay significantly less for it, and end up with much less debt.”

Use 529 assets to cover student loans

For those who really hate the idea of ​​529 cashing out in a bear market, remember that the federal Privacy Act of 2019 allows 529 distributions to be used to pay off qualifying student debt — up up to $10,000 of that.

“It can be worthwhile to lend the kid a $10,000 student loan,” says Ashton Lawrence, a financial planner in Greenville, SC. Provide the necessary funds to school now, and you can use that 529 plan asset to pay off the loan later.”

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