A 529 account is a tax-advantaged savings plan that can help you pay for education expenses, from kindergarten to graduate school. There are two main types of 529 plans: education savings plans and prepaid tuition plans. Each type has its own benefits and drawbacks, depending on your goals, risk tolerance, and time horizon. In this article, we will explain how 529 plans work, how to choose the right investments for your 529 plan, and what are the latest changes and trends in the 529 industry.
How 529 Plans Work
A 529 plan is sponsored and run by a state or a group of states. You can open a 529 account for yourself or for a beneficiary, such as your child or grandchild. You can contribute money to the account, up to the limit set by the state. The money in the account grows tax-deferred, meaning you don’t pay taxes on the earnings until you withdraw them. And if you use the money for qualified education expenses, such as tuition, fees, books, supplies, and room and board, you can withdraw the money tax-free. Some states also offer tax deductions or credits for your contributions.
You can choose from a variety of investment options offered by your 529 plan. These options may include mutual funds, exchange-traded funds (ETFs), or other securities that invest in stocks, bonds, or other assets. The performance of your 529 account depends on the performance of the underlying investments. You can change your investment options up to twice per year, or whenever you change the beneficiary of the account.
How to Choose the Right Investments for Your 529 Plan
When you enroll in a 529 plan, you need to select an investment portfolio from the choices offered by your plan. You should consider factors such as your beneficiary’s age, your risk tolerance, and your expected return. Generally, there are two types of investment portfolios: age-based and static.
- Age-based portfolios are designed to adjust the asset allocation automatically over time, based on the beneficiary’s age or expected college enrollment date. In the early years, the portfolio is more aggressive, with a higher allocation to stocks, which have the potential for higher returns but also higher risk. As the beneficiary gets closer to college, the portfolio becomes more conservative, with a higher allocation to bonds or money market funds, which have lower returns but also lower risk. This helps protect your savings from market volatility and preserve your purchasing power.
- Static portfolios have a fixed asset allocation that does not change over time. You can choose a portfolio that matches your risk level or investment objective, such as aggressive growth, moderate, or income. You can also choose a portfolio that mirrors an underlying mutual fund or ETF. Static portfolios are suitable for investors who want more control over their investments and are willing to monitor and adjust them periodically.
The table below shows some examples of age-based and static portfolios offered by different 529 plans:
| 529 Plan | Portfolio Type | Asset Allocation |
|---|---|---|
| California ScholarShare 529 | Age-based | 0-6 years: 100% stocks <br> 7-9 years: 80% stocks, 20% bonds <br> 10-12 years: 60% stocks, 40% bonds <br> 13-15 years: 40% stocks, 60% bonds <br> 16-18 years: 20% stocks, 80% bonds <br> 19+ years: 10% stocks, 90% bonds |
| New York’s 529 College Savings Program | Age-based | 0-3 years: 80% stocks, 20% bonds <br> 4-6 years: 70% stocks, 30% bonds <br> 7-9 years: 60% stocks, 40% bonds <br> 10-11 years: 50% stocks, 50% bonds <br> 12-13 years: 40% stocks, 60% bonds <br> 14-15 years: 30% stocks, 70% bonds <br> 16-17 years: 20% stocks, 80% bonds <br> 18+ years: 10% stocks, 90% bonds |
| Utah Educational Savings Plan | Age-based | 0-3 years: 90% stocks, 10% bonds <br> 4-6 years: 80% stocks, 20% bonds <br> 7-9 years: 70% stocks, 30% bonds <br> 10-12 years: 60% stocks, 40% bonds <br> 13-15 years: 50% stocks, 50% bonds <br> 16-18 years: 40% stocks, 60% bonds <br> 19+ years: 30% stocks, 70% bonds |
| Virginia529 Invest | Static | Aggressive Growth: 100% stocks <br> Growth: 80% stocks, 20% bonds <br> Moderate Growth: 60% stocks, 40% bonds <br> Conservative Growth: 40% stocks, 60% bonds <br> Income: 20% stocks, 80% bonds <br> Money Market: 100% money market funds |
| Ohio CollegeAdvantage 529 | Static | Vanguard Aggressive Growth Index Portfolio: 100% stocks <br> Vanguard Growth Index Portfolio: 80% stocks, 20% bonds <br> Vanguard Moderate Growth Index Portfolio: 60% stocks, 40% bonds <br> Vanguard Conservative Growth Index Portfolio: 40% stocks, 60% bonds <br> Vanguard Income Index Portfolio: 20% stocks, 80% bonds <br> Vanguard Money Market Portfolio: 100% money market funds |
There is no one-size-fits-all answer to choosing the best investment portfolio for your 529 plan. You should compare the fees, performance, and risk of different portfolios and choose the one that suits your needs and preferences. You can also consult a financial advisor or use online tools to help you make an informed decision.
What’s New and Trending in the 529 Industry
The 529 industry is constantly evolving to meet the changing needs and demands of investors and students. Here are some of the latest developments and trends that you should be aware of:
- Expanded use of 529 funds: In recent years, the federal government has expanded the eligible expenses that you can use your 529 funds for. In 2017, the Tax Cuts and Jobs Act allowed 529 plans to be used for up to $10,000 per year for tuition expenses at private, public, and religious K-12 schools. In 2019, the SECURE Act added apprenticeship programs and student loan repayments (up to $10,000 per beneficiary) to the list of qualified expenses. In 2024, the SECURE 2.0 Act will allow up to $35,000 of leftover funds in a 529 account to be rolled over into a Roth IRA account, provided the fund is at least 15 years old.
- Increased state tax benefits: Some states have increased their tax benefits for 529 plan contributions, either by raising the deduction or credit limit, or by allowing deductions or credits for contributions to any state’s plan. For example, in 2023, Illinois increased its deduction limit from $10,000 to $15,000 per taxpayer, and New York increased its deduction limit from $5,000 to $10,000 per taxpayer. In 2024, Arizona will allow a tax credit of up to $1,000 for contributions to any state’s plan, and Georgia will allow a deduction of up to $8,000 for contributions to any state’s plan.
- Improved investment options and lower fees: Many 529 plans have improved their investment options by adding more diversified, low-cost, and socially responsible portfolios. For example, in 2023, California added three new ESG (environmental, social, and governance) portfolios, and Utah added two new customized portfolios that allow investors to choose their own asset allocation. Many 529 plans have also lowered their fees, either by reducing the management fee, the program fee, or the sales charge. For example, in 2023, Virginia reduced its program fee from 0.10% to 0.06%, and Ohio reduced its sales charge from 5.75% to 4.50%.
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