Keep chipping in to 529 college plan, but look closely at strategy
— -- Forget The Shining. Invasion of the Body Snatchers? Kid stuff. If you really want to scare yourself this Halloween, open up your 401(k) statement. And if you're in the mood for a hair-raising double feature, pop some popcorn and review your 529 college savings plan.
The bear market has taken a chainsaw to many 401(k) plans, slashing their values by 40% or more. But for parents of children in their early to late teens, the carnage in their 529 plans is even more frightening.
"If you're close to that time period when you need the money, this is very scary," says Andrea Feirstein, an independent consultant to 529 plans.
State-sponsored 529 savings plans allow parents and grandparents to save $250,000 or more toward a child's college education. As long as the money is used to pay for college expenses, withdrawals are tax-free.
The majority of 529 plan participants invest in age-based portfolios, which shift money to more conservative investments as the child nears college. By the time parents start taking withdrawals to pay college bills, most of their money is in money market funds or other low-risk investments.
Joseph Hurley, founder of SavingforCollege.com, has two children in college, and says the age-based portfolios worked to his advantage. Because most of his savings were moved to low-risk investments before the downturn, both of his children's plans are showing small gains this year.
Parents of children in the early to midteens are in a much more tenuous situation. The stock-based portions of their portfolios have suffered deep losses, and they have only a few years to recover.
At the same time, the economic slowdown has made it more difficult for families to make up the difference by saving more. More than a third of parents have reduced the amount they're saving for college or stopped saving altogether because they're having trouble with day-to-day expenses, according to a recent survey by Fidelity Investments.
While the market meltdown has exposed some problems with 529 plans, they still offer the most tax-efficient way to save for college. Some survival tips:
