College savings plans

December 21, 2008 7:00:22 AM PST
Considering the state of the economy, freshmanfund.com, a free online gift registry that lets parents invite friends and family to contribute to their child's college savings fund, should be a popular option for parents this year. The founder joined us with details. 1. Why if you switch from an equity-weighted option in your 529 plan to a conservative option, you may in effect be "locking in" your losses and end up disappointed as tuition increases outpace the returns in your conservative option?

When people talk about being "disciplined" investors, they mean that you should avoid making emotional decisions and stick to your plan. The reason that people put money in equities is that they tend to have higher returns over time, although they tend to bounce up and down more dramatically than conservative investment options like money market funds. Our emotions tell us to buy when stocks are high and sell when stocks are low. That's a recipe for losing money!

2. In the late 1990s, 529 plans were criticized for being "too conservative, so they started opening up 100% equity options. Although these accounts were spanked in the market downtown at the beginning of this decade, investors who stuck with equities then saw their accounts swing positive with the rebound from 2003 through October of last year. What should investors do now?

Unless you are a sophisticated investor, you should be in an age-weighted option. The plan administrators put together an appropriate mix of assets for your child based on the number of years until he or she goes to college. They can adjust and rebalance it automatically, so you don't have to worry about it every year.

3. Why does it pay to put money in a 529 plan?

529 plans are the best way to save for college. Anyone who expected to take out student loans or a second mortgage to pay for college has had a painful shock this year. Socking money away in the stock market is a good strategy for long-term savings, although you have to pay taxes on your capital gains and dividends. Money in a 529 plan never gets taxed, which means that you end up with about 20% more money than if you kept the money directly in the stock market.

4. When can you switch investment in your 529 plan and what you should do when the access is given?

You can reallocate your investments annually. You should rebalance your allocations every year because some assets grow or shrink faster than others. Also, your allocations should become more conservative over time as you get closer to withdrawing the money. Or you should bite the bullet and switch to an age-weighted plan if you're not already in one. For investors, patience and discipline is a key virtue.

About FreshmanFund.com

Launched in August, 2008, FreshmanFund.com is the first and only online college savings registry. The free service allows anyone to get and give the gift of college savings. The secure site sends money directly to the tax-free 529 College Savings Plan that the recipient chooses. FreshmanFund.com does not provide financial advice or manage funds.

For more details on this, visit freshmanfund.com.

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