Investing Strategies for a 529: A Guide for Parents and Grandparents

As a parent, it's natural to want to provide the best possible education for your child. For many, this means saving for college tuition through a 529 plan. 

While 529 plans are a great college planning vehicle, they can be complex and require careful consideration. In this article, we'll discuss our 529 investment strategy and the factors that should be considered when investing in a 529 plan.

College Is Not an Investment

First and foremost, it's important to remember that college is not an investment. No college has ever paid a parent a dividend. Therefore, we prioritize our client's retirement before college saving. While saving for college is important, it should not be at the expense of retirement savings.

That being said, compounding is valuable when it comes to saving for college. Even small contributions today can go a long way toward covering future tuition bills. However, it's important to start with the end in mind. You want to have something saved when tuition bills start, but you don't have to use all the 529 funds immediately. Sometimes this isn't even the best strategy.

Short-Term Investment Horizon

When the tuition bills start rolling in, assuming four years of college, the investment horizon becomes short-term. This means we don't want short-term money subject to stock market swings. If we use a target date fund, the asset allocation will slowly reduce equity exposure when the child is in high school and replace it with fixed-income exposure. However, this strategy isn't always the best option.

For example, in 2022, this would have been a terrible decision as fixed income underperformed and was negative. Cash yields have been higher than most fixed-income yields. Therefore, asset allocation becomes more tactical as the student enters high school. We recommend investing 100% in globally diversified equities until 8th grade and evaluating economic factors as the student enters high school.

We don't recommend using a target date fund. Instead, we suggest systematically pairing back equity exposure and swapping equities for cash and cash equivalents to have 25% of the account in cash or money market by the start of their senior year of high school. This strategy allows for the systematic selling of 1/4 of the account over the subsequent years of college.

Other Considerations

It's important to note that there are other considerations when investing in a 529 plan. For example, 529 plans offer tax benefits, but the rules vary by state. Additionally, some states allow for tax deductions on contributions, while others offer tax credits. The investment options and fees also vary by state. It's important to work with a trusted financial advisor who can help you navigate these considerations and develop a personalized 529 investment strategy.

Conclusion

In conclusion, 529 plans are a great college planning vehicle, but they require careful consideration and a personalized investment strategy. It's important to prioritize retirement savings, start with the end in mind, and evaluate economic factors as the student enters high school. Working with a trusted financial advisor can help you navigate the complexities of 529 plans and ensure you're making the most of this valuable college savings tool. To learn more about your my529 options, schedule a call with one of our Financial Advisors.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by GW Financial, Inc. to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2023 GW Financial, Inc.