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Are 529 Investment Plans too Risky for College Savings?

6:33 PM, Jan 12, 2012   |    comments
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JACKSONVILLE, Fla. -- When it comes to the cost of a college education, the price keeps increasing.

But there are ways to save: the college prepaid plan, or a 529 college savings plan, which some fear may be too risky.

"There's a lot of miscommunications about those 529s," said James Newman, a financial advisor with Janney Montgomery Scott who advises parents who are trying to save for children's college educations.

"I know the earlier you start at anything the better you will be," he said. 

Newman has both a college prepaid plan and a 529 college savings plan for his son's college education.

"Since we don't know what college it will be, it is always best to have something to supplement," said Newman.

529 college saving plans did well before the economic downturn, but because of the type of investment involved, when stocks and bonds took a loss earnings disappeared.

But does that mean they are risky investments?

"Yes, they can be risky....but most 529 plans will have a variable rate of interest that's going to be like a mutual fund or could be inside a mutual fund, thus you have the risk of whatever the stock market or economy is going to do," said Newman.

Newman said the advantage of a 529 plan is it is tax free and you can start saving anytime, regardless of the age of your child.

"A prepaid might be too expensive (when you're ready to save); a 529 could be what amount of money you have," he said.

His general advice to parents is don't procrastinate; plan now, save now. "A 529 is a lot better than the mattress," said Newman.

"We hope over a period of time that the earning will get back in order, the stock market will do better and you will do better than if you buried your money in the backyard or put it in a mattress."

Are there other options? Newman said there are two things separate from college prepaid or 529s.

One is a "Uniform Gift to Minor Acts Account."

It allows an adult to contribute to a custodial account in the child's name without having to set up a trust or name a legal guardian. The downside is this could negatively impact the chances of college financial aid. 

The second choice is a "Coverdell Education Savings Account." 

The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. 

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