If you haven’t been hit with a loss of wages (or a job), reconsider. Even if your child is just a few years away from going to college, it’s still a wise move to keep funding the account. 529 college savings plans allow tax-free withdrawals to pay for qualified educational expenses, such as tuition and fees, room and board, and books and supplies.1 They can be used to pay for primary and secondary school tuition of up to $10,000 a year and can also be used for vocational schools and apprenticeship programs.2
Here are three reasons why it may make sense to keep contributing to your child’s (or grandchild’s) 529 plan.
- Avoid a panic sell. By selling now, you could be locking in a loss, particularly if you only opened the account within the last few years. How will you know when it’s time to reinvest? Did you know that the year after a 20% market decline, the average stock market return was 14.21%?3 How will your account recover if you miss the market’s rebound? Timing the market can be a very risky endeavor. And don’t forget that if you make nonqualified withdrawal from a 529 plan, it will be subject to taxes and you could face a 10% federal penalty.
- Consider switching to an enrollment-based portfolio: If you invested too aggressively in the past, consider an enrollment-based portfolio, offered by most 529 plans. These investments are designed to shift to a more conservative allocation over time. You simply pick one with the year range that is similar to when your child will be old enough to attend college. The portfolio management team does the rest.
- Take advantage of dollar-cost averaging: By regularly investing a set amount, you end up buying more of an investment when prices are low and less when prices are high.4 By investing periodically, you may find yourself worrying less about the market’s movements from one quarter to the next, even if they may feel dramatic at the time.
Consult with a financial professional
Market volatility can make even the most seasoned investors nervous. Your financial professional can help you build a plan that considers your goals, risk tolerance, and time horizon.
1 Tax consequences of such payments will vary depending on state law and may include penalties. Earnings on nonqualified distributions will be subjected to a 10% federal penalty tax. Please speak with your tax advisor for more information. 2 Consult your financial, tax, or other professional to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. Some states do not consider 529 withdrawals for primary and secondary school education, student loan repayments, and apprenticeship costs to be qualified withdrawals and, therefore, the investor may be subject to penalties. The $10,000 limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction. 3 “U.S. Equity Returns Following Past Downturns,” Dimensional Fund Advisors, February 2020. 4 Dollar cost averaging does not assure a profit or protect against loss. Systematic investing involves continuous investment in securities regardless of price level fluctuation. Individuals should weigh their ability to sustain investments during periods of market downturns.