President Barack Obama late last year signed into law a bill
allowing investors in the popular, state-sponsored 529 college-savings plans to
make changes to their investment holdings twice a year, rather than the
once-yearly change permitted under previous Internal Revenue Service
Before the change, investors seeking to adjust their
investments within a 529 plan more than once a year had to get around the
restriction by simultaneously changing the beneficiary, which could be done as
often in a given year as desired.
Short of that, however, investors were handcuffed no matter
what the stock market was doing, and that left some 529-plan contributors
frustrated. Groups providing information to investors—such as the College
Savings Plans Network, an affiliate of the National Association of State
Treasurers—had campaigned for four permissible investment changes a year. Even
now, some are clamoring for additional opportunities to adjust their holdings
beyond the new twice-a-year window.
Not Designed for
But just because investors are now able to make
more-frequent adjustments to their investment holdings doesn’t necessarily mean
they should, says Joseph Hurley, founder of financial-planning site Savingforcollege.com.
That’s because regular tweaking simply isn’t necessary for
most investors. Many people select an automatic age-based option that starts
out heavy on stocks and shifts toward fixed income as the beneficiary
approaches college age. Others replicate this age-based approach on their own,
adjusting the allocation annually. And those who adhere to a static allocation
strategy need not rebalance more than once a year.
The state 529 plans, which are named for the section of the
federal tax code that created them in 1996, are a way for parents and others to
finance college or graduate school with tax-free funds. The 529s typically
invest in mutual funds, and withdrawals that are used to pay for qualified
higher-education expenses generally aren’t subject to taxation. The funds have
$244.5 billion in assets.
The underlying reason for investors wanting more windows to
make changes might be more psychological than practical. Investors don’t want
to feel as locked in as they were.
The new rule for 529s was included in the Achieving a Better
Life Experience (ABLE) Act, the primary purpose of which was to create tax-free
accounts to save for disability-related expenses. The twice-yearly provision in
that law was made to apply to existing college-plan 529s, too.
Meanwhile, other restrictions on 529 movements remain intact
under the new rules. For example, only one tax-free rollover from one 529 plan
to another is allowed in a 12-month cycle. But again, changing the beneficiary
is a way to get around the restriction.
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