9 August 2022

529 Plans Loosen Up a Tad

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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 restrictions.

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 Timing 

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.

Psychological Reasons 

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.

Click here to access the full article on The Wall Street Journal.

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