Section 529 Plans: Managing Your Investments

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You know, of course, that you're not allowed to direct the investments of a Section 529 plan once your money is safely stowed in a particular plan. You do, however, have choices about where you put your money initially, and if your investments aren't doing well, you can move it once in every 12-month period without a penalty for a nonqualified withdrawal.

Selecting An Investment Strategy That Works For You

One of the biggest complaints about early Section 529 plans (all of which were prepaid tuition plans) was the straitjacket component: These plans might have been guaranteeing tuition payments, but they weren't big on flexibility. Your major choice was whether or not to participate; once you opted in to the plan, your ability to choose investments ended.

Section 529 savings plans were created as a response to that perceived inflexibility. They've traded guaranteed tuition payments for your increased ability to select a wide variety of investment options. Of course, now that you have choices, you need to understand them to make good decisions for your money and for the future education of your designated student.

The Element Of Risk

In the world of investments, nothing is a "sure thing." If you have retirement and other investment accounts that have risen and fallen with the financial markets, this comes as no surprise to you. If, however, this is your first serious venture into the wide world of investing, the inherent riskiness of it may come as a shock to you. No investment should ever make your hair stand on end; if it does, you may want to consider changing it.

Mutual funds are made up of either equities (stocks) or debt instruments (bonds) or a combination of both. When you purchase a stock, you're actually buying a piece of a particular company; when you buy a bond, you're lending money to that company. The income from stocks (which you receive either as a dividend or by receiving more for your stock when you sell than you paid for it) derives from the income from the company. A company that fails to earn more money than it spends rarely issues a dividend. Bond income represents interest payments on the loan you've made to that particular company.

It's all very simple in theory but may be more complicated in practice. The prices of stocks can rise and fall on the basis of rumor rather than solid financial data. Prices are often inflated on hopes and promises rather than on reality. Likewise, a fixed payment on a bond may seem secure, but if the company that has borrowed the money is on less-than-sound financial footing, the actual amount of the loan could be at risk.

To successfully invest in any mutual fund, whether it's in a Section 529 plan, a retirement plan, or just as an independent investment, you need to determine what level of risk you're willing to take. If you have trouble sleeping when the stock market is on a roller coaster, you may want to invest in bond funds (which are generally more stable in price than stock funds but which can offer a more moderate rate of return). But, if you can shrug your shoulders even when the stock market is exploring the depths, and just continue on with your life, investing in an aggressive stock fund could be just the ticket for you. The higher amount of risk should lead to a higher total return on your investment over time, if you have the patience to wait out market downturns.