A More Flexible College 529 Plan

One of the rules that I always disliked about 529 plans was this one:

You can only change the mix of investments within a 529 plan once a year. It’s always struck me as an unfair rule since other investments accounts such as IRAs and 401(k)s don’t impose this restriction.

In light of the stock market turmoil, the Internal Revenue Service has decided to modify the rule for 2009. Parents will now be able to change a 529 plan’s asset allocation twice next year.

Of course, just because you now enjoy the freedom to alter the investment mix definitely doesn’t mean you should.

Actually, families with younger children should welcome the drop in stock prices because they can now buy 529 mutual fund shares cheaply.

Parents with college students or high school seniors who own decimated 529 plans — or other college investments — might want to avoid raiding these accounts for at least a year or two. An alternative is borrowing through the federal loan programs — Stafford for students and PLUS for parents – to give a family’s college investments time to recover.

Here is the IRS announcement of the 529 change. And here’s another take on the change from a nationally recognized financial advisor.

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