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Question:


Is a 529 college savings plan a safe investment?
-Ralph


Answer:


A 529 plan is similar to a 401(k), at least on the outside. Both are tax-advantaged savings vehicles, one for education and the other for retirement. The answer to your question is that it all depends on the inside of the plan. A 529 generally can hold the same assets as a 401(k) – stock and bond mutual funds, individual securities or money-market funds. What makes them safe is the underlying value of these assets, relative to what you paid for them, and the extent to which their market values fluctuate.
 
To make your 529 plan or any other investment portfolio safer, make sure it’s well diversified among assets whose values tend to rise over time but are minimally correlated with one another, such as stocks and Treasury bonds. That way, when the going gets tough and one is losing value, the others are holding their own or going up. You should also gradually move to less risky assets, such as high-quality bonds, money-market funds or bank deposits, as the time when you will need to withdraw the money for education expenses draws closer. Otherwise you run the risk of a sharp downturn in whatever assets you hold occurring when it’s too late to recoup the losses.
-Conrad de Aenlle



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