3 Ways to Protect Your Kids’ College Savings if the Market Falls

The record run for stocks – along with ongoing trade and election jitters – has some parents on edge about college nest eggs.

After all, you might be able to delay retirement if the market tumbles and your 401(k) takes a hit. Not so much if your 529 plan implodes.

For savers, we’re not talking about chump change. Families had nearly $329 billion invested in 529 plans, as of June 30, according to the College Savings Plan Network, a coalition of state-run 529 plans. That’s about double the amount in 2011.

A record 13.6 million accounts exist – with the average size of each account reaching  $24,153 (also a record) as of June 30.

Many college savings plans are fatter, thanks to the strong bull market.

So what do you do if you’re worried about how long the good times will last, now that you’re sitting on enough money to cover a year or two or, maybe even more, of college?

1. Whatever you do, don’t panic and cash out

Simply pulling money out of a 529 plan to park in a savings account somewhere until your child heads to college is a very bad idea.

If you’re just cashing out of a 529 plan now because you’re nervous about stock prices, you’d take a tax hit. In this case, you’d be taxed on the earnings withdrawn at the account owner’s rate. Plus, you’d pay a 10 percent penalty on the earnings – not the entire amount you’ve withdrawn.

By contrast, you avoid those taxes and penalties if the money is withdrawn to cover “qualified 529 expenses” when the student is in college. Beginning in 2018, qualified withdrawals also include up to $10,000 a year per beneficiary for tuition expenses for elementary, middle, and high schools, said Melissa Ridolfi, vice president of Retirement and College Products at Fidelity.

A key point to understand: You must request a cash withdrawal from a 529 plan during the same calendar year as you make the payment. If the timing is off, you risk owing tax because it will be considered a nonqualified withdrawal.

Eligible expenses at colleges, universities and other post-secondary institutions include tuition, books and supplies, room and board, a computer and special equipment required by the school or class, according to FINRA’s tips for tapping your 529 plan.

Expenses that aren’t covered include travel expenses to and from campus, campus logo sweatshirts and computer games.

“If you are nervous, don’t pull out of the plan altogether, but change the investment to a fixed or safer option,” said Leon LaBrecque, managing partner and CEO, LJPR Financial Advisors in Troy, Michigan. “You can change the investment without incurring the penalty if you stay in the 529,” he said.

Take time to review what investment options exist in the 529 plan. You may be able to shift money to sidelines within the 529 plan or to more conservative options.

Remember, though, 529 plans should be invested for the long-term. But if your child is a junior in high school, time is running out and you don’t want all the money sitting in stocks.

“When the stock markets get more volatile, people panic. But, the worst thing you can do is pull the money out, since that will lock in losses and may cause you to miss the recovery,” said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.

“A better approach is to increase the amount you save each month, to compensate for the losses. Fear is the wrong reason to sell stocks.”

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Source: USA Today