How to Manage a 529 Plan for Your Child’s Education

By Ann Carrns Feb. 10, 2017

Saving money in a 529 plan offers families a way to put cash away for college and save on taxes as well. But if your child is entering high school soon, it’s time to double-check the allocation of your investments.

Funds in state-sponsored 529 accounts, typically invested in mutual funds, grow tax-free. When you take the money out, funds aren’t taxed as long as the money is spent on eligible education costs, including tuition, room and board and books. Total investment in 529 plans reached $253 billion in 2015, according to the College Savings Plans Network.

Investments in 529 plans generally have a shorter window of time to grow than money in a retirement account does. And once a child enters high school, college is just four years away. A steep drop in the market could leave you short of funds when your child heads to campus — so scaling back high-risk investments is often a good idea, unless you have other funds available to pay for college.

“If all your college money is in the 529,” said Kim Lankford, an editor at Kiplinger who writes about the plans, “you should be more conservative.”

To help avoid that situation, most 529 plans offer age- and risk-based investment options, designed to automatically shift funds to more conservative investments as the child grows. Plans typically begin with a majority of funds in stocks, then shrink the allocation over time and add more bonds.

Still, some advisers suggest that families — even those using age-based portfolios — double-check the specifics of their 529 holdings as college nears. The mix of investments and the shift in allocation, sometimes called a glide path, vary greatly by plan.