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Ask Jean: Figuring Out 529s

“A dear and generous family friend recently sent my three daughters $10,000 each for their college education. We live in Nevada, and want this money to cover room and board, books, and other living expenses. My daughters are in 6th, 8th, and 9th grade, so we have a little time to invest this money and make it go further once they get to college. What exactly would you do with this money?” – Kerry, Nevada

Dear Kerry,

How great would it be if every family had friends like yours! You’re right that you don’t have all that much time to invest the money — particularly for your ninth grader. So, as you decide what to do with it, I’d keep two things in mind. First, putting it somewhere where any growth is sheltered from taxes. And second, although you’re focused on growth, not losing the money is equally, if not more, important.

For both of those goals, I’d take a look at a 529 college savings plans. These work a lot like Roth IRAs in that you contribute after-tax money to the account, and your dollars are then invested and grow tax-free. When you pull the money out, as long as you use the proceeds for education, no taxes will be owed.

When it comes to picking a 529, you have a few options. In Nevada, the Vanguard 529 plan is the direct-sold (as opposed to adviser-sold, which tend to have higher fees) version of the Nevada 529. It has a wide array of age-based, static options. “529 college savings plans can be used for room and board, books and supplies in addition to tuition and fees,” says Mark Kantrowitz, publisher of FastWeb.com and FinAid.org, “so in this case, sticking with the Nevada 529 college savings plan might be best.” If, however, you find that this plan doesn’t really suit you, visit savingforcollege.com to consider all of the options you have available. You should consider 529 plans based on their performance, investment options, expenses, and perks.

Once you’ve put the money into the plan you choose, you need to decide what to do with it. A 529, like an IRA, is an account. Once the money is in it, you decide how you want to manage it. Personally, I suggest using an age-based portfolio, which works like a target-date retirement fund. For your 9th grader, you’ll want to choose a more conservative option – perhaps choosing one that includes a CD, so a portion of your money is FDIC insured — whereas you can choose a more moderate, balanced portfolio for your younger kids. However, your children are past the age at which you’d want to have a stock-heavy, aggressive portfolio, so be sure to keep that in mind.

Jean