Sunday, February 15, 2009

'Safe' College Plans: 3 Things to Know

Posted by Jen Lynch

By Aleksandra Todorova

IN AN APPEAL TO PARENTS reeling from steep losses incurred in their 529 savings plans, several states are offering safer, government-insured investment options like savings accounts and CDs. But going the "safe" route may not be worth it for many college savers.

1. You may be better off in equities
With low risk come low returns. Because the money contributed to a savings account or CD is invested in low-yielding products, such as Treasury bonds, the returns on these products can be as low as 1%. So don't expect great returns.

2. Roll over now and you’ll lock in massive losses
With the market continuing to spiral downward, you may be tempted to roll over your 529 savings plan assets from equities into one of these new government-insured investments. But by pulling your money out now, you’re locking in losses that can run as high as 40%, says Brown. And when the stock market recovers, you’ll miss out on what will likely be much stronger returns than those offered by a CD yielding 3%.

3. Lump-sum contributions may be necessary
With 529 savings plans, investors are only allowed one investment change per calendar year (this year, the IRS made an exception, allowing two changes). That limit also applies to rolling over funds from a matured CD to a new one, says Feirstein.

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