Ask Money

Fund a 529 plan now?

Chris Farrell Oct 2, 2008

Question: My son is 4.5 and I am thinking of starting a 529 plan for his college tuition (I know I am late to this). My question to you (I know it sounds dumb but I want to get it right) – is this a good time to buy a 529 plan or should I wait for sometime and wait for the markets to stabilize? Krishnan, Tallahassee FL

Answer: No, you’re not late getting started on a college savings plan. You have plenty of time on your side since your son is less than 5 years old. And no, it isn’t a dumb question to ask. A lot of people share your concern considering the Wall Street credit crunch and the global financial crisis.

That said, the big advantage of funding a 529 plan now–despite all the turmoil–is that the money will compound tax free until you need it to pay for your son’s college sheepskin. What’s more, the money can be withdrawn tax free so long as its used for qualified expenses, such as tuition. I’d get the money to work.

Now, the option I like the most is the age-based investing option. The younger the student, the higher the percentage is invested in an equity index fund and as the student ages the percentage invested in equities automatically decreases and the percentage invested in fixed income securities automatically increases. Of course, the equity portion of the portfolio is getting hammered right now. If that’s too risky an option for you, most plans offer a money market fund as well as a conservative bond fund choice.

I’d open the plan and harness the power of tax free compounding over time.

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