Get a head start on college: Allocation

Revisit how you’ve invested your child’s college savings.

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As you prepare for college, take a good look at the investment portfolio within your college savings, and make sure it still makes sense. After all, your savings goals are beginning to shift from growing your savings to getting ready to use them to pay your college bill. In fact, many people don't understand the need to reduce the proportion of their equity investments—and thus their risk—in their college savings portfolio as college approaches.

"As college gets closer, it’s important to review your investments and consider shifting to a less aggressive mix than perhaps seemed reasonable 10 years before college," says Keith Bernhardt, vice president of college planning at Fidelity Investments. "Big swings in savings due to market volatility can be disruptive to your plans, while going too conservative may not give you the opportunity to keep pace with tuition inflation. An age-based investment strategy, such as the age-based investment portfolios in the Fidelity-managed 529 college savings plans, takes this into account by investing in an appropriate mix of assets based on when the student is expecting to enter college. Investments in these portfolios shift from equity to fixed income as the college-entry date gets closer."

Professional portfolio managers handle the asset allocation based on the target date of when the student is expected to begin college. As the portfolio approaches the target date, the allocation shifts over time to reach 20% equities, 50% bonds, and 30% short-term investments within a few years of when the child enters college. The chart below shows how the Fidelity-managed 529 college savings plans manage risk over time.

The federal income-tax-free advantage granted to 529 college savings plans for qualified distributions can be significant. Distributions from 529 college savings plans can be used to pay for qualified higher education expenses (tuition, fees, books, supplies, and equipment required for enrollment at accredited institutions). In addition, the distribution may also be used toward room and board, so long as the beneficiary of the plan is attending the school at least half-time.

A 529 college savings plan may offer added estate planning benefits as well. “Any contributions made to a 529 college savings plan are considered ‘completed gifts’ for estate tax purposes, so they come out of your taxable estate, even though the account remains under your control,” Bernhardt says.

But, say you are risk averse and don't want to invest in equities. "You might consider purchasing U.S. savings bonds, which would earn more than cash over five years," Stephen Devaney, vice president of financial solutions at Fidelity Investments, says. Not only are savings bonds safe (they are backed by the U.S. government), but you and a spouse can each purchase up to $30,000 of certain types of bonds and defer federal taxes on any interest earned until you redeem the bonds. Depending on your income, you may be able to exclude the interest from your federal taxes if you use the bonds for qualified educational purposes. Talk to your tax adviser for the best approach for your unique situation.

Also, it’s important to keep in mind that your education savings plan is just that—a savings plan. No matter how much you tweak the investments within your 529 plan, it all comes down to how much savings go into your plan. You may want to revisit your goals as your situation evolves. Look at the schools you and your child are considering, and make sure you’re saving enough to pay for them.

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The UNIQUE College Investing Plan, U.Fund College Investing Plan, Delaware College Investment Plan, and Fidelity Arizona College Savings Plan are offered by the state of New Hampshire, MEFA, the state of Delaware, and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments. If you or the designated beneficiary is not a New Hampshire, Massachusetts, Delaware, or Arizona resident, you may want to consider, before investing, whether your state or the designated beneficiary's home state offers its residents a plan with alternate state tax advantages or other benefits.
Units of the Portfolios are municipal securities and may be subject to market volatility and fluctuation.
Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, call or write to Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.
The views and opinions expressed herein are not necessarily the opinions or recommendations of Fidelity Investments. This material is provided for informational purposes only and should not be used or construed as a recommendation for any security.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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