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Parents Are Learning a Harsh Lesson With 529 Savings Plans

Because of a huge downturn in the stock market, several American families are worried about their 529 savings plans. But don't worry. There's still hope.

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Americans who are funding their child’s college with a 529 savings plan have taken a hit lately due to the recent downturn in the stock market. But financial experts say there are ways to avoid further losses with proper planning and know-how.

Thanks to benefits like tax-free withdrawals and state income tax deductions, 529 savings plans have become increasingly popular. In fact, the amount of money invested in 529 plans in the United States reached an all-time high in 2018 at a staggering $328.9 billion spread across 13.6 million accounts.

So how can parents protect their funds during a down market? 529 College Savings Plan Consultant Vince Sullivan of SavingForCollege.com says that the best option is to set up an age-based account, where the money is invested more conservatively the closer the child gets to college age.

“With an age-based approach, risk is automatically reduced at specific age / years-until-enrollment intervals, from equities to fixed income securities to money market type portfolios,” Sullivan says. “The sooner [parents] need to access their money to fulfill a prior obligation (like college), the less risk that should be taken with that sum of money.”

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However, for parents who don’t have an age-based account, there’s no need to panic—yet. There are other ways to weather a down market without taking major losses.

“If you think that the market is going to go down and continue going down forever until it hits zero, then maybe you should be worried,” VP of Research at SavingForCollege.Com, Mark Kantrowitz, explains. “But if you think this is a momentary blip and then eventually the market is going to recover then you should continue investing.”

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He says that rather than selling stocks at a discount, parents can delay distributions and instead use cash or loans to pay pending tuition bills. Then, they can reimburse themselves from their 529 account before the end of 2019 to avoid being charged a penalty.

Another option for anyone who doesn’t need to make an immediate payment is to wait for the market to recover before paying a nonqualified distribution. While parents will have to pay both tax and a tax penalty on the distribution, Kantrowitz notes that “the family is no worse off than they’d be in a taxable account.”

Regardless of how parents choose to react to dips in the Dow, experts urge them to remember that market downtowns are not only normal, they’re inevitable. Kantrowitz says that research shows that the market will experience at least three corrections and one bear market during a given 17-year period.