Customizing Allocations to a 529 Plan

While many 529 college savings plans offer standardized glide paths that reduce risk as the child gets closer to college, these paths are one-size-fits all.

Parents can do better by choosing the plan’s glide path and customizing their allocations to achieve a better fit for their personal situation and goals.

Start with a 100% equity allocation until the beneficiary is 12 years old. Thereafter, move 10% of the account to a conservative investment option each year, which will result in a 100% conservative allocation by the child’s final year of a 4-year program, assuming he or she goes directly from high school to college.

But this baseline approach often needs to be customized. You should consider some factors:

Risk tolerance

Some investors are willing to take on more risk than others, even among those with equal ability to do so. It is important to realistically assess your tolerance for risk, both for your overall portfolio and for your 529 plan account.

Additional sources of college funding

If you can meet college costs from other sources, such as your personal taxable accounts, a riskier 529 strategy may be more palatable to you. In addition, you may expect the beneficiary to benefit from outside college funding, such as scholarships, financial aid, or gifts from other family members. In this case, you may be willing to take on more risk in pursuit of higher returns.

Graduate school

If the student intends to attend graduate school, you may not want to shift to a fully conservative asset allocation as soon as you otherwise would. It may be appropriate to maintain a more aggressive allocation until a few years before the beneficiary intends to enroll in graduate school.

Expected cost of college

If the beneficiary seems likely to attend a lower-cost public or in-state school, you may want to take on less risk in the account. Conversely, if the beneficiary has his or her heart set on an expensive private institution, taking on more risk for a potentially greater return might make sense.

Number of college-bound children or grandchildren in the family

A 529 plan account with excess funds after a beneficiary graduates can be rolled over to another beneficiary within the family. As a result, you may consider taking on more risk in an older child’s account. If the markets underperform, you can supplement the older child’s account using a younger child’s account, with the intention of recouping any losses using the younger child’s account with a longer time horizon.

This list is not exhaustive, but illustrates some of the most common factors that may cause investors to deviate from baseline recommendations.

Paul Jacobs, CFP, is chief investment officer of Palisades Hudson Financial Group, based in the firm’s Atlanta office. He can be reached at info@palisadeshudson.com.

Palisades Hudson (www.palisadeshudson.com) is a fee-only financial planning firm and investment adviser based in Scarsdale, NY, with $1.3 billion under management. It offers investment management, estate planning, insurance consulting, retirement planning, cross-border planning, business valuation and appraisal, family-office and business management, tax preparation, and executive financial planning. Branch offices are in Atlanta, Fort Lauderdale, FL, and Portland, OR Read the firm’s daily column on personal finance, economics and other topics at http://palisadeshudson.com/current-commentary. Twitter: @palisadeshudson.