Should I close my son's 529 college plan?

[DreamDelta]

I've been saving money through Bright Start (Illinois' 529 college savings plan) and it's taken quite a hit. I'm thinking about wtihdrawing the money that is left (substantially LESS than what it should be) and reinvesting in another way.

Any tips or suggestions would be greatly appreciated!

TIA!

 

[Eeyore's Wife]

I am sorry that your college savings plan has taken such a huge hit.

I have not participated in a 529 and so have not done any research on the subject.

If college is right around the corner, have you thought about moving to New Mexico. They have a lottery scholarship available to all students who graduate from a licensed school in the entire state.

Essentially, you pay for the first semester of tuition, but if your kiddo gets at least a C average then the lottery scholarship pays for 8 semesters, or four more full years, of tuition.

Given that the two largest state schools are also where most of the population resides, your son could live at home while he went to school.

University of New Mexico and New Mexico State University are wonderful schools. In addition, there are several smaller schools such as New Mexico Institute of Mining and Technology, Eastern, Western, and community colleges.

Since the Lottery scholarships provide so much student aid, the colleges have a lot of available funds for things like bridge scholarships (one semester scholarships that bridge between high school and when the lottery scholarship kicks in.)

We live in New Mexico and have offered to let our nieces and nephews do a "semester abroad" with us the last semester of Senior year so that they could go to college essentially for free.

There are lots of wonderful options out there often go overlooked.

In addition, New Mexico has not been hit as hard by the recession as other places. Our cost of living is relatively low and the weather is wonderful. We have over 300 days of sunshine per year and if you want snow and cold the mountains provide it just a short drive away.

 

[monarchsfan16]

How much longer until you have college expenses? If it's still a few years off, I would leave it. The economy IS recovering, and the stock market is following suit. I WOULD talk to a financial advisor, however, as there are ways to make 529s more conservative (in terms of risk) as you get closer to needing them.

 

[tinlizzy]

I've never invested in a 529 and normally I'd say leave it and let it hopefully come back but first you should figure out what exactly it was invested in and if there IS a chance to recoup the loss (not invested in bankrupt companies, etc.). If it has just taken a beating then leave it.

If it makes you nervous, why not leave what you have in there, quit contributing and put your future college contributions somewhere else?

 

[Maniacmous]

I would definetly do some research on the tax repercussions and how exactly you distribute the funds, as it could cause you some headaches when you file next year. The only thing I can find about handling tax repercussions is IRS Publication 970 (Tax Benefits for Education), so that would likely be a good start. That being said, there may be issues with state tax benefits that might have to be repaid as a result, so a healthy Googling or talking to a tax or financial advisor really wouldn't be out of the question here.

 

[kydisneyfans]

I would add more money to it and when things do get better in 2012 you will have more money proportionately.

 

[minnie1928]

I think one of the key questions is how soon do you plan on needing this money for your son? Assuming it's not soon, if you withdraw the funds now you will be taking an unrealized loss and turning it into a realized loss. I would leave the funds alone, perhaps put future investments in something you are more comfortable with.

 

[ICF]

if you dont need the money for a good # of years, I'd be dropping all the extra cash I could in there to buy shares (I am guessing its a mutual fund) cheap. My advice would might change if the kids is 8 or 18.

The money in there is lost and the fund will most likely will go up.....if you take it out now all you have is loses to show for it. The market has rebounded a good amount in the last year or so and while it has its up and downs, it has generally tended to grow if given enough time.

 

[Kitzka]

I tend to think of the lost as not real until you take the money out. Right now that lose is just on paper. Once you take the $$ out it's real. If yuor child still has a few years to go until college i would leave it alone but since you don't feel comfortable maybe stop contributing to that and invest the new money somewhere else.

Lara

 

[deerhart]

First, look at reevaluating the distribution in the account first. There may be better funds in the 529 plan then what your in.

2nd, there may be significant state tax penalties for withdrawing the money. Most of the state 529 plans give you a state tax deduction, not a federal deduction.

3rd, if your in for the long haul, then it is never wise to withdraw simply because the total has decreased. All funds and the market have ups and downs, but over the course of years, they almost always rise.

Our kids 529 plans and my dh's 401(k) took a 20-25% drop between 2008 and the start of 2009 and have already fully recovered. In fact, my rate of return last year between the plans averaged 30% + and we are in the positive on all accounts.

You should review your mutual fund choices every 6-12 months to see how each fund is doing and if you need to reallocate. Also remember that the closer you get to the date of your goal, the more you need to move from risky funds to conservative funds.

With my kids being 10+ years from college, we are allocated 25% high risk (international/small cap type funds) 10% conservative (bonds) and the rest in large cap, growth/income type funds

 

[ilovejack02]

First, look at reevaluating the distribution in the account first. There may be better funds in the 529 plan then what your in.

2nd, there may be significant state tax penalties for withdrawing the money. Most of the state 529 plans give you a state tax deduction, not a federal deduction.

3rd, if your in for the long haul, then it is never wise to withdraw simply because the total has decreased. All funds and the market have ups and downs, but over the course of years, they almost always rise.

Our kids 529 plans and my dh's 401(k) took a 20-25% drop between 2008 and the start of 2009 and have already fully recovered. In fact, my rate of return last year between the plans averaged 30% + and we are in the positive on all accounts.

You should review your mutual fund choices every 6-12 months to see how each fund is doing and if you need to reallocate. Also remember that the closer you get to the date of your goal, the more you need to move from risky funds to conservative funds.

With my kids being 10+ years from college, we are allocated 25% high risk (international/small cap type funds) 10% conservative (bonds) and the rest in large cap, growth/income type funds

I would review how allocated, but not remove it.

We took a big hit also in my son's 529 in 2008, but have already regained what lost and a bit more.

 

[mjkacmom]

if you dont need the money for a good # of years, I'd be dropping all the extra cash I could in there to buy shares (I am guessing its a mutual fund) cheap. My advice would might change if the kids is 8 or 18.

The money in there is lost and the fund will most likely will go up.....if you take it out now all you have is loses to show for it. The market has rebounded a good amount in the last year or so and while it has its up and downs, it has generally tended to grow if given enough time.

I agree - DH is a CFP, and says you want to put more money in when it's down, not up. You haven't lost anything yet, but will if you take it out.

 

[deerhart]

I agree - DH is a CFP, and says you want to put more money in when it's down, not up. You haven't lost anything yet, but will if you take it out.

The reason you put more money in when it is down is because you buy more shares at the cheaper price, so every time the price rises by $0.01, you gain back the money on what you lost PLUS gain that amount on everything you have put in.

So if you bought 100 shares at $40 each (total of $4,000) and it loses 20% (total $3200) at a price of $32.00. Then you buy 50 more shares at $32.00 ($1600, now you have 5600 invested). When the price goes to $35 a share, you now have $5,250, when it goes back to $40 a share you now have $6,000, or when the market returned, you made $400.00.

This works REALLY well with accounts you purchase shares over time, like 401(k)s. This is because your buying randomly throughout the year and thus on average your going to buy sometimes on down days, sometimes on up days and when you buy down (the normal fluctuation of the market) and the price fluctuates back up again, you have instant positive results.

Usally, what you will see is the price go up, drop down, then go back up higher, then drop down less, then go back up even higher and slowly over time continue to climb.

 

[I_believe]

I was in the Illinois program also and had watched the money I was putting away slowly dwindle. I don't care for the managing group for the Bright Start program and it is not setup for you to be able to diversify. I noticed the ages of your children and they are relatively close to mine. I rolled my kids money out of the Illinois plan and put it in the New Mexico plan. Yes, I lost the state tax credit but my kids accounts have been able to grow even during this down turn. With the New Mexico Plan I can move the money around and diversify it a little better. I think thier plan managers actually pay attention.

It is up to you, but for me the tax break was not worth it. I suggest you research what plan you like the best and roll your money from one 529 to another. If you just close it you will get hit with a tax bill that will be pretty large.

Either way good luck and remember you have time for the money to come back so don't worry. Just find a good plan somewhere other than this great state of ours.

 

[teacup princess]

I feel your pain. I too am invested in the Bright Start program. It wouldn't bother me so much that the plan has dipped right along with everything else due to the economy, but I think the state has just really mismanaged this plan and I have my doubts as to our state's ability to fiscally run anything right now. I've stopped investing (not so much due to the plan, more I'm trying to catch up with other debts right now). I'm going to start reinvesting in a college plan again in a couple of months but I'm considering invested in other mutual funds in the future (while leaving my money in the Bright Start program for now).

 

[MinnieGi]

My kids 529 plan is doing much better lately. We're in the DE plan run by Fidelity. It had taken losses when the whole economy started tanking but as of the last half of '09 it is climbing back up again.

I would not just withdraw the money. I would start looking at other 529 plans and who manages them and consider moving the money to another state's plan. Good luck!

 

[bonoriffic]

If you are in IL College Illinois is an amazing deal, assuming you get in early. In the 2 years since I paid tuition, they separated out the University of Illinois (Urbana-Champaign) as a stand alone tier that costs several thousands per semester plan higher which makes it slightly less attractive. (And also makes you "guess" if your kid will be smart enough to get in) As long as your kid goes to an IL state school, tuition is paid for in full. If they go private or out of state, they take the average of several local schools and apply that per semester hour. So if you went to a "cheap" out of state school it is still paid in full, and if you go to Stanford you will probably be short about half the tuition.

In theory a 529 plan could earn more, but it can also lose money. College Illinois can't lose value even if your kid doesn't go to school, and the potential upside is huge. Of course if the state goes bankrupt they could pull the program, but as that would guarantee every parent in the program would vote against them the next year it seems unlikely they would do that.

 

[DreamDelta]

Thanks for the advice everyone! I think I'm going to stop contributing to Bright Start, leave the money and look elsewhere. I've started looking into College Illinois! and think it may be the way that I want to go!

 

[ceecee]

If you aren't going to need it in the near future...let it ride.