Coping With Bad College-Savings Results

You say you’re unhappy with your 529 college savings plan? You’re not alone.

Many investors are disgusted with the big losses their plans suffered, and industry data shows substantially less money flowing into these plans this year compared to two or three years ago.

But before you throw in the towel and move out of 529s altogether, take a reality check. Your 529 plan may not be as bad as you think, and the alternative may be no better.

The chief benefit is still there. That’s the tax-free treatment of investment gains withdrawn for higher-education expenses. Granted, that’s not too valuable if your account has losses rather than gains, especially if your child will start college in the next few years.

But if you’ve had the account for a number of years, or have five years or more before college expenses begin, investment gains could still be big enough to make tax-free treatment valuable.

Of course, if you have suffered losses, pulling your money out could be painless. You must pay tax and a 10% penalty on withdrawals that are not used for college or graduate school, but tax and penalty apply only to investment gains, not your original deposit.

Among the most disgusted groups of 529 investors are those who selected age-based funds that emphasize stocks when the child is young and gradually shift to bonds as the college years get close.

The brokerages and mutual fund firms that provide 529s can be faulted for not explaining more clearly that age-based funds do contain plenty of risk. Even if the target date is very close, many of these funds keep some assets in stocks, hoping to provide inflation-beating growth in case the funds aren’t tapped until the tail end of the child’s college or graduate school years. Some age-based funds went overboard, keeping more than half the assets in stocks even after the college starting date had arrived.