Managing your 529 plan effectively is crucial to ensuring your investments grow without incurring unnecessary taxes. One key feature of 529 plans is the limitation of two strategy or investment changes per year. This constraint can be challenging if market conditions prompt a need to adjust your account investments. For that reason, it is very important to consider when the beneficiary of the account will need access to these funds as you invest these accounts.
Within these two annual changes, you have several options:
- Adjusting Investments: Change from one investment to another to better align with your current investment objectives or respond to market volatility.
- Adding or Changing Rebalancing Plans/Automatic Exchanges: Some plans allow you to implement or modify rebalancing plans or automatic exchanges. This feature can automatically adjust your investments to a more conservative stance as the time to access the funds approaches. While adding or changing these count as a strategy change, the automatic processes themselves do not.
If you need to make changes beyond the two annual adjustments, consider these alternatives:
- Utilize Rebalancing Plans or Automatic Exchanges: While adding or modifying these options can count as a strategy change, once in place, they continuously ensure that your portfolio stays aligned with your risk tolerance and time horizon without using your limited number of strategy changes.
- Changing the Allocation of New Contributions: You can redirect new contributions to different investments at any time without using one of your strategy changes. This flexibility lets you gradually adjust the risk profile of your portfolio over time.
- Use Age-Based Portfolios: Some plans, depending on where they are held, offer age-based portfolios for you to invest in. These investment options work like rebalancing plans or automatic exchanges, where they move to a more conservative allocation as you approach the year you need to use those funds.
- Transferring Account Ownership: If you need more strategy changes and have a spouse or other family member you trust, transferring ownership may be beneficial. This option resets the annual strategy change count, allowing for more flexibility if additional adjustments are needed before the next year.
Final Thoughts
The key to making the most of your 529 investment strategy is to plan based on when you will need to use the funds. By utilizing the allowed changes effectively and exploring alternative options when necessary, you can manage market volatility and optimize your educational savings. Stay proactive, review your plan regularly, and adjust your strategy as needed to ensure you’re always on track to meet your financial goals.
