Selecting investments to match your time horizon is arguably the #1 rule in investing. If you have a long time horizon, you can invest more in volatile investments with a better long-term expected return. If you only have a short time horizon, you can only afford to invest in stable, lower return instruments.
529 plans for college expenses present such a classic case. As each year passes, your investment time horizon shrinks. When the child gets to the senior year in high school, your investment time horizon becomes really short. You know you will need 1/4 of the money in one year, two years, three years, and four years. Ideally money that will be needed in such short time frame should be invested in principal-guaranteed options.
However, Vanguard gives this asset allocation as the moderate aged-based option for children 17 and older in the Nevada 529 plan it manages:
- 34.5% U.S. intermediate-term bonds
- 22.5% international intermediate-term bonds
- 18% short-term inflation protected bonds
- 25% short-term reserves
With over half in intermediate-term bonds, this doesn’t look like a good match for money that will be needed very soon. When you need 1/4 of your money in one year, another 1/4 in two years, another 1/4 in three years, and a final 1/4 in four years, on average your money is only invested for 2-1/2 years. Your time horizon only goes shorter from there.
Many 529 plans offer a money market fund option. You can choose the money market fund for stable principal but sitting in money market for up to 4 years feels a bit of a waste. Are there something in between, something that can give you slightly better returns than money market but have less risk than bond funds?
Only some 529 plans offer CDs and stable value funds. They strike that happy medium between risks and returns for students who are close to going to college or who are already in college.
Ohio’s ColleageAdvantage Direct 529 Plan offers FDIC-insured savings accounts and CDs. As of December 2018, the yields are 2.5% – 2.75% for 1-year to 4-year CDs. The yields are slightly better than the prevailing money market fund yields.
Stable Value Funds
A Stable Value Fund is like a bond portfolio with an insurance contract. It’s guaranteed by the insurance company, not by the government. A stable value fund can offer both a stable principal and a higher yield than money market. However, unlike CDs, their yield isn’t guaranteed for a fixed term. It’s subject to periodic adjustments.
Washington DC’s DC College Savings Plan offers a Principal Protected Portfolio backed by Ameritas Life Insurance. The crediting rate is 2.35% in the fourth quarter of 2018.
Colorado’s CollegeInvest Stable Value Plus plan is backed by Brighthouse Financial. The rate for 2019 is 2.49% net after fees.
Utah’s My529 Plan offers PIMCO Interest Income Fund as an choice under its Customized Static option. The yield shown on the fact sheet was 3.33% as of August 2018. The PIMCO fund has an advantage of investing in contracts from multiple insurance companies.
If I were to invest in a stable value option, I’d go with the PIMCO Interest Income Fund in the Utah My529 plan.
Moving 529 Plans
Although 529 plans are offered by each state, you are not necessarily limited to using only your own state’s plan. If you like the CDs and stable value fund options offered by the plans mentioned above, it’s possible to move your 529 plan account to those plans when your child gets close to going to college.
State tax benefits vary. Based on my own research, if you live in the states colored green and orange below, moving a 529 plan account does not have a negative impact (in Oklahoma and Washington DC, only after satisfying a minimum stay requirement).
In the other states you’d be better off staying with the state’s own 529 plan. See Using a 529 Plan From Another State Or Your Home State?
Before you choose a 529 plan from another state or move your 529 plan account, find out (a) whether your state offers tax benefits; (b) whether it limits the tax benefits to a plan sponsored by itself; and (c) whether it claws back the benefits you previously received if you move the money out to a plan from another state. The map here is based on my own research to the best I can. It may not be 100% accurate. State laws can and do change. Please always double-check with your state’s tax authorities.
If you decide to move, the actual process for moving the account is quite simple, although you are limited to only one move in rolling 12 months. I moved a 529 plan account before. See Rollover a 529 Account From One Plan To Another.
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