Reader Vicki left this comment on my previous post 529 Plans: Age-Based Options Don’t Make Sense:
“I was just about to enroll in an age based plan here but pulled up your page before I signed on the dotted line. Help!! I just want this over with. I thought I had looked at all options and was satisfied with my decision until I read your article.”
I can understand her frustration. With so many 529 plans and so many options within each plan, it’s hard to decide what to do.
I stand by my original conclusion in that post: most standard age-based options in 529 plans are too aggressive. In a follow-up post Asset Allocation for a 529 Plan, I proposed an allocation that starts with 50% in stocks and 50% in bonds and/or CDs at birth. The allocation to stocks then goes down by 10 percentage points every three years. By the time the child reaches age 15, the account will be 100% in CDs.
How do we put this plan into action? Is there a way to set it and forget it, as one would in a standard age-based option?
Yes, if you use the Customized Age-Based option in the Utah Educational Savings Plan (UESP). Here’s how I would set up the customized age-based option in Utah’s plan:
|Vanguard Total Stock Market Index Fund||35%||28%||21%||14%||7%||0%||0%|
|Vanguard Total Int’l Stock Index Fund||15%||12%||9%||6%||3%||0%||0%|
|Vanguard Total Bond Market Index Fund||50%||60%||70%||80%||0%||0%||0%|
|Vanguard Short-Term Investment Grade||0%||0%||0%||0%||90%||100%||0%|
|FDIC Insured Savings||0%||0%||0%||0%||0%||0%||100%|
This simple setup uses maximum three funds at any time. The stocks portion is split 70:30 between US and international. The bonds portion starts with intermediate-term bonds and then moves toward short-term bonds and FDIC insured savings.
Utah’s UESP is the only plan I know of that allows you to create your own age-based option. I heard about it from reader Mike. In other plans you have to either take an existing age-based option as-is or do your own mix and adjust the allocation yourself as time goes by.
You don’t have to live in Utah in order to use Utah’s plan. If you live in the following states you don’t get any extra state tax benefits for contributing to the 529 plan from your own state; therefore you can use a 529 plan from any state, including the good plan from Utah.
- New Hampshire
- New Jersey
- South Dakota
If you live in other states you do get an extra tax break one way or another from using your own state’s 529 plan. You should first consider using your own state’s 529 plan. If you still like using an age-based option and that plan offers several age-based options to choose from, pick the most conservative one. If the plan only offers one age-based option, it’s likely too aggressive; you will have to do your own mix and adjust it every few years yourself.