Fixed Income Investments Inside of 529 Plans
By: Karen Rinehart, CFP®
The Henssler Financial Group Position Paper

The Hensler Financial Group Wealth Management

Our firm believes in the "Ten Year Rule:" Any money needed within the next 10 years should be invested in fixed income investments and any money not needed within the next 10 years should be invested in equity investments. If you follow the recommended rule to plan for college, you should start moving money from growth investments to fixed investments when your child is around age 8 to prepare for your child's first year of college at age 18. Each year after age 8, you should move money to cover for an additional year of college. This means you would need to invest a portion of your college savings into fixed income investments in a 529 Plan.

Over the past several years interest rates have been at all time lows. The rates for money market funds for 529 Plans were affected as well. In addition to the fixed rates of a 529 Plan being low, the plans also charged a management fee for assets invested in fixed income investments. The interest these fixed investments were paying was not substantial enough to warrant paying a fee to the 529 Plan. Therefore, if you followed our "Ten Year Rule" and needed to invest a portion of your money in fixed income investments, we would recommend you either leave it in your name or leave the assets in the custodial account so you would not have to pay the management fee to the state's plan.

Many 529 Plans are no longer charging a management fee for the assets invested in fixed income portfolios or guaranteed portfolios. This is good news if you have an older child to send to college and wanted to use a 529 Plan to provide the assets to pay for college. You can earn the interest paid by these funds tax free (assuming the child uses the money for college).

The plans administered by TIAA-CREF (Georgia, Minnesota, and Missouri) have a guaranteed option in their plan. Contributions are initially invested in the TIAA-CREF Money market fund. The assets are then invested in the funding agreement issued by TIAA-CREF Life that provides for a guarantee of all principal and a minimum rate of return of three percent annually and offers the opportunity for additional returns beyond the minimum periodic rate declared. This rate can change annually.

Of the plans we currently recommend, Georgia, Minnesota, Missouri, and Utah do not charge a management fee for the assets invested in the guaranteed option. Since these states do not charge a management fee for assets invested in the guaranteed option and as interest rates rise, using a 529 Plan for an older child could be beneficial. I recommend discussing this with your financial planner as each individual's situation will be different and could warrant a different recommendation. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
 
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