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.
