Balancing Risk and Reward by Diversifying Education Savings | Pay for college


Mike Chapman, an attorney from the Cincinnati area, describes himself as a “risk taker,” so he and his wife decided to adopt an aggressive college savings investment strategy for their two sons, ages 3 and up. 8 years.

“Even if we invest aggressively, the total amount available will not be close to what we will need for college,” he says.

They chose the Vanguard 500 Index Fund, he says, because its low-cost equity portfolio is designed to follow the Standard & Poor’s 500 Index. By investing inward with the Ohio 529 plan, it also benefits. tax benefits – a state tax deduction and tax-free withdrawals for qualified higher education expenditure.

However, as he watched the stock market fall since the start of the year, Chapman says he might consider switching to more conservative assets as his sons approach college age.

Tuition fees are a tricky target for many families. The spending is intimidating and, in recent years, growing at a rate above inflation, according to the College Board, a nonprofit dedicated to college preparation.

This means that saving in a conservative vehicle, like a regular savings account, is unlikely to keep pace with soaring costs. On the other hand, aggressively investing in the stock market puts the investment at risk.

The key, experts say, may be to consider diversifying your portfolio.

“A diversified portfolio has the potential to benefit you over the long term by helping you both grow and preserve the capital you have put to work for you,” says Jim Eutsler, wealth advisor at Hengehold Capital Management LLC, based in Ohio.

Here are a few ways to do it, both in a designated college savings account, such as a 529 plan, and by combining savings vehicles.

• Diversify your education savings fund: Some 529 plans offer age-based portfolios, similar to goal-based retirement funds, which can be a mix of stocks, bonds and sometimes cash. As the beneficiary approaches university, the portfolio is automatically shifted to a more conservative level of risk.

Eutsler says these portfolios also tend to offer diversification even within equity and bond classes; for example, some nationals, some internationals.

“If (the investor) was comfortable with allocating a portfolio based on age, it might not be the ‘bottom line’, but it could go a long way in provide you peace of mind as you diversify, ”he says.

Investors can also customize their own fund. In a 529 plan, investors can choose relatively safe assets such as bank certificates of deposit, which are insured by the Federal Deposit Insurance Corp., or a money market account. They could choose to open two accounts – with two different risk profiles – or open just one 529 and create their own mix of asset types.

“You can choose to emulate (an age-based plan) on your own, tailoring it to whatever you feel comfortable doing,” he says.

• Mix and match vehicles: Families might also consider mixing and matching designated education savings accounts, such as 529 Education Savings Plans or Coverdell Education Savings Accounts, with other funds that could be invested for the purpose. ‘university.

“Diversifying among vehicle types gives you more flexibility in what you can do,” says Sam Fawaz, certified financial planner and president of YD Financial Services Inc., a fee-only financial planning firm with offices in Michigan and Tennessee. Fee only means that commissions are not received for selling or recommending certain products.

Fawaz says he has clients who are concerned about over-funding their 529 accounts. If withdrawals are not used for qualified higher education spending, 529 investors could face taxes and a 10% income penalty.

One way to cover this, he says, is to use both a 529 plan and a Roth IRA. In a Roth IRA, the principal can be withdrawn without tax or penalty at any time, although the earnings are not exempt from tax until the account holder reaches 59½.

“The Roth basically gives you the option of using it for your children’s college or for your own retirement,” he says.

Another possible combination is to use a Coverdell ESA and a 529 Education Savings Plan together.

Like the 529, Coverdell education savings accounts offer investment growth and tax-free withdrawals for qualifying expenses. They can also be used for some Kindergarten to Grade 12 expenses, not just college. The restrictions include a contribution limit of $ 2,000 per year, plus an income eligibility limit.

Any Coverdell funds not used for K-12 spending could be directed to college, and there is more individual title selection available through Coverdells, Eutsler says.

“In a Coverdell, the universe is much, much larger,” says Eutsler. “You can choose any of the funds offered by the specific brokerage that you have established a Coverdell through. There could be thousands of options that you need to diversify into.”


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