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IRS Eases Rules On 529 Plans

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By EILEEN AMBROSE The Baltimore Sun

The Tampa Tribune

Published: January 17, 2009

Many families could only stand by and watch as their 529 college savings accounts plunged along with the stock market in 2008.

Their hands were tied by an Internal Revenue Service rule that allows account holders to change investments only once a year or when they switch the account beneficiary.

So if they had made a change in their account early in the year - often the time families make adjustments - they were unable to act again as stocks tanked in the fall.

But the IRS, which has been giving taxpayers leeway in other areas because of the severe recession, is doing the same for 529 college savings plans. For this year only, the IRS will allow you to switch your investments twice.

"In the first part of the year, people made responsible decisions to change their investments from one option to another. No one would have predicted what happened in the stock market in the latter half of the year," said Joan Marshall, executive director of the College Savings Plans of Maryland.

"It is very restrictive ... to allow only one change per year," Marshall said.

It's up to the plans whether to permit twice-a-year changes, but they're expected to do so.

Having flexibility to make investment changes, however, doesn't mean investors should exercise the option.

For example, moving from stocks to bonds might lock in losses and miss out on an equity market rebound.

"Flexibility is a double-edged sword when the market is in turmoil," said Greg Brown, a mutual fund analyst with Morningstar Inc. "Sometimes the best thing is to do nothing."

Whether 529 investors should make changes will depend largely on age.

Families with a younger child have the time to ride the ups and downs of a fairly aggressive stock portfolio. And stocks still manage to provide the best returns over the long haul.

The difficult choice will be for families whose children are a year or two from college.

The first step is to dig into the details of what you're invested in now. The majority of 529 money is invested in age-based portfolios, where the mix of stocks and bonds becomes more conservative as a child approaches college.

But what is conservative can differ widely from plan to plan.

For instance, Louisiana and Florida's plans don't invest in stocks for portfolios designed for children 16 and older, according to a study of age-based accounts in 2008 by Savingforcollege.com.

It is not uncommon for portfolios for those 17 and older to have 20 percent or 30 percent of their money tied up in stocks, said Joseph Hurley, founder of Savingforcollege.com.

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