When you have the right information, you are more likely to do the right thing with your money.
Take, for example, a conversation I had recently with a relative. We got into a debate about Section 529 college savings plans. During the discussion, I became a little frustrated that most of what my relative knew (or didn't know) about this type of college savings vehicle came from some guy he worked with.
Turns out that guy didn't really know much at all. He was misinformed. And the unfortunate thing is that my relative was basing many of his objections to 529 plans on this misinformation.
When you invest in a 529 savings plan, you put in after-tax dollars, but your contributions grow tax-free, and distributions (the money you take out later) are free from federal taxes as long as the money is used to pay for qualified higher education expenses. Every state and the District of Columbia offers at least one 529 plan.
My relative may ultimately decide not to invest in a 529, but I encouraged him to get his facts straight. I wrote about 529 plans in a recent column. The questions and comments I received from readers showed that many people (including some financial professionals) don't know fact from fiction when it comes to 529 plans. To help them and my relative, here are some common myths and the truths about 529s:
Myth: All 529 investment options are conservative.
Financial fact: Not true. 529 plans operate much the way 401(k) retirement savings plans do. States, like employers, arrange for an investment company to set up and manage their 529 savings plans. Each plan can have a number of investment options.
Are some of those options conservative? Yes. But most plans offer a broad menu of investment options ranging from conservative to aggressive, said Joe Hurley, founder and chief executive of Savingforcollege.com. "By aggressive, I mean 100 percent equity," he said.
While it's true that you won't find too many plans that offer specific sector investment options such as technology or international funds, there is still enough to choose from to get good returns in the long term, Hurley said. "Back in the old days, many 529 plans were conservative because you had very limited ability to change investments," he said. "That has since changed. Among the various 529 plans you can find hundreds of different options, including pretty much anything you find in mutual funds."
Myth: You are stuck with a specific 529 plan once you invest in it.
Financial fact: You can change 529 plans any time you change the beneficiary on the account. You can also switch from one 529 plan to another once every 12 months without changing beneficiaries, Hurley said. Additionally, you can change investments within your 529 plan once every calendar year.
Myth: Most plans constrain flexibility in asset allocation.
Financial fact: If you want to select the specific stocks or bonds that go into your 529 portfolio then, yes, this isn't the investment choice for you. However, most 529 plans offer several investment options featuring different asset allocations, Hurley said.
For example, let's say you have two children, a 10-year-old and a 4-year-old. With many 529 plans, you can sign up for a plan that will invest your money based on when your child will attend college. The age-based investment option you choose for the 10-year-old may not be as aggressive as the one for your younger child. Keep in mind that the longer you have to invest, the more time you have to weather the ups and downs of the stock market so, with the younger child, you may be willing to invest more aggressively.
But even within age-based options, you may be able to choose whether your money is invested aggressively, moderately or conservatively. There are also target portfolios where you target a specific asset allocation, Hurley said.
Myth: All 529 plans have requirements and constraints on the use of assets.
Financial fact: Just as with a 401(k), the money you invest is yours. You can take it out whenever you want. However, if you withdraw the money and it's not used for qualified higher education costs, your earnings may be subject to taxation and a 10 percent penalty.
Myth: My ex-girlfriend is investing in a 529 plan for our child, so I can't.
Financial fact: As outlined in a brochure prepared by the Investment Company Institute, you can open multiple accounts for the same student, and more than one person can contribute to a college savings plan for the same beneficiary. To download a copy of "A Guide to Understanding 529 Plans," go to www.ici.org.
As I said, you may decide that a 529 plan isn't right for you. Maybe you don't want to follow all the rules that govern 529 plans. Maybe you want to put the money in gold. That's your choice. But don't reject this investment opportunity without doing your own research. As President James Madison once said, "Knowledge will forever govern ignorance: And a people who mean to be their own governours, must arm themselves with the power which knowledge gives."
* On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online at www.npr.org.
* By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.
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Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.