How to protect your college savings from market swings

  • Many 529 plans offer age-based portfolios, which start off with more equity exposure early on and become more conservative over time.
  • Pay attention to your fund's approach toward shifting from stocks to bonds.
  • An overly aggressive portfolio could quickly put your child at a financial disadvantage without enough time to recoup losses before move-in day.

When it comes to paying for college, every carefully saved penny counts.

Yet, putting money away is only the first step. Protecting those dollars through market ups and downs is equally important.

Overall, more families are taking advantage of 529 college savings plans. Total investments in 529s reached a record $319.1 billion last year, 16 percent higher than in 2016, according to the College Savings Plans Network.

The average account size also jumped to a high of $24,057 in 2017, up 13 percent from the previous year. (See the chart below from the College Savings Plans Network.)

There's a reason these plans are catching on: They offer many tax benefits that are better than using a simple savings account.

Not only can you get a tax deduction or credit for contributions (more than 30 states and the District of Columbia offer a direct state tax deduction for your contributions), earnings grow on a tax-advantaged basis and, when you withdraw the money, it is tax-free if the funds are used for qualified education expenses such as tuition, fees, books and room and board.

However, that does come with some degree of risk.

Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child's life and then become more conservative as college nears.

Yes, stocks have been on the tear. In fact, the U.S. market is on its longest bull run in history. Still, a downturn — or even a correction — can come at any time. And your college-age child shouldn't have to pay the price.

Pay attention to your fund's approach toward shifting from stocks to bonds. Full exposure to the stock market may be just fine if you're opening an account for a newborn, but it's probably a bad idea if your child is two years away from college.

An overly aggressive portfolio could quickly put your child at a financial disadvantage without enough time to recoup losses before move-in day, according to Brian Merrill, a certified financial planner and partner at Tanglewood Total Wealth Management.

"The real concern comes in for those who have kids in their teenage years. You have to get more defensive." -Brian Merrill, partner at Tanglewood Total Wealth Management

"When the child is young, you want to be aggressive," Merrill said.

"The real concern comes in for those who have kids in their teenage years," he added. "You have to get more defensive."

Merrill advises clients to consider a target portfolio at the outset, which will adjust automatically over time. If you've hand-picked the funds within your 529, then remember to review those choices every year, just as you would other investments — and add more fixed income to the portfolio as your children approach college age.

"You are going to want to be pretty close to a 50/50 allocation going into the high school years," Merrill said. That way, "if there is a significant market decline you have the bonds and fixed income from which to withdraw," he added.

"Once you get to year 18, then you can get even more conservative and even look at something that's 30/70."

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