Is a 529 plan your first foray into investing? If so, it’ll be helpful for you to understand some investing basics so you are better informed when it comes time to make important investment decisions. In this section, we invite you to read more about:
Everyone wants to earn a profit on their investments. But achieving a higher rate of return often means taking on more risk.
Of the three primary asset classes—money market, fixed income and equities—money market funds pose the least risk. In comparison, fixed income is considered a moderate risk, and equities carry the greatest risk for investors. Not surprisingly, money market investments generally offer the least amount of profit and equities have the potential for the greatest return.
So, how does one balance risk and reward? In order to determine your comfort level on the risk/return spectrum, you have to ask yourself some additional questions. What is your time horizon? What tradeoffs are you willing to make to try to maximize returns? What is your investment priority: increasing returns, reducing risk or a combination of both?
There is no way to predict how well the markets or particular investment options will perform over time.
Diversifying your assets, or spreading them around to different investments, stocks, bonds and money markets, is a useful strategy as it allows you to greatly reduce your portfolio’s exposure to any one type of asset class.
Overall, a diversified portfolio is less risky because even if some of your holdings go down, others may go up.
In 529 plans, many follow the rule of thumb to start out with an “aggressive” portfolio (with more equity funds) and later shift toward “conservative” investments like fixed income funds, which seek income and principal protection as the beneficiary nears college.
| Features | LoneStar 529 College Savings Plan | Coverdell Education Savings Account | UGMA/UTMA Account |
|---|---|---|---|
| Beneficiary Age Limit | None | Can contribute until child reaches 18. Must spend assets by child’s 30th birthday | 18 or 21, depending on state law |
| Account Owner Income Limit | None | Phases out for incomes between $95,000 and $110,000 if single, $190,000 and $220,000 if married | None |
| Federal Tax Exemption | For qualified withdrawals | For qualified withdrawals | None |
| Contribution Limit | $500,000 per child1 | $2,000 per year | None |
| Account Control | Parent/account owner | Parent/account owner | Child assumes control at legal age of majority |
| Beneficiary Flexibility | Flexible beneficiary designation2 | Flexible beneficiary designation2 | May not be transferred |
| Financial Aid Impact | Considered account owner’s assets | Considered account owner’s assets | Considered student’s assets |
| Asset Use | Can be used for a broad range of higher education expenses | Can be applied to elementary, secondary and higher education expenses | Unrestricted, provided it is for the benefit of the minor |
| Gift Tax Treatment | Qualifies for up to $15,000 ($30,000 for married couples) per child, or a combined five-year gift of up to $75,000 ($150,000 for married couples)2 | Amount contributed qualifies for exclusion from gift tax | Qualifies for up to $15,000 ($30,000 for married couples) per child, or a combined five-year gift of up to $75,000 ($150,000 for married couples)2 |
| Estate Tax Treatment | Considered removed from donor’s estate (partial inclusion if donor dies during the five-year election period) | Considered removed from donor’s estate | Considered removed from donor’s estate |
| Investment Flexibility | Yes3 | Yes | Yes |
1. All assets, including earnings, under all 529 accounts within all plans maintained by the state of Texas, including the Texas Guaranteed Tuition Plan, established for the benefit of a particular beneficiary must be aggregated when applying this limit. New contributions will not be allowed once this limit is reached. Earnings, however, will continue to accrue.
2. Under federal law, changes are limited to qualified family members of the current beneficiary.
3. You may reallocate existing assets twice a calendar year or when changing a beneficiary. Changing the allocation of future contributions may be done at any time.