Using a 529 Plan for Your “Safe” Money

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By Joseph Hurley

October 23, 2020

Parents with children approaching college age may be tempted to park their college savings in a bank certificate of deposit or a high-yielding account and avoid the short-term market risk that comes with stocks and longer-term bonds.

However, before you run down to your local bank branch, consider income taxes. Depending on your federal and state income tax brackets, your after-tax return on a bank CD may be a third lower than the published interest rate.

You may be able to do significantly better than that on an after-tax basis in a 529 plan and still avoid market risks. That’s because more 529 plans with bank products and other principal-protected investment options, and your 529 earnings are 100% federal tax-free.

Here are just a few of the “safe” options you can find in 529 savings plans:

  • Several 529 plans offer FDIC-insured investment options, including high-yield savings accounts with no minimum balance, and certificates of deposits with terms ranging from three months to twelve years with low minimums.
  • College Savings Bank offers FDIC-insured fixed-rate CDs and high-yield savings accounts nationwide through several state 529 plans.
  • TIAA makes a “Guaranteed Option” available in the 529 plans it manages. There is also no minimum holding period so you can put the money in today and take it out again in a month.
  • Stable-value investments are similar to a guaranteed option and are available in many other 529 plans. Money-market options are also prevalent. Be sure you understand the fee structure of any of these investment products as fees can have a significant impact on your net returns.
  • Many prepaid tuition plans also provide protection from market risks.

These examples illustrate the opportunities for putting your safe money into a 529 plan. They are not investment recommendations. To have any chance of keeping up with college inflation, you may have to allocate at least a portion of your savings to higher-risk investment options.

[Editor’s note: This article was originally published on April 13, 2006 and updated on October 23, 2020 by Mark Kantrowitz.]

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