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How should you invest money in a 529 plan? These education savings plans present some unique investing challenges. On the one hand you want the money to grow to at least keep up with the rising cost of college. On the other hand, there is a limited time horizon. Assume too much risk, and the stock market might wipe out much of your savings when your child needs it most.

These challenges came to mind as a read this email from a reader named Robert:

Hi Rob. I have an idea for a future podcast or blog if this has not been previously covered. I have 529 plans for both of my children ages 12 and 15. Unlike retirement planning, college tuition planning has a predictable, somewhat fixed date for which you will need the money and typically need it for 4 or more years. Along these lines, asset allocation strategies are somewhat different and market timing may be appropriate since a bear market can wipe out your investments if you have too much risk on the table as your child approaches college age. I’m not sure if you’ve used 529 plans for your college tuition planning but it might be worthwhile for your readers/listeners to get your perspective.

For what it’s worth, my son, who is a sophomore, currently has 30% equities, 36% bonds, and 34% money market in a Vanguard state-sponsored 529 plan. My daughter, in 7th grade, has 43% equities, 28% bons, and 29% money market.

But beyond the time horizon, your 529 asset allocation may also depend on the assets in the plan, your ability to divert income or other savings to college tuition, expectations for financial aid or scholarships, family support, college choices, and many other factors. Again, it might be an interesting issue to digest in a future program.

I just love the fact that Robert knows the asset allocation for each of his son and daughter’s 529 plans. Investing for college in a 529 plan is different than investing for retirement. As much as there are similarities, there are a couple of significant differences. When you’re in your 20s or 30s or 40s and you’re saving for retirement, you have a much longer time horizon than you do with a 529 plan. Also, most college savings plans are exhausted in about four years; retirement should last for decades (hopefully!).

So how do you go about figuring out your asset allocation? In this article we’ll cover the basics of a 529 plan as well as explain how age-based portfolios work.

The 529 Plan Basics

A 529 plan is a tax-advantaged account that enables you to save for your child’s education. Actually, you can have a beneficiary of the 529 plan that is not your child. Although most people probably think of 529 plans for their kids, grandparents could save, too. These accounts come with federal and often state tax benefits. And you can now use them to cover up to $10,000 per year in private K-12 tuition, as well.

Federal Tax Benefits

At the federal level, you don’t get a tax deduction for contributions to a 529 plan. You contribute after-tax dollars. The tax advantage is that gains in the account grow tax-free, assuming you use the money for qualified educational expenses.

For those who start investing when their child is young, these tax advantages are significant. There is no federal tax on the interest or dividends generated each year from the investments. And there is no tax on the capital gains when you sell the investments and use the proceeds for qualified purposes.

State Tax Benefits

At the state level, you may also get the tax advantages on the earnings from the investments. One thing to keep in mind is that you don’t have to use your state’s 529 plan. Sometimes out-of-state plans have lower investment fees or better investing options. And most states allow for state income tax free investing even in out-of-state 529s. Some, like Pennsylvania, even allow in-state investors to take a hefty tax deduction on out-of-state 529s.

But some states do not offer tax-free growth on out-of-state accounts. This is something to research and keep in mind when choosing your 529 plan.

In some states, you also get a deduction for the contributions. Typically there is a limit to the deduction, which varies from state to state. At the end of this article you’ll find a Vanguard map that quickly and easily shows you the tax advantages offered by each state.

Investment Options

A 529 plan is similar to a 401k when it comes to investments. You are limited to the investments the plan offers. As a result, you need to pick a plan based, in part, on the investments offered. In this sense, evaluating the investments is no different than evaluating a mutual fund for retirement investing.

In terms of investing, one of the easiest approaches is to use age-based portfolios, which many of the 529 plans offer.

Age-Based Portfolios

Age-based portfolios make investing for college extremely easy. These portfolios include a mix of stock and bond funds with the asset allocation based on your child’s age. As your child gets closer to college, the investments become more conservative by shifting more of the assets out of equities and into fixed-income investments. The change in asset allocation is automatic as your child gets older. Here are the details of one plan as an example.

When your child is younger and you have a longer time horizon for investing, these portfolios invest heavily in stocks. While the specifics vary from one state to the next, in Virginia the mix at this stage is 80% stocks and 20% bonds. Here are the details (note that Virginia calls this portfolio the Rappahannock. There’s nothing significant to the name, other than they like to name their portfolios after rivers and landmarks in Virginia):

80-20 Asset Allocation 529 Plan

As your child ages and gets closer and closer to needing the money for college, age-based portfolios will automatically shift the investments to a more conservative allocation. With the Virginia 529 plan, for example, there are a total of seven asset allocations ranging from 80% stocks and 20% bonds (the Rappahannock portfolio above) to 100% fixed income as your child enters college. Again, these changes in the allocation occur automatically as your child ages.

Now that you have the option of using a 529 for K-12 expenses, it will be interesting to see if states offer different age-based portfolios. Perhaps there will be options to begin cashing out the plan when your child is a freshman. They’ll have to pull into safer investments more quickly, but also plan on the money lasting for eight years rather than four.

Does this work the same for retirement savings?

I should add that the changes in asset allocation for a 529 plan have no application to retirement investing. When you hit retirement at say age 65, a 100% bond portfolio would expose most people to longevity risk (the risk of outliving your investments). For a college education, you’re generally looking at a 4-year time period in which to spend the money. When you retire at age 65, you’re looking at a 30-year time period for retirement. Because retirement spans a much longer time period than does college, the investing horizon is much different. Not only do you still have time to handle market fluctuations, but you have to account for inflation over a much longer time period.

Another Alternative to Age-Based Portfolios

If you don’t have age-based portfolios, what should you do? In the case of Virginia, they have non-evolving portfolios, meaning the investments are not reallocated as your child gets older. You can construct your own portfolio with these investment options, but you’ll need to change the allocation as your child nears college. You can, however, use the age-based portfolios as a good to a reasonable asset allocation.


There are a number of very good online resources for 529 Plans. Here’s a map from Saving for College that lets you know how much the tax savings in your state’s plan is actually worth. And here’s a list of states that offer income tax benefits for 529 plans.


Author Bio

Total Articles: 1080
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

Nancy Farmer says:

Rob, This discussion of college savings and investment options provides great encouragement and options for parents, grandparents and others to fund children’s college education. I am president of Private College 529 Plan, which provides prepaid tuition at more than 270 private colleges. It has the advantage of locking in current tuition rates far into the future to protect against rising costs. This plan is established by member institutions under the same tax code as plans run by states. With this plan, families don’t bear risk because the member universities guarantee tuition and they absorb the market risk. It is one more option for readers to consider.

“While you do not need to use the 529 plan in your state, you won’t get a deduction for the contributions if you use a plan in another state.”

This is not totally true. Remember, there are 6 “tax parity” states which allow deductions for contribution to ANY state’s plan. These are Arizona, Kansas, Maine, Montana, Missouri and Pennsylvania.

Rob Berger says:

Matthew, thanks for the information.

Brent Rufenacht says:

I much enjoy your “common sense” ideas delivered on your blog. I have wondered for some time if any studies have been done that would show the actual life span of retirees that have retired in the last 5 or 10 years.
It seems all planning is based on retirement at 65 and a 30 retirement. I am not sure this is actually the case in many instances.
Also, I find a similar issue with the planning software programs available for “when should I take Social Security” as they all default to a lifespan of 100 years.
I assume they are taking a “what if” approach, but not sure how realistic that is for planning purposes.
Looking forward to your thoughts. Thank you for the service your blog provides.

Reggie Lal says:


I enjoy your post, always some great info.; thanks for sharing this about the 529’s.
Would have loved to have a mention in there that A few 529 plans do offer self-directed investments.

This gives some an alternative to the “Wall Street only” option on their platform.

Self-Directed ESAs

A self-directed ESA is different than a standard account because it allows you to have more investment freedom. Self-directed ESAs offer the unique opportunity to hold alternative assets, such as real estate, precious metals, and more. The earnings from these investments will grow tax-free, allowing you to save more for education expenses

thanks for your great insights and website.

Reggie Lal

Shova Gupt says:

I have 4 yr VA Prepaid 529 for my 2 kids (10 yr and 8 yr old). We started 4 years ago and about 60% is already paid. I was wondering to increase the returns, can it be transferred to VA InVEST or another kind of 529 investments?

Shova G

Paul says:

I’ve learned a few things as my daughter is a senior and preparing to head off for college. A 529 is considered a parental savings and not the child’s, so the amount in a 529 counts as an asset when the parents assets are considered. A real eye opener for me is because I have 4 children with 4 separate 529 plans, I always considered the amount in each separate for each child. Bad thinking on my part! Because it is a parental asset, the total amount (for all children) is considered when looking at the oldest child’s parental contribution.

Rob Berger says:

Paul, thanks for the insight.

JC Webber III says:

What about a grandparent’s 529 plan? Are those assets considered when applying for scholarships?

Abby Hayes says:

Paul, this is actually a good thing. Parental assets count less towards financial aid calculations than do student assets. So it’s best to keep the account under your control. Otherwise there’s a risk of the student having a much higher expected out-of-pocket cost. Distributions from grandparent-held accounts can also count against students heavily in future years of college.