Despite downturn, 529s make sense to me

I'm a fan of 529 college savings plans: the convenience, the tax break, the message they send to my children.

However, I know many people find it hard to stomach any kind of investing these days, as the stock market seems to spiral ever downward.

So I wasn't too surprised when a reader, who asked not to be identified, responded to an October column with some concerns about Utah's 529 plan.

"I had read so many positive things about the Utah education 529 plan that I invested $20,000 for my son in July (just three months ago)," he wrote at the time. "It is now worth $15,000. How does something that should be as secure as that, with bonds as well as S&P 500 stocks, go down 25 percent in three months? Their Web site says Option 8 has only lost 8 percent, but my account says otherwise."

That's a fair question, good reader. For an answer, I spoke with Lynne Ward, director of the Utah Educational Savings Plan.

Before I share her answers, here's a little background. The UESP, available online at www.uesp.org, is a 529 plan, named for the section of tax code that allows it. Most states offer 529 plans to help people save money for college for their children, grandchildren or friends.

The UESP does not require any minimum deposits or balances, and any adult can be an account owner. If you're a Utah taxpayer, contributing to a UESP account makes you eligible for a state tax credit. Also, the funds grow tax-free, as long as they are used for qualified higher-education expenses.

Ward says the UESP has about 130,000 accounts with a total of $2 billion in investments right now. It remains popular, but she admits the last few months have been difficult.

"Most investments have been on a wild ride this last four months," she says. "Whether it's your 401(k), your IRA or your children's 529 accounts, there's a good chance it's been impacted by the market."

The UESP offers several investment options. Option 8, cited by our reader, is an age-based option, Ward says. That means money invested under Option 8 is automatically moved into more conservative, less volatile investments every few years.

However, the average age of a UESP beneficiary is 6 years old, she says. A 6-year-old under Option 8 would have significant investments in various stock funds, and that may be why our reader's account suffered.

"The drag on those funds in the market right now has dragged this particular individual's account down," Ward says. "But if he is 6 years old, he has 11 or 12 years before that child is in college.

"Like my husband keeps telling me about my 401(k), don't worry about it now. Worry about its value when you retire."