After being pilloried by critics and written off by many families, 529 college-saving plans are getting better. But well-heeled investors still would be wise to spread their bets around.
So-called 529 plans allow people to save for college expenses and withdraw the earnings tax-free. Many also offer a break on state income tax–savings that, in theory, an investor can roll back into the account.
For years 529s were pitched as the ultimate college-savings vehicle, but their limitations were thrown into sharp relief during the financial crisis. Too reliant on stocks, the average 529 investment option lost nearly 24% in 2008. Even portfolios geared to older kids just a few years away from college got hammered, losing 14%, according to investment-research firm Morningstar Inc. What’s more, because savers can generally make investment changes only once a year, many people watched helplessly as their accounts dropped in value.