Why can’t I pick individual stocks in a 529 plan?
529 plans are designed for long-term educational savings. Individual stocks can be volatile and risky, which could jeopardize the college savings goals. 529 plans offer diversified funds that aim for steadier growth over the long term. You as an investor should prefer a diversified portfolio, as Modern Portfolio Theory has shown that you can achieve a similar return with less risk by diversifying.
Other investment accounts let you pick your own stocks, so why not the 529?
529 plans get their name from Section 529 of the Internal Revenue Code. As part of the rules, states are empowered to offer these tax-advantaged accounts, but certain rules apply. In short, the IRS likely views individual stock picking as straying from the intended educational savings goal. The state treasurers and investment firms appointed to manage their 529 programs also have a fiduciary duty to act in the best interests of the beneficiaries, and their position is that a managed and diversified portfolio achieves this whereas picking stocks in a self-directed account does not.
How much choice do I have in picking how my 529 plan is invested?
There are different options to choose from. You are free to choose a 529 plan from any state, which will vary in terms of their investment holdings, tax subsidies and other factors. If you open the account on your own directly through a state website, you can choose to select from a small group of diversified funds. Once you make your selection, you can only change it a maximum of 2 times per year.
Alternatively, you can choose to work with an Investment Advisor who can make the selection of an investment fund on your behalf, based on their knowledge of your situation. Make sure you do your research before making a decision as the investment approach, cost structure, and tax impacts can vary widely across states and programs.
