529 account

My son is 14 and I want to start a 529. Should I go for a more riskier fund or or a more conservative one because I have only 4 years left to save?

SAVAGE SAYS:Good question.  You really only have a few years to save, at the max 7 years if you wait to use it till his senior year (which I recommend for various reasons, including eligibility for financial aid).  The second issue is whether you’re just putting a small amount away — or a huge hunk of money (you can give 5x the annual $14,000 gift tax exclusion at one time) in order to get some real tax-deferred growth.  In either case, you don’t want to take a lot of risk with the money.

My concern is that many of the “conservative” options involve buying bonds.  And bonds could be a big loser if interest rates start to rise in the next three years, which I’m betting they will.   But if you invest in stocks, you have market risk — the risk that when you need to withdraw the cash, stock prices could be down.  And if you take the safest, “short-term chicken money” option in the plan, then it is hardly worth the tax-free benefit because the money won’t grow at these rates!

So now that you understand the alternatives and risks, I’m saying that if it were my child, I would put most of the money in stocks — knowing that if the stock market is down when the money is needed, you can always defer withdrawals and use it for graduate school, or for another child in the family.  Or let it grow for HIS children to use for college — seriously!  This is a tough one because investing in the market for a relatively short-term is always risky.  Hope this helps.