CAPITAL REGION The economic meltdown Tax-free education investments are taking a hit BY JASON SUBIK Gazette Reporter
Over the last several weeks, Bill Parlapiano has watched more than a third of the money in his children’s 529 tax-free investment funds disappear. “We got into these [529 accounts] basically as an investment tool that would be safe and basically for some tax sheltering,” Parlapiano said. “I’ve been charting them very closely. We were in some aggressive portfolios. We’ve lost I think 38 percent of their value.” Parlapiano and his wife, Karen, live in Ballston Spa. He owns his own energy consulting firm while his wife is a full-time mother and a member of the PTA. The Parlapianos have three separate 529 investment accounts — one each for their daughter Haley, 10, and sons Joshua, 8, and Tyler, 6. Like many New York parents who saved for college tuition through the state’s tax-free investment program, they haven’t escaped the turmoil in global markets. Depending on the portfolio, the performance of the 529 savings plans since January range between a 42 percent loss for the most aggressive plans and 2.48 percent gained in the most conservative options. Parents with younger children generally take the hardest hit because many of the plans are set up to be more aggressive and risky early on. “If you have a 2-year-old, you’ve taken some hits,” said John Heywood, a principal in The Vanguard Group, which manages New York state’s 529 plans. “On the other hand, if their child is 16 and they chose a moderate or conservative track — they’re actually ahead for the last 12 months.” TAX BENEFITS The education savings plans are detailed in section 529 of the federal income tax code. The accounts allow individuals to grow money for post-high school education and then spend the funds without any federal income tax penalty when they withdraw, so long as the expenditures are allowable costs like tuition, books and other education supplies. Most states have their own 529 plans. New York’s allows parents a $5,000 per year state income tax deduction for money going into the account and doesn’t tax the income when it comes out, but New York state does tax New Yorkers who chose to invest money in other state funds. All but one of New York’s 12 packages designed for specific age groups have lost value since the beginning of the year. Many parents will have to increase contributions to their portfolios, or contribute for a longer period to get the same payout they would have seen without the downturn. Bill Parlapiano said his children’s 529 accounts had been up about 25 percent before the stock market crash, so he estimates the accounts are only about 10 percent down from his original investment. “My 10-year-old’s still got seven or eight years before we’ll be looking to touch it, so I’m expecting we’ll be able to recoup, hopefully, all of it,” he said. Peter Laurenzo, the president of Albany-based College Aid Planning Associates Inc., said his company provides advice on how to afford to pay for college to about 2,000 clients in the Capital Region. He said some of his clients use 529 plans and most of them come to him when they have only a few years left before their children plan to go to college. “When the kids are high school seniors and juniors and their parents aren’t in those plans, it’s kind of a little late to get in,” Laurenzo said. “The majority of my clients who have 529 plans had them before they met me.” According to the state Comptroller’s office, 59 percent of the state’s 529 accounts are in age-based portfolios. Another 11 percent are conservative — with no stock holdings — while 30 percent are divided among the most aggressive — and vulnerable — portfolios. Laurenzo said the danger of 529s comes when investors don’t follow the recommended path: aggressive investments when plan benefi ciaries are young and then more conservative investments as college age approaches. “They should be structured specifically based on the number of years until [the student] starts college. If you’ve got a 2-year-old sitting at home and you’re in something aggressive, you’ve got time to recover,” he said. WAITING IT OUT Many experts and the comptrollers office are urging parents to wait out the downturn, noting that the plans have seen overall growth since inception and invested principal is intact. Myers said Vanguard didn’t fare as badly as it might have because it wasn’t highly exposed to some of the major market troubles, including the collapse of Lehman Brothers last month. After the Sept. 11, 2001, terrorist attacks, the 529 plans took major hits, leaving many families with less than what they had invested. The plans were managed then by TIAA, part of the financial fi rm TIAA-CREF. Vanguard took over in 2003. About 296,000 people own New York 529 savings plans, which cover 492,000 children and teenagers, according to Vanguard. That’s increased since 2003, when 136,000 people held 211,000 accounts. The average balance of the accounts was about $13,000 as of Sept. 30, according to Vanguard. Neal Solomon, the managing director of Gloversville-based fi nancial planning company WealthPro, LLC said he’s advising his clients who have 529 accounts and young children to stay the course. “People who are 10 or 15 years out, yes some of those accounts that more aggressively positioned have fallen in value, but depending on the client’s risk tolerance they may view that as an opportunity to make additional deposits to those plans,” he said. “It never makes sense to panic during a panic. The damage has already been done. You haven’t lost unless you sell at a low point.” Bill Parlapiano said that despite the turbulence in the market, he plans to stick with his kids’ 529 plans. He said he may even put more money into their accounts. In fact, he and his wife are planning to start another one for their 8-month-old son, Nicholas.
Not a surprise. 1/4 of my 401(k) disappeared at the beginning of this month. Still waiting for it to come back. I'm lucky that I still have time to have it grow back, plus, our company just gave us the opportunity (which I am taking) to review our accounts with someone from the company that handles them to tell us if we're going the right way. I would suggest that for everyone from time to time.
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