Nebraska is changing its 529 Savings Plan for college expenses, adding an investment option that will operate similar to a bank account. This option will allow people to shield their money from market losses.
529 plans are a great way to save for college expenses. No federal tax deduction is available for contributions to a 529 plan, but withdrawals from the plan are tax-free if used for college expenses. (NOTE: many states, such as Iowa, do allow deductions for 529 contributions. See this article and this article from The Dinesen Tax Times for more information.)
The downside to a 529 plan is, similar to 401(k) plans, you are given certain investment options and are at the mercy of the market. Now people in Nebraska will have a potentially safer investment alternative. According to this press release, Nebraska will now start offering an FDIC-insured option that won’t be subject to market swings.
As the Wall Street Journal reports, Nebraska is not the only state to add more investment options:
In recent weeks, at least five states have revamped their 529 plans or added new investment options in the hope of limiting volatility and investor losses. Rhode Island said its 529 plan will scale back some investors’ exposure to stocks when market turbulence picks up. Arizona, Delaware, Massachusetts and New Hampshire each added more diverse funds to their lineups.
But as the Motley Fool points out, these added investment options are too late to help people whose accounts have tanked this year:
These moves may seem to make sense in light of the terrible performance in stocks over the past few months. But as usual, these moves come too late to do anyone any good — and they encourage scared savers to flee stocks after the damage has already been done.