Should I Invest A Lump Sum Or Use Dollar Cost Averaging When Investing In A 529 Plan?

There’s no right answer — you can do either. For some parents, contributing smaller, regular amounts to a 529 plan is preferable because they might not have the discretionary income to invest more. One way to put your monthly contributions on autopilot is to set up automatic monthly debits from your checking or savings account to your 529 account.

By investing a fixed amount each month, you can benefit from something known as dollar cost averaging, which can help you ride out the ups and downs of the market. That’s because when you invest the same amount regularly over time, you buy more shares when prices are low and fewer shares when prices are high. (Note: dollar cost averaging does not ensure a profit or protect against a loss in a declining market. You should consider your ability to invest continuously when the market is down.)

As an alternative to regular monthly investments, you might consider investing a lump sum. Under special rules unique to 529 plans, you can make a lump-sum gift to a 529 plan of up to five times the annual gift tax exclusion amount and avoid federal gift tax if you make a special election on your tax return to treat the gift as if it were made evenly over a five-year period and you don’t make any other gifts to that beneficiary over the five years. This means that in 2024, you can gift a lump sum to a 529 plan of up to $90,000 ($18,000 x 5) and avoid federal gift tax. Married couples can gift up to $180,000 ($90,000 per person).

Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable–we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Copyright 2016 by Broadridge Investor Communication Solutions Inc.
All Rights Reserved.

Concluding your financial strategy involves careful planning and consideration of various options available to you. Whether you choose regular monthly contributions or a lump-sum investment, understanding the benefits and risks associated with each approach is crucial.

For personalized guidance on your financial planning, including topics like 529 plans, consider reaching out to Drenen Financial Services. Located at 89 South Maple Street, Westfield, MA, their team can provide tailored advice to help you make informed decisions. Call 413-569-0015 to set up an appointment today.

For further information on financial topics and regulations, you can visit IRS.gov.

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