MONEY-SMART KIDS


Open a Low-Risk College Fund

Janet Bodnar

Nervous about the stock market? Consider starting with a conservative investment or spreading out your contributions over time.



We received a bit of cash for our son, Colin, when he was born last September. I wanted to put it in a 529 college-savings plan, but with the market tanking I'm not sure now is a good time to invest.

We live in New York State, and although I haven't checked out all the investment options for New York's plan, I assume that even the most conservative can't promise we won't lose a lot of money right off the bat. What would you do in this situation?

I'd go ahead and invest in New York's 529 plan.

For starters, as residents of New York you're entitled to a big break on your state income taxes if you contribute to the New York plan. You can deduct up to $5,000 in contributions per taxpayer each year, or up to $10,000 for joint filers. (Note to residents of other states: More then half the states offer their residents income-tax breaks for 529 contributions, so check the rules for your state's plan.)

In addition, New York's plan is managed by the well-respected Vanguard Group. You can invest in Vanguard mutual funds, and can choose an age-based portfolio of funds that starts out weighted toward stocks and becomes more conservative as your child gets older.

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For investors who are nervous about the stock market, New York's age-based portfolios even offer a choice among three different risk levels: aggressive, moderate and conservative. Each has a different weighting in stocks, ranging from 100% (aggressive) to 50% (conservative).

You can invest with as little as $25, and fees are attractively low. To keep your costs down, invest in the state's direct-sold plan.

Because Colin is so young, investing in stocks is a great idea. Not only can you buy them on sale right now, but by the time you'll need the money in 18 years the current market downturn will almost certainly be ancient history -- and Colin's investments will have grown along with him. Plus, under current law, you'll be able to use the money tax-free to pay for qualified college expenses.

If you're still concerned about the potential for current stock-market losses, you can do a couple of things to protect yourself and your money. For example, instead of using one of the age-based stock portfolios, you could start off with a conservative, short-term money-market-style account. That would minimize your losses until you gained more confidence in the market.

You could also divide Colin's lump-sum "bit of cash" into, say, three different pots and invest one-third every six months -- a strategy that one financial planner calls "diversifying by time."




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