Virginia grandparent Ben Hamilton had a straightforward investment plan for the tax-advantaged college savings accounts he set up for his four grandchildren.
His strategy for these accounts, known as 529 plans, was always to invest in more stock-based investments when the children were younger and then switch to more stable investments as they got older.
His plans are automatically adjusted as his grandchildren get older because they're in age-based 529 plans. Sarah and Rachel Hamilton are already in college, while 10-year-old Ella and 6-year-old Tessa Brown have years to go.
Even if the older children had decided to wait to go to college, he still would have chosen safer investments in later years so the money would be there when they needed it to pay for college.
[Learn which 529 plan investments are recommended for different ages.]
But age-based plans can't always be set and forgotten. Some families will want to change age-based plans as family finances change or because their children won't be attending college at the time they expected.
In an age-based plan, the mix of investments changes automatically from riskier investments such as stock market-based investments to more conservative investments, such as bond funds, as the child ages. The investments typically shift at designated age brackets, offering one mix of investments while the child is 10-12 years old and a less risky mix from 16-18 years old.
What these plans don't account for is if a child starts school late or graduates early. For instance, a child who starts school as a 6-year-old would begin college at 19.
Students may also take what's known as a gap year, a year off between high school and college. In this case, students who graduate high school at age 18 would be equivalent to 17-year-olds in terms of the time left until they'll need to use their college savings.
[Find out how to choose an age-based 529 plan.]
Before an automatic switch in age categories, Mary Morris, chairwoman of the College Savings Foundation, recommends families ask themselves if their child is on a path to complete high school early or will start college late. Parents should check with states about whether they can choose age brackets for their kids based on when they'll need the money instead of actual age.
In Virginia, a 1-year-old can enroll in a plan designed for a 12-year-old or a 12-year-can enroll in a plan meant for a 1-year-old.
Parents could choose a conservative age-based plan that they put a specific amount into each month, but then want to invest more aggressively with an age-based plan that is funded with workplace bonuses or state or federal tax refunds, Morris says.
The advantage to this strategy is that parents know they'll have a specific amount in relative safety in the conservative plan and then take a little more risk with a plan that contains the rest of the money. More risk generally means more opportunity for growth, she says.
Aunts and uncles opening a plan with a more aggressive investment strategy than a plan opened by the child's parents is common, she says. The ability to open multiple age-based plans may not be available in each state, so parents should consult their state plan's website before choosing this strategy.
Parents should reach out and ask for advice before choosing this strategy from either their accountant or family, she says.
[Understand how to evaluate and predict 529 plan growth.]
Family needs can vary widely and parents should think about whether they expect their children to get scholarships or to attend a less expensive school like a community college, says Armando Roman, an Arizona-based certified public accountant.
A student starting off at a community college may need the money at different times than someone starting off at a four-year school.
However, Roman cautions parents to carefully consider going with a more aggressive strategy. The ultimate goal is to have the money available when the student needs it. Staying conservative within a few years of when the child needs the money helps accomplish that goal.