From the "a picture is worth a thousand words" archives, I'll add a few words and let this rest.

I've noticed that over the last several years, before and after our recent recessionary times, it has become fashionable to question the return on investment of a college education. There seems to be some validity to the question, particularly in light of some of the more innovative "college educations" that are currently available for sale.

Although I haven't always been the best student I can be, I have always valued education, and I think a degree has value beyond the simple ROI it brings in terms of enhanced wages.  As a technology manager, I also hired more than a couple of non-degreed professionals into serious, professional technical roles.  Generally speaking, they were very smart and very capable, two things a degree doesn't guarantee.  However, everything else being equal, it's nice to know that the person you're hiring has shown the fortitude and persistence to get his or her butt out of bed every day(ish) to get to the end of that sometimes grueling road.  That matters, and getting a degree acts as a signal to potential employers that has nothing to do with intelligence, and often little to do with specific knowledge.  It's not the only signal, but it's a powerful one.  I think these numbers from the excellent CalculatedRISK blog bear that out.

An oft-cited tenet of investing philosophy that has been passed down over the years is that Dollar Cost Averaging (DCA) is a good way to invest in a risk-managed manner, particularly for beginning investors.

The basic approach is that you invest a consistent amount at regular intervals, which ensures that you buy more shares when prices are low (and fewer shares when they're higher).  You engage in DCA with each 401(k) contribution, and with any systematic investments you make to an IRA, 529 plan or a taxable investment account.

For instance, if you had $8,000 to invest at the beginning of this year, and decided that you simply wanted to invest in an index fund that tracks the S&P 500 Index, you could have chosen the SPDR S&P 500 Exchange-Traded Fund (SPY)*.  You would have then faced the decision of when to invest the money.  Doing so on January 1 would have allowed you to buy at $128.68.  Investing $1,000 on the first day of every month would have given you an average cost of $131.16, because prices trended higher through much of the first half of this year. 

Is it a good idea?

Probably the most logical comparison to make is between DCA and lump sum investing.  In other words, if you don't have a lump sum that you could invest at the beginning of a period, but want to invest on an ongoing basis, your decision to dollar cost average is pretty straightforward.

What if you do have a lump sum that you could invest?  Should you average into the market over time?

While DCA may feel better to a lot of investors, the fact is that it doesn't result in better aggregate returns.  If you had $10,000 ready to invest at most points in history, you'd be statistically better off putting it all in the market rather than averaging in over time.  Why?  Because the market typically goes up.  I know, I know, it doesn't seem like it, especially after watching CNBC the past few weeks.  However, between 1970 and 2010 most sectors within the stock market showed a loss in only 7-9 of the 40 years, depending on the sector.  Since 1926, it's more like 20 years, out of 84.  I don't want to sound too analytical, but the stock market goes up more than it goes down.  It stands to reason that investing a lump sum at the beginning of a period will generally do better than spreading it across a series of investments over a number of years.  Of course, you may not want to break that data out at a cocktail party with somebody who went all-in in May of 2008.

The decision to invest the lump sum is more obvious for the dividend enthusiasts among us.  Waiting to get into the market could mean foregoing dividend payments.  Those dividend payments can be reinvested, and over the long run they will contribute significantly to the overall returns of a stock market investment.

Does it ever make sense?

A Dollar Cost Averaging approach to investing matches up nicely with most savers' ability to invest.  Not many of us have a pile of cash sitting around looking for something to do.  Not to sound like Yogi Berra, but if such a pile exists, and we invest it, it no longer exists.  Systematic investing makes a ton of sense, and that implies that DCA is at work.  The discipline and forced savings that accompany such an approach are key components of building wealth, and in that sense Dollar Cost Averaging makes a ton of sense.

*Not a recommendation to buy a specific security.

The quick answer is yes, 529 accounts can be rolled into new 529 college savings plan accounts.  There are several rules that must be followed to avoid unwanted taxation and penalties, but they’re not particularly complicated and shouldn’t be an obstacle to shifting funds in this manner.

Why would somebody want to roll over funds to a new plan?

Before we get there, though, you may be asking why somebody would want to roll over a 529 account.    There are a several reasons that make sense to me.  These plans are not all created equal, and they change from time to time.  It’s possible that a family initially chose a plan without realizing that it had high fees and/or poor investment choices.  Upon learning that better options exist, they decided to make a change.  In many cases, in fact, brokers sell plans that are not really the best option for the purchaser.  They’re sold because they are a good option for the broker, even if it means that customers forego a state tax benefit because they’re buying a plan that is administered by another state.
Another basic reason that a rollover would make sense is that people move, and there may be new state tax benefits offered in their new home state.  That is certainly worth investigating, in any case.

What should I be aware of?

As long as a 529 account has not been rolled over for the given beneficiary in the previous twelve months, there are no negative consequences to rolling it over.  This is true even if the accounts have different owners.  If the beneficiary has had an account rolled within the previous twelve months, it can still be done, but the beneficiary has to be changed.  The beneficiary can then be changed back at a future date without no adverse consequences.

One key consideration

There may be state income tax consequences to rolling over a 529 account.  Certain states may seek to recapture any state tax benefit that was previously received on contributions.  Similarly, they may just treat it as a nonqualified distribution for state income tax purposes.

What if it’s done wrong?

The worst-case scenario if the process isn’t executed properly is that it will be considered a nonqualified distribution for federal taxes, which would also add a 10% tax penalty to all earnings in the account.  There also could be gift tax considerations.  The good news is that this shouldn’t be too hard.  As with retirement account rollovers, doing a direct, trustee-to-trustee rollover is a good way to stay out of trouble.

In the very first post of this blog, I talked about 529 plans and why I thought they were the best way for most parents to save for college.  That was more than five years ago.  In some ways, much has changed since then.  The crash of the markets in 2008 led to lawsuits and the restructuring of a lot of individual state plans.  Generally, this restructuring led to better investment options and lower fees, such that the bad plans started looking more like the good ones.

The basic regulatory structure has remained the same for 529s, although there have been some notable developments over the past few years.  Perhaps the most significant of these is that the Pension Protection Act of 2006 made permanent  tax-free withdrawals from 529 plans, for qualified educational expenses.  This didn’t come as a big surprise, but it removed an element of uncertainty that made these plans even more popular.  In 2009 and 2010, the costs of computers and other computer technology for college students were included as qualified expenses, but that provision expired on December 31, 2010.

An obscure decision in 2006 undoubtedly increased the value of 529 plans for contributors.  It was made by a regulator of the plans, and specified that brokers must inform customers that they may be eligible for state income tax breaks if they invest in their home state.  Ameriprise Financial Services was fined for selling clients only one plan (which presumably compensated them handsomely) regardless of where the client lived and what tax benefits were available for the clients.

One of the questions that I often get about these plans pertains to what happens if the beneficiary receives a scholarship and doesn’t need all of the money that has been set aside.  It’s probably notable that a much less frequent question involves what happens if the beneficiary chooses not to go to college.  In any case, there are a couple of options in the case of a scholarship.  One is that the funds can be ported to another beneficiary, such as a sibling, without any consequence.   If there are no siblings, or they all receive scholarships, an amount equal to the scholarship award can be withdrawn from the 529 account without penalty.  Taxes will still be due on the funds that are withdrawn.