<p>DS will be starting college in fall 2014. We know where he's going and have the financial aid offer, which will be finalized after filing the FAFSA.</p>
<p>DH and I looked over the mutual funds and they have gone up as the market has gone up.</p>
<p>So I'm wondering: is it time to move money out of the market? </p>
<p>We could cash out some funds and put them in a dedicated savings account, in order to preserve its value. </p>
<p>Is there a rule of thumb on these matters? Any advice would be most appreciated.</p>
<p>I don’t have a lot of advice on this, but you should definitely make sure you are comfortable with the level of risk you are taking on. Remember, you have four or more years to be investing the unspent portion as well. I moved my D’s 529 (about half of her funds) to a conservative index fund that includes cash and bond investments as well; the rest is still in index funds.</p>
<p>If you have enough to pay for the education, and that was the goal, maybe it should be put in very secure instruments (treasuries, money market) now.</p>
<p>Technically, you could “ladder” the money. Money earmarked for Year 4 would technically be considered mid-range money by many investment managers, and could probably tolerate more risk than the money for Year 1. But I believe college money is a unique investment. It is earmarked for a very specific goal that must happen on a set schedule, without much malleability in the price (once the parent agrees that the kid can attend a certain school). Retirement is different – with bad luck in the market, we have some discretion to postpone retirement, work part time in retirement, pick a different year to start social security, change our minds about where we will live in retirement, etc. None of this is true for college, once we announce a budget and the kid shows that he or she is academically on track.</p>
<p>I, personally, feel that once a parent has told the kid the budget, the parent must guarantee that the money will be there. Earning even 10% per year on the Year 3 and Year 4 money would be nice. But quickly losing 40% of it, even in conservative stocks (as people did in 2008-09) could mean that DS or DD has to pulled out of school before finishing. To many people, that downside exposure is not worth the upside exposure of keeping the Year 3 and 4 money in equities, after DS/DD is in 11th or 12th grade.</p>
<p>Yes, this is money that will be needed starting Fall 2014.</p>
<p>The plan for each year’s tuition is to use: 1) savings, now mostly in mutual funds; 2) funds DH or I usually earn in a chunk from a summer project or grant or teaching an extra course; 3) monthly amounts from our usual income and 4) a student contribution.</p>
<p>We don’t have enough in savings alone to cover tuition but can do it with items 1-4. Luckily the FA offer is good.</p>
<p>So my question concerns the savings portion of this scheme.</p>
<p>I’m hearing from you’all that at least a few years of the needed savings should come out of the market and be placed in the bank or into a conservative investment that can be cashed out without penalty.</p>
<p>You should definitely put some funds into a safe investment. Even though we knew we should pull out funds before D1 started in 2008, we never got around to it and of course that all ended with a substantial loss of funds. Hard lesson learned on that, so D2,D3 and S1’s funds are all very conservative-I’d rather have fewer gains but the peace of mind knowing that we won’t take a 30% loss.</p>
<p>Definitely get it out of stocks. Those losses from 2008 took a long time to come back! Think about how you will feel if a big downturn occurs. I feel bad that the money in my kids’ 529s missed out on 2013 market gains, but as they are both currently in college and their money is in cash type investments, it is better to be safe than sorry. Their fund company automatically readjusts as they get older.</p>
<p>Any 529 funds that will be needed this Fall should definitely be invested in CD’s/MM…no question. Even though bonds are traditionally thought of as “conservative”, the interest rate risk is too high right now for any money that will be needed in 7-8 months.</p>
<p>Would converting these mutual funds to a savings account mean that they would then be income for 2014, rather than assets? Would you do corrections to the FAFSA? I would feel kind of funny making a change like that right after doing a FAFSA, but maybe that is a common thing to do.</p>
<p>Whoa. If your money is in regular mutual funds and not a 529, you will owe taxes on any you withdraw. Take that into account when you take out money. For example, assuming it’s in your name and not your child’s, if you withdraw $10,000 this year, you may owe something like $2500 in taxes next April 15. On the other hand, having college money in mutual funds heavily invested in stocks during the college years (you don’t say where they are invested) is a bad idea.</p>
<p>If you check what the age-based 529 investing plans do, you will see the portfolio gets more and more conservative (less stock/mutual funds, then eventually no stock/mutual funds) as the child approaches college entry. Take a look at what the plans do and go from there.</p>
<p>Assuming that the sale is in a taxable account, that amount of tax is unlikely, unless there were extraordinary gains. The entire amount withdrawn is not to be taxed, only the capital gains. And that gets taxed at somewhere between 0% and 20% and might be offset by carry forward losses. Short-term capital gains are taxed the same as income. </p>
<p>Nobody likes to pay tax, but do not let the tax tail wag the tuition dog.</p>
<p>EDITED TO ADD: this is all true-ish, but taxes are complex and can’t be fully described in a one paragraph anonymous posting :-)</p>
<p>@momfromme, thanks for the post. I had procrastinated moving funds into safer investments myself. Funny how that happens in a rising market :-). So, that goes on today’s to-do list.</p>
<p>Yes, you will have to pay capital gains tax if you shift appreciated assets in a taxable account to another investment. But you will have to pay the same tax if you withdraw the funds to pay tuition.</p>
<p>@momfromme, there is something to be said for only exchanging/selling MF shares that have long term capital gains. Those shares purchased more recently should probably simmer long enough to time out the short term gains. You probably already knew that, but just in case…</p>
<p>That means that you must use either FIFO (first in, first out) or specific lot accounting for this account.</p>
<p>I moved the vast majority of mine into the money market fund, but they’re in a 529, so no tax bill for switching funds. I left relatively little in a conservative fund (40 stock/ 60 bond). I guess, like so many others, I want to know the money is there when I need it come August.</p>
<p>laddering the funds makes sense. You have a 4 year window. That was my plan until my child decided on the almost full ride versus a top ten uni (savings going towards med school). I will probably do that once she starts the next phase of her education.
With all that said, most market watchers agree it will continue to climb modestly- 3-5%.
Think about what you would gain versus what you could lose. I wouldn’t expect the 20% increase this or the next year. Too close to the home stretch to gain a few hundred or 1,000 dollars.
As others have said, beware of bonds. Investments there must be made carefully.</p>
<p>The amount of “savings” you have in mutual funds is less than meets the eye, for two reasons. First, as others have pointed out, you’ll need to pay tax on the capital gains, so the amount you net when you cash out of the stock market will be less than the full fair market value of the shares you’re selling. </p>
<p>Second, when you do cash out, you’ll need to report the income (capital gain) on your next year’s FAFSA/CSS Profile, which could affect your EFC and might reduce any need-based FA award in the subsequent year. For that reason, if you can stomach some market risk, I’d consider cashing out of stocks more gradually, over two or even three years so you don’t show such a sharp spike in income for 2014 that you take a big hit in FA next year. (Of course, assets also affect your EFC, so to some extent diminution of assets counterbalances capital gains income, but income is weighted much more heavily in the EFC formula and is likely to dominate, especially since capital gains are likely to be large given the recent run-up in stock prices).</p>
<p>For other parents out there, the ideal time to cash out of the stock market to pay for college may be either when kiddo is still in HS, or in the fourth year of college. You’ll pay capital gains tax whenever you cash out, but it won’t show up as income on your FAFSA if you do it before the year for which you first need to file a FAFSA, or after the last FAFSA is filed. On the other hand, if your kid is a full-pay you don’t need to worry about any of these timing issues.</p>
<p>Well, there are other reasons to limit the capital gains hit, things like potential eligibility for the AOC and others (Roth IRA?) come to mind. I read the OP and it did not occur to me that these funds were not in a 529 and taxes would be a consideration.</p>
<p>If you absolutely need to sell some of the mutual funds to pay the bills, then you should probably sell some ahead of time and reduce your exposure to the downside. </p>
<p>Getting out of the market means no more dividend income of maybe 2.5% or so, depending on your fund, and no more gains if the market heads further upwards. But also no exposure to 20% plus drops at a time when you’ll have to sell (depending on your overall financial picture.</p>
<p>One of those things few can predict. The market rose nearly 30% last year (although that was far more than sales and earnings rose.)</p>