Two Cheers for the IRS

The IRS recently instituted a rule change on 529 college savings plans, temporarily allowing investors to change their mix of investments twice (rather than once) this year.

Good.

One can imagine the likely-all-too-common feeling that families had in 2008 when they changed their allocations to a more aggressive mix of investments, watched the market nosedive mid-year, and couldn’t do anything about it. Now imagine those families only having a few years left to save for a child’s tuition.

Most 401ks and the like will allow at least quarterly changes to one’s portfolio, and many have no limit on the number of times one tinkers with their plan. Why not consider the former with 529s?

Financial advisors wisely guard against timing the market and making too many switches in order to prevent locking-in your losses, and patience certainly is a virtue when it comes to medium- and long-term saving.

However, families saving for education in this market need as many confidence boosters as they can get. Allowing them to change their investment options twice a year is a start. It’s a solid strategy to prevent families from withdrawing funds for unqualified (non-educational) expenses — a disturbing trend in some states.

So bravo, Internal Revenue Service. Two suggestions, however: Lose the “temporary” nature of the rule change, and consider allowing an individual to have quarterly control over his or her plan.