Using a 529 when facing a bear market

Published on Saturday, October 22, 2022

My second oldest started her freshman year this fall. In January, when I realized I was going to be a little short on her 529, I made some last minute contributions to start catching up.

Then the market dropped. And kept dropping throughout the spring, summer and fall.

Stocks and bonds have both taken a beating this year. As of today (10/22/2022), the S&P 500 is down 22%, year to date. Bonds are also down, with Vanguard’s Total Bond Market Index Fund ETF (BND) down nearly 15%.

To date, my daughter’s 529 has lost 14% of its value. However, I'm not sweating it.

If you’re using a 529 to pay for college this fall, Here are some strategies that you can use to lessen the impact of a bear market.

Use Principal Protected Accounts

I’d rather not lock in losses by selling into a bear market. Instead, this summer I invested additional funds in principal-protected accounts, such as the Stable Value and FDIC-insured portfolios. With inflation on the rise, I also opened an Inflation-Protected portfolio.

I don’t expect any of these new accounts to generate significant returns. I’m using them to pay this fall’s expenses, giving my other accounts more time to recover. My daughter is a freshman, giving me four more years to use her other accounts.

Because Virginia gives a deduction of up to $4,000 per account, these three accounts will save me $690 in state tax, sweetening the deal.

After opening these new accounts, my ratio of equity to fixed income shifted from 85:15 to 56:44.

Use Younger Siblings

I have four additional years over which I’ll be paying college expenses for my daughter. But by using her younger siblings, I actually have much longer. My youngest won’t enter college for another nine years, giving me thirteen additional years of investing. I suspect that things will get much uglier before they improve, but I’m hoping that it won’t take thirteen years to recover. If my daughter's accounts never recover by the time I’m through paying for her expenses, I can simply shift them to my next child by changing beneficiaries.

Delaying Withdrawals Until December

Families typically draw down their 529s as if it were a savings account, withdrawing money as expenses happen.

But not me. I pay the expenses out of pocket and then wait until late December to reimburse myself. It’s late October and I still haven’t withdrawn the money from my 529 to cover last January’s tuition bill.

Not only does delaying withdrawals require me to float the expense, but it also requires discipline. I track the outstanding expenses in a spreadsheet that shows exactly how much I can still withdraw.

Why is this a cool 529 hack? In general, time in the market is superior to timing the market. Waiting until December not only gives me more control over when to make the withdrawal, but it gives me up to 12 more months in the market.


I’m not happy that it’s a bear market, but I’m also not worried. The market is cyclical and you can’t have the ups without the downs. Having a plan on how to stay calm during the downs is vital.

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