5 multiple-child strategies for 529 plans

http://www.savingforcollege.com/articles/20091002-5-multiple-child-strategies-for-529-plans

What's the best way to allocate funding for your 529 plan if you have two or more children?

Funding a single 529 account has its challenges — but figuring out how to divvy up spending between two or more children can be even more daunting.

Parents with more than one child must decide whether to fund one account or several, and further, must determine if one child will need more or less funding depending on his or her age, likely school choice and scholarship potential.

Fortunately, most parents have an overarching goal that can help guide their decision-making, says Greg Dosmann, a principal partner in the retirement and education marketing department at Edward Jones in St. Louis, Mo. "Most people just want to provide for a quality education for all their children," he says. "But there are different ways to do the math and figure out how it makes sense to do that."

Here are five strategies to consider as you determine how to focus your 529 funding with two or more children.

No. 1: Equal funding in separate accounts

Rationale: Each child should be treated equally, and in most cases, this can be accomplished by contributing the same amount each year to separate accounts for each child.
Pros: The simplest solution, it may also allow you take best advantage of any tax breaks that your state may offer — some allow you to take a deduction or credit for each child's account.
Cons: This method can lead to unequal funding if parents start the accounts long after both children are born and the first child has significantly less time than the second before heading to college. In what scenarios does it make sense? If you start each account when the child is born, this is a sound solution. Experts say: "The typical way that people tend to fund plans is evenly among their children," says Ken Nussbaum, certified public accountant and consultant at K. Nussbaum & Associates in Richmond, Vt. "In most cases, there is no reason not to do so, and psychologically, it feels like the right thing to do."

No. 2: Start with a single fund; adding more over time.

Rationale: For those who want to get an early start on funding a 529 plan with high minimum funding requirements, this strategy can jump-start savings while parents build up enough cash to start a second account.
Pros: Parents can start benefiting from tax-advantaged investments even if they don't have enough money to start two separate accounts.
Cons: It can be a hassle to set up accounts at different times. In what scenarios does it make sense? For parents with limited means, this can be a good starting strategy as they build up savings. Experts say: Nussbaum says that it's not an ideal option, but if it helps get the ball rolling with college savings, it's probably worth it.

No. 3: Start with a single fund; changing beneficiaries after the first child has finished college.

Rationale: A single account minimizes fees and paperwork.
Pros: Parents can save on account setup costs and annual maintenance fees — which are generally minimal but can add up over time.
Cons: It may not be possible to take full advantage of tax breaks with just one account for multiple children, and it will require perceptive investment strategies. In what scenarios does it make sense? If you have kids who are more than four years apart, you may not need to have two accounts because it's easy to switch beneficiaries on an account. Experts say: "If you're going to use one 529 plan for two kids, it's important to create a more customized portfolio than the standard ones that are available," says Rebecca Schreiber, a Certified Financial Planner and founder of Solid Ground Financial Planning in Silver Spring, Md. "When you select a preset portfolio, it's based on one time horizon, not two."

No. 4: More aggressive funding for the older child

Rationale: The older child will need the money sooner, and a shorter time horizon means the funds will have less time to grow.
Pros: Extra funding for the older child may ultimately mean that both kids get the same amount of financial help by the time they enroll.
Cons: Parents (and kids) may find the differential funding inherently unfair, and financial situations may change over time, leaving the younger child with less funding for college. In what scenarios does it make sense? When there's a significant age gap between the children — particularly if the older is within a few years of college — it may make sense to stash away more cash for the older child. Experts Say: "In general, you can put away smaller amounts of money for the younger child, since you'll have the time value of money to allow your funding to compound and grow," says Dosmann. "You can have a financial adviser do the math for you."

No. 5: More aggressive funding for the younger child

Rationale: College costs have been outpacing inflation — and many investments — for decades. All else being equal, the cost of a college education will be much higher for the second child than it will be for the first child.
Pros: Having significant funding available for the second child as college costs pile up for the first child offers some psychological relief. Also, many parents find that grandparents and other loved ones are conscientious about contributing to a 529 plan for the first child, but are not always as attentive for subsequent children. More aggressive funding for the second child can help bridge that gap.
Cons: Parents may not have access to money for the first child when they need it. In what scenarios does it make sense? If the older child likely will earn big scholarships or attend a less expensive school, this strategy can make sense. It may also make sense for parents who expect to be close to retirement as their last child goes through college, since they may taper off spending later to focus on retirement savings, not college savings plans. Experts say: "When you've got a second or third kid coming through the pipeline for college, the financial situation for many people kind of blows up," says Michael J. Lopata, certified public accountant and a certified college planning specialist (CCPS) in Atlanta, Ga. "The more money you've got saved up for later on, the better off you'll be."

Posted October 2, 2009