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Multiple 529 accounts for the same child: does it ever make sense?
There's no set limit on the number of 529 accounts that can be opened for any particular beneficiary, leading some to wonder if maintaining accounts in different 529 plans might be a good strategy. It's hard to imagine circumstances in which anyone (other than those researching these plans) would want to open accounts in more than two, or at most three, different 529 plans for the same child. But here are some reasons that will lead some families to consider using more than one 529 plan:
- Asset allocation.
Most 529 savings plans offer investment options that are well diversified among different asset classes (stocks, bonds, money market, etc.). But perhaps your favorite 529 plan lacks some component that you would like to see in your 529 portfolio, such as international equity or small cap value or a principal-protected option. You may find that missing element in another state's 529 plan and decide to put part of your 529 savings with that second plan.
- Fund manager diversification.
Different 529 plans utilize different investment managers. If you are happy with a particular fund company, you may be able to find a 529 plan with investment options consisting of products from only that fund company. But if you want to diversify across different fund companies, you will either need to open accounts in more than one 529 plan, or find a 529 plan that employs a "multi-manager" investment platform.
- State tax deduction limits.
If the primary reason you are making contributions to your own state's 529 plan is for the state income tax deductionó30 states require that you use the in-state 529 plan to claim the benefitóbut your intended investment exceeds the maximum deduction allowed in your state, you may decide to go with another state's 529 plan for the non-deductible portion. That same thinking may apply in states offering a matching contribution or some other capped incentive to invest in the program.
- Combining prepaid with savings.
You may want to enroll in your state's 529 prepaid tuition plan, or in the private-college Independent 529 Plan, as a way of locking in future tuition and fees. Many of the prepaid plans do not cover certain expenses like books, supplies, equipment and room and board. You would have to open another account in a 529 savings plan for these additional expenses.
- Avoiding aggregation.
All 529 savings accounts in a state with the same account owner and beneficiary must be aggregated for purposes of the maximum contribution limitation as well as for the calculation of earnings reported on Form 1099-Q when withdrawals are made. Accounts in different states are not aggregated, even when the account owner and beneficiary are the same. If the maximum contribution limitation in a particular state poses a problem (which is hard to believe considering the high limits in most 529 savings plans), you could open accounts in multiple states to get around it. Avoiding aggregation in the earnings calculation theoretically gives you some additional tax-planning opportunities, but practically speaking is hardly ever worth the extra effort.
The K.I.S.S. principle suggests that you not open multiple 529 accounts unless you have a very specific reason for doing so. The additional paperwork, increased monitoring, and need to juggle distributions, can cause you to regret the complications that come with multiple accounts.
Posted October 17, 2008
Joe Hurley is the founder of SavingforCollege.com, and a certified public accountant.