COLLEGE SAVINGS 101

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Open accounts in more than one 529 plan
by Joe Hurley, founder, Savingforcollege.com
Saturday, May 13th 2006

[Updated March 27, 2008]

I don’t wish to complicate your financial life—and signing up with more than one 529 plan for your child will do just that—but there could be some good reasons for spreading your college savings among two or more 529 plans:


  • You may want the benefits of both a prepaid tuition plan and a savings/investment plan. Most of the states’ prepaid tuition plans, as well as the private-college Independent 529 Plan, cover only tuition and mandatory fees. You can add a 529 savings plan if you wish to cover other eligible expenses.


  • You’ll gain some income tax flexibility. By establishing multiple accounts, you’ll have the flexibility to pay college bills from the account with the most growth first, thus assuring maximum tax savings. If money ever has to come out of your 529 plan subject to tax (i.e. as a non-qualified withdrawal), you’ll want to take it from the account with the least growth. Note: Your accounts must be in different states. All accounts you have in the same state for the same beneficiary are aggregated for tax purpose.


  • Your state may offer a state tax deduction capped at a certain amount. Your “favorite” 529 plan could be one from a different state, yet you may still want to take advantage of the maximum tax deduction available for using your own state’s 529 plan. Allocating your contributions between both states may be the solution.


  • Your state may require that you be “vested” to be eligible for a particular benefit. A small number of states (e.g. Kentucky and New Jersey) offer a scholarship, resident tuition rates, or other benefits, but only if you participate in the state’s 529 plan for a minimum time period. Maintaining a small balance in your state’s 529 plan can ensure eligibility for any such benefit, even if the majority of your savings go into another state’s 529 plan.


  • You may be seeking more diversification. Most of the 529 savings plans do a good job in offering diversification among equity and fixed-income asset classes. But while some programs employ mutual funds from multiple fund families, many use a single investment manager for all investment options. If you are satisfied with the fund family in a single-manager plan, that’s fine. But if you want to diversify your investment among different managers, you may decide to use more than one 529 plan.


Creating multiple accounts can involve higher total fees. Managing those accounts can also mean additional paperwork headaches and uncertainties, so be sure your reasons for doing it are sound.

» Claiming a state income tax deduction - 12/20/16
» Understanding 529 Investment Options - 12/13/16
» Should you open an UGMA/UTMA 529? - 02/06/08
» Understanding your state's slice of 529 fees - 12/13/07
» Planning for the new "kiddie tax" - 10/30/07
» Show All Archives

 

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