Pros and Cons of Separate 529 Plans for Two or More Children

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Kathryn Flynn

By Kathryn Flynn

December 11, 2019

529 plans offer tax-deferred investment growth and tax-free withdrawals when the funds are used to pay for qualified education expenses for a specific beneficiary. Parents may use a single 529 plan account to save for more than one child, however, as long as they change the beneficiary when it’s time to pay for the next child’s college expenses. There are no costs to change a 529 plan beneficiary, but the 529 plan account owner will be required to complete and submit a beneficiary change form. Distributions that are used to pay for education expenses for someone other than the designated beneficiary are considered non-qualified and subject to ordinary income tax and a 10% penalty on the earnings portion of the distribution.

In most cases it makes sense to have a separate 529 plan for each child, but some parents may prefer to use a single plan. Here are some advantages and disadvantages to consider when determining the best college savings strategy for your children.

Advantages of Using Separate 529 Plans for Each Child

PRO: You can customize the mix of investments for each child

If your children are different ages, they each have a different investment time horizon. With separate 529 plans, you can select investments based on each child’s age and when they will start taking distributions to pay for college. This is especially true if you plan to use an age-based investment option.

PRO: You may be able to claim a larger state income tax break

Many states offer an income tax benefit based on 529 plan contributions. Some states allow taxpayers to claim the income tax benefit per beneficiary. For example, in Iowa, 529 plan contributions up to $3,387 per beneficiary are deductible from Iowa state income tax. Parents who have separate 529 plans for three children may deduct up to $10,161 in 2019.

PRO: You may be able to save more

Each state has a maximum aggregate 529 plan limit per beneficiary that is intended to cover the cost of an expensive college and graduate school education in that state. If you have separate 529 plans for each child, you can save beyond the aggregate limit.

PRO: It’s easier to receive and track 529 plan gifts

Grandparents and other relatives may want to contribute to a child’s 529 plan instead of giving a traditional holiday or birthday gift. If someone is giving a gift to a specific child, they may be reluctant to contribute to a 529 plan account that is shared with a sibling.

PRO: Grandparents can give larger, tax-free gifts

Contributions to a 529 plan are considered gifts for tax purposes, and up to $15,000 per beneficiary in 2019 qualifies for the annual gift tax exclusion. Grandparents who contribute to 529 plans as part of an estate planning strategy are able to remove a larger amount from their taxable estate if each grandchild has a separate 529 plan.

Disadvantages of Using Separate 529 Plans for Each Child

CON: There may be fees to maintain each account

The biggest disadvantage to having separate 529 plan accounts for each child is that you may have to pay an account maintenance fee for each account. For example, Arkansas’s GIFT College Investing Plan charges a $20 annual account maintenance fee to non-Arkansas residents. View a complete list of 529 plan account maintenance fees here.

CON: You will have to keep track of each account

With separate 529 plan accounts, you will have to select and keep track of investments in each of your child’s 529 plan account, and you will likely receive statements for each account. Some parents may prefer the simplicity of keeping all of their family’s college savings in one 529 plan account. However, they will have to change the beneficiary each time they take a distribution to pay for a different child’s college expenses. 

CON: Some 529 plans have minimum contribution requirements for automated investments

With automatic investing, you won’t have to worry about forgetting to make 529 plan contributions each month. If you have more than one 529 plan account, it is also easier to set up automatic investments rather than making manual deposits to each account. But, some 529 plans have minimum contribution requirements to use their automatic contribution plans. A family with more than one 529 plan would have to commit to contributing the minimum amount to each plan every month.

A good place to start:

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