When to have more than one 529 plan

By: Savingforcollege.com

Q:

Dear Joe, I have two kids and am opening an account for each of them. I am planning on using the Utah plan for both. Should I consider separate state plans? Or is going with two accounts in one state's plan OK? Thank you. -- Steve

A:

Dear Steve,

I'm giving you my answer in two parts.

The first part is to tell you that for our own two children -- one now in college and the other in high school -- my wife and I currently have accounts in 32 different 529 plans. Our 529 accounts hold a variety of investments including age-based options, 100 percent equity options, principal-protected options, FDIC-insured certificates of deposits and even prepaid tuition plans.

The second part of my answer is to suggest that you NOT follow my example. The reason my wife and I have so many different accounts is because it helps in my research of 529 plans, and many of our accounts carry small balances. Most parents or grandparents can find what they need within a single 529 plan, even when they have more than one child, and it's a lot simpler dealing with only one 529 plan.

Even so, there are situations where it makes sense to use a different 529 plan for each child.

Occasions that call for multiple 529 plans

• If your children are more than a couple of years apart in age, you will most likely have different investment objectives for their college savings. You may decide that one particular 529 plan has better equity-weighted investments (suitable for a young child) while a different 529 plan is more attractive for its conservative options (suitable for an older child). The "age-based" options available in many 529 plans, including Utah's, will automatically adjust as your children grow older, but you may still find differences in the target blends of equities and fixed income at various ages, and that may cause you to choose different plans for your two children.
• If you have a sense of which particular schools, or types of school, your children are likely to attend, the choice of institution may influence your selection of a 529 plan. This is especially true if your state offers a prepaid tuition plan, or if you are considering the private-college Independent 529 Plan. A few of the 529 savings plans also offer extra benefits for students attending certain schools. For example, the child of a New Jersey resident using New Jersey's 529 savings plan is eligible for a one-time scholarship of as much as $1,500, but only if attending a New Jersey private or public institution. And students attending one of the 200 private colleges affiliated with the SAGE Scholars program may get an extra boost if you join the Pennsylvania or Wisconsin 529 savings plans.
• If you're simply not sure about your choice of 529 plan, you can hedge your bets by spreading your contributions among two or more 529 plans. You might also achieve some more diversification in your investments by doing so, at least in regard to the fund managers handling your college savings.

Instead of opening accounts for your two children in two different 529 plans, you can obtain the extra diversification by using multiple 529 plans for each child.

When shopping for a 529 plan, you should always consider your own state's 529 plan, even if you ultimately decide to go with an out-of-state 529 plan. Special tax or other benefits may be available for using your in-state plan.

In some states, you may be able to take full advantage of a state tax deduction by enrolling just one of your children in the state's 529 plan, giving you more freedom to search outside your state for a 529 plan for your other child. In other states, however, the full state tax benefit is obtained only when both of your children are enrolled in the in-state 529 plan.

Popular Questions

Question

Two kids, two 529 plans?

Dear Big Bill,
While it's possible to maintain a 529 plan in just one child's name, even when you intend to send more than one child to college, I generally recommend that families open a separate 529 account for each child.

That's assuming there is no additional cost to maintaining multiple accounts. If your 529 plan charges an annual or quarterly account maintenance fee, check to see if you can avoid the fee by signing up for automatic contributions through payroll deduction or electronic funds transfer)

With a separate 529 plan for each child, it becomes easier for you to tailor the mix of stocks, bonds and stable-principal investments (e.g., stable value, guaranteed principal and money market funds) to the particular ages of your children. When your older child is nearing high school graduation, you may want to ratchet down the level of market risk in her 529 plan. At the same time, you could keep a more-aggressive asset allocation in your younger child's 529 plan, accepting more risk for a potentially higher return. Many 529 plans offer "age-based" investment options that automatically make these adjustments as the beneficiary ages.

Separate accounts for your children also offer more gift-tax leeway. Since your 529 contributions are treated as gifts from you to the account beneficiary, your $15,000 (in 2018) annual gift exclusion will go twice as far with two accounts -- one for each child -- than with just one account.

Financial aid is another reason to recommend maintaining separate accounts. You wouldn't want the investments reserved for your younger child's future college expenses to count against your older child's financial aid eligibility. Be warned: The rules here are rather murky, and the impact of a sibling's 529 account may depend on the college's own policies as well on as the type of aid -- federal or institutional -- being sought.

Finally, I believe that separate 529 accounts allow for better family bookkeeping. There will never be any doubt as to your intention to help send all of your children to college. You'll avoid the uncomfortable position of being asked to explain to a curious 8th-grader why account statements are showing up in the mail with only a brother or sister's name on them. And in the event of your death or divorce, no matter how unlikely, your legal representatives and other family members will have less reason to question your actions in setting up and funding the 529 plans.

Even with separate accounts, you'll continue to have the flexibility to shift the money around in the future. You simply need to make sure that whenever funds are withdrawn from the 529 plan to pay for college they are coming from an account in the name of the child incurring the costs. It's a simple matter to change the beneficiary designation among family members at any time, transfer 529 funds between different family members' accounts or split one 529 account into two. The ability to move assets around the family is a key advantage of 529 plans when comparing other college-savings alternatives, such as Uniform Transfers to Minors Act, or UTMA, accounts.

Original Post: 2005-10-13
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Coverdell ESA vs. 529 Plan: Which to choose? (Script)

The Coverdell ESA and the 529 plan are both excellent college savings vehicles because they are both tax-free when used for college. But many families face a choice: do they use a 529 plan for all of their child's college savings, or do they use a Coverdell for the maximum amount of $2,000 each year and put any any extra savings above $2,000 into a 529 plan? In spite of its low annual contribution cap, Coverdell's are now attracting quite a few families. There are two major reasons for that. One is that only the Coverdell allows you to self-direct your investments, just like you might self-direct the investments in your IRA. The other is that in addition to college expenses, Coverdells can be withdrawn tax-free to pay for a broad range of K-12 expenses, while 529 plans are limited to K-12 tuition. This feature is appreciated most in families planning to send their children to private grade schools, which may include additional costs such as room and board or uniforms. A 529 plan, on the other hand, does not impose age limits or income limits like the Coverdell does and so overall we see a lot more money going into 529 plans than into Coverdells. Plus many savers are happy with the investment choices offered by the 529 plans and don't necessarily want to self-direct their investments. And don’t forget this: your state may be giving you a state tax deduction for using a 529 plan, but there are no states offering a state tax deduction for investing with a Coverdell ESA.

Learn more about Coverdell ESAs.

Original post date 2013-07-15
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