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Should You Have a Separate 529 Account for Each Child?

Key Points
  • While it's technically possible to use one 529 plan for multiple children, rather than making things simpler, it actually makes them more complicated.

  • From beneficiary rules to investment strategies to ultimate fairness, having a separate 529 account for each child is the preferred way to go.

  • Choose a low-fee plan and take advantage of any automatic contribution fee waivers and account minimum reductions.

Dear Carrie,

My wife and I just had our second child. We already have a 529 plan for our 2½-year-old son. Can we continue to make contributions to our current plan and distribute the savings to both of our children's colleges? Or should we have separate 529 plans for each child and make contributions to each plan?

—A Reader

 

Dear Reader,

The tax advantages of a 529 plan make it one of the best ways to save for a child's education, so congrats on getting a jump on saving for your son. Now that you have a second child, I can understand why it might seem easier to manage a single 529 and just divvy up the money as the kids need it. But while that's technically possible, having one 529 rather than a separate account for each child actually complicates things. Here's why.

You can only have one named beneficiary

When you open a 529, you need to name a beneficiary—one beneficiary. While your intent may be to fund the education of more than one child, you can only make tax-free withdrawals for qualified education costs of the named beneficiary. So how would this work for multiple children? There is a way, but it takes jumping through some administrative hoops. Here are a couple of examples.

Let's say your kids are four years apart. In this case, you could use the 529 money for the first child's education then, when the older child graduates, change the beneficiary to the younger child. Simple enough.

However in your case, with children 2½ years apart, it's more complicated. When your older son first enters college, no problem. But when you want to tap the funds for the younger child's education a couple years later, you'd have to make that child the beneficiary. Then when you again needed money for the older child, you'd have to change the beneficiary again. It's technically possible depending on the plan, but it would mean a lot of back and forth during the two years the kids' college careers overlapped.

Plus, now that 529s can be used for elementary and high school tuition up to $10,000 per year, beneficiary switching could get complicated sooner should you decide to use the money for their earlier educations.

An investment strategy for one child might not suit another

One of the beauties of a 529 is that you can create an investment strategy that suits your child's timeline—usually more aggressive in the early years and more conservative as you get closer to needing the funds. It's also possible to choose an age-based portfolio in which the fund manager automatically adjusts the asset mix from more aggressive to conservative as your child nears college age.

With one account, you'd most likely initially invest with the older child's education in mind. With an account for each, you can vary the portfolios according to their individual needs.

There's the question of fairness

While every parent intends to treat their children equally, circumstances can sometimes get in the way. Let's say you opt for a single 529 plan but, for whatever reason, you're not able to keep funding it. Will there be enough money to cover two educations? And if one child goes to a more expensive school, will the other's education suffer?

To be fair, it’s best to have a 529 plan for each and make comparable contributions to the accounts. That way there should be no competition between your kids in the future, and no concern on your part that you've inadvertently short-changed either of them. If one child ends up not going to college, you can always roll the money from that child's 529 into the other.

You could lose some tax advantages

With today's high lifetime gift tax exemption ($11.18 million per individual), hardly anyone needs to worry about paying gift taxes. However, contributions to a 529 over the annual exclusion of $15,000 ($30,000 for couples ‘sharing’ gifts) do count against your lifetime exclusion and must be reported on a gift tax return. A 529 account per child doubles the potential annual limit free of reporting—for you and anyone else that wants to contribute. If you're lucky enough to have grandparents who can make a lump sum contribution, they could potentially give up to $75,000 ($150,000 for a couple) to each 529 as long as the gift is reported and treated as if it were spread evenly over five years.

Also be aware that some plans offer state tax deductions or credits for 529 contributions. Depending on the state and the plan you choose, having a 529 for each child could increase those tax advantages.

Others may not understand your intentions

This may not be top of mind, but what if something happens to you and your wife? Unless you have a 529 for each child, you'd have to clearly spell out your intentions for the single 529 plan to make certain both kids get the education you envision.

To me, a 529 for each child is the preferred way to go. It's easier for you and, ultimately, for your kids. And it doesn't have to cost significantly more. Start with your home state plan before looking at other 529 plans. Look for low-fee accounts and take advantage of any benefits that may come with making automatic monthly contributions. In fact, if you put contributions to both accounts on automatic, that will be the easiest of all.

 

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

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Investors should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.

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The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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