Share toys? Yes. Share a 529 savings plan? Not so much
Your family is growing and so are your plans for the future. You want to have a healthy college savings fund for each of your children but may have questions. Can one 529 savings plan be shared by two? Or should you establish separate accounts for each child? What if you want to change 529 savings plans altogether? Here's the nitty-gritty about using 529 savings plans for more than one child.
Pick the right plan
As you become a more experienced parent, you can become a more knowledgable investor too. Are you questioning your existing 529 savings plan? You may be able to find one with lower costs and better results.
Research which plans are available to you and which offer the best tax incentives. Be sure to factor in the expenses and fees associated with each plan. As you're researching, consider investing in CollegeAmerica®. It's the nation's largest 529 savings plan, with some of the lowest fees in the industry.*
A financial professional can help you sort through your options to choose the right one for your family.
Customize for their needs
Since your children will head off to college at different times, the investment mix of stocks, bonds and cash should be tailored to each situation. For example, as your oldest approaches college age, you may want to dial back to a more conservative investment mix. Meanwhile, you may want a more aggressive investment mix for younger children who still have time for their accounts to grow.
Some 529 savings plans offer target date funds, based on the date you expect your child to enroll in college. Separate 529 savings plans make this kind of individual planning easier.
Consider financial aid
It might seem easier to keep all your college savings in one pot and worry about dividing it up later, but remember that your account has only one beneficiary. If all your money is in that one account, it’s going to look like that beneficiary has much more money available. Plus, using the money for a child who is not the designated beneficiary would not be considered a qualified expense. So the earnings would be subject to a 10% federal tax penalty, as well as federal, and sometimes state, income taxes. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.
A 529 savings plan owned by you is considered a parental asset on the Free Application for Federal Student Aid (FAFSA), and could possibly reduce a student's aid package by a maximum of 5.64% of the account's value. So a smaller account for each child could be better than one larger one.
More accounts, more money?
Besides giving your child a valuable sense of ownership and inspiration, there are financial incentives to opening separate 529 savings plan accounts. The federal government treats a contribution to a beneficiary as a gift, with no gift-tax implications for amounts up to $16,000 per child annually. A married couple can contribute $32,000 per child annually. And, under a special election, they can make a one-time contribution up to five times that amount by accelerating five years' worth of investments. So the more beneficiaries, the more gifts!
There’s also the question of how much you can sock away in a 529 savings plan account. Different plans have different limits for the final account value. If you’ve got generous relatives, you don’t want to put a cap on how much they can put aside. The account limit applies for each individual child’s account. So the more accounts you have, the more gifts your children can receive.
Speaking of assistance, siblings can help each other without even trying. With separate 529 savings plan accounts, you can change the family beneficiaries at any time. So, if one of your children finishes college without using all of the money in the account — maybe school was less expensive than you anticipated, or financial aid was better than expected — changing the beneficiary to a brother or sister is simple.
You can also transfer money to a 529 savings plan account named for another child or split one 529 savings plan account into two. The flexibility of a 529 savings plan is one of its best benefits.