A separate 529 plan for each child versus one 529 plan for multiple children makes the most sense. Let me share with you the reasons why in this post.
When my wife was in her third trimester, we began to brainstorm about all the things we needed before our daughter was born:
- Name for birth certificate and Social Security #
- Sleeping arrangement
- The type of crib, bassinet, and sleeping devices to use
- The various size diapers, bottles, nipples, swaddles, hats, nose aspirators, clothes, socks
- The safest car seat
- New tires and recently performed car maintenance
- Childcare help
Once we got done with the basics, we focused our attention onto education and finances. Because we already have a son in preschool, if our family remains in good standing, his school policy is siblings automatically have a spot when it's time to enroll. I think this policy is pretty standard across all schools.
With preschool concerns out of the way, we focused on paying for our daughter's education through a 529 plan. To keep things simple, my initial thought was to add my daughter to my son's 529 plan. Alas, after doing some research, it's probably better to have a separate 529 plan for each child.
If you are faced with the same dilemma, here are the reasons why a separate 529 plan for each child makes more sense.
Why It's Better To Have A Separate 529 Plan For Each Child
While it sounds easier to manage a single 529 plan for multiple children, having only one plan actually complicates things.
Timing Issue
Let's say your children are 2.8 years apart, like my children. When your eldest enters college, you can use the single 529 plan to pay for his college education expenses. Easy peasy.
However, when your second child enters college, you then need to change the beneficiary to your youngest in order to use the funds. Then when you need to pay for your eldest's final year in school, you'll have to switch back the beneficiary.
All this switching can be very cumbersome. Further, if you plan to use the 529 plan to pay for grade school tuition up to $10,000 per year, beneficiary switching would create even more of a headache.
Therefore, if you still want to have one 529 plan for two or more children, it's best your children be at least 4 years apart and not attend private grade school. The further apart they are in age, the better.
Investment Strategy Issue With Only One 529 Plan For Two Children
While having children at least four years apart makes having one 529 plan more reasonable, it makes having one investment strategy for multiple kids less ideal.
The general investment philosophy for 529 plans is to gradually get more conservative the closer the child gets to college. A 529 plan 18 years away from getting tapped can take more risk than a 529 plan one year away from getting tapped. The last thing a parent or child wants is to see a 529 plan get demolished when it's time to be used.
With one 529 plan, you'd most likely invest with the oldest child in mind. As a result, the plan may have too conservative of an allocation for your youngest child or children.
With a 529 plan for each child, you can customize your investment allocation accordingly.
Equitable Issue
By opening a separate 529 plan for each child and contributing the same amount to each plan, you can always tell your children you treated them equally when it came time to fund their education.
With only one 529 plan split among multiple children, the issue of fairness may rear its ugly head. What if you had one child attend an expensive private university that ate up 80% of the funds?
Would your second child be bitter that only 20% of the funds were available to only pay for a public university? Or would your second child not think anything of it? Hard to say!
Private Versus Public School Debate
My sister attended Smith College that cost about $23,000 a year to attend from 1992-1995. I went to The College of William & Mary that cost $2,800 a year to attend in 1995-1996.
After college, out of curiosity, I asked my dad whether I could have the 4-year tuition difference, which equated to about $80,800. He told me, “Sorry son, I used part of your college savings funds to pay for your sister's graduate school education.”
I wasn't disappointed by his response because I had just landed a good job post-graduation. I was also kind of just joking around. One of the reasons why I chose to attend a public college was so that my parents wouldn't haven't to spend so much on my education. I was already grateful to have gotten through college without any student loan debt.
But if I knew then that I wouldn't get the extra funds by going to a public university, maybe I would have at least asked for financial assistance to get a nicer car. Driving around in a $1,800 Toyota FX16 hatchback with a dented door was kind of embarrassing.
Tax Implications
Depending on where you live and what plan you choose, you may get to deduct a portion of your 529 plan contributions. Therefore, having a 529 plan for each child could increase your tax deductions. Unfortunately for us, California doesn't have any 529 plan deductions.
Another reason for opening a 529 plan for each child is being able to lower your estate value. Given the lifetime gift tax exemption, at $12.92 million per individual is so high today, most people won't be concerned about this threshold when they pass. The gift tax exemption amount tends to go up to account for inflation.
However, if you have been fortunate enough to have accumulated so much wealth, then opening a 529 plan for each child increases your ability and other people's ability to contribute $17,000 a year per person tax-free. Never forget about a grandparent's ability to also contribute!
An individual can also superfund each 529 plan by up to $85,000. To do so, the gift is reported and treated as if it were spread evenly over 5 years. In other words, once you superfund a 529 plan with $75,000, you are not allowed to contribute the gift tax exclusion amount ($17,000 for 2023) until the 6th year.
If your estate value is over the lifetime gift tax exemption, the value of a $85,000 contribution equals $34,000 in tax savings at a 40% tax rate.
More Clarity By Having Separate 529 Plans For Each Child
I've always said it's best to have specific financial accounts set up for specific purposes e.g. 401(k) for retirement, house downpayment fund, etc. This way, there is never any ambiguity about the money's purpose. It's when we start co-mingling funds that the temptation to “cheat” or slack off arises.
By having a 529 plan for each child, you reduce ambiguity in case of a divorce or untimely death. To provide further clarity, most parents should also create a revocable living trust.
A Separate 529 Plan For Each Child Is Best
If you are an eager beaver, there's one last roadblock to setting up a 529 plan for a child. We tried to set up a new 529 plan for our daughter during the third trimester. However, we couldn't because the application asked for her Social Security number.
It takes between 4-6 weeks to get your child's Social Security # in the mail. But by the time you get the Social Security #, you might be so sleep-deprived that opening a 529 plan may be the last thing on your mind.
But there is a solution. Future parents can open a 529 plan in their own name. Parents would list themselves as the beneficiary and change the beneficiary to the child after the child is born.
If you don't set up your child's 529 plan by the 4th trimester, don't stress too much. However, you should eventually get it done.
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I never even considered combining 529s for my 3 children. I always thought of each having their own separate (my oldest actually has 2). I live in Pennsylvania where 529 contributions to any 529 are tax deductible, so that gives me $15,000 x 3 in possible deductions.
But I do not know if I will contribute equally to all because earlier timing of the contributions plays a role roo. As I grow older, I’ve gotten more money, and I’m able to contribute more money to the younger children when they are a younger age. So their funds have more time to grow so I don’t see that I need to contribute the same as theirs. Rather, what I calculate they will have by age 18 is more where I want to be equal on.
I love learning something new every day. I didn’t know the beneficiaries could be changed like that. Definitely sounds like a pita to do it that way when managing payments for two kids. Also makes a lot of sense to be able to select two different investment strategies by having two separate accounts. Thanks for all the insights!
If I was rich, I would invest in private security or at least firearms training for my kids. The plebs aren’t going to keep falling further into inequality without revolting soon. We’re already seeing it in France where “the president of the rich” was just chased out of a theater by a mob.
It has been clear for the past 40 years that while global growth has transformed the lives of billions in the global South, growth in the West has been depressed. Low productivity growth, low investment and low wage growth, especially when compared with the postwar boom, have become depressing features of all the major Western economies.
It’s over Johnny.
I love the new tires! Safety first.
I opened an Education Savings Account for our kid since it is a little more flexible, but will also do a 529 at some point as that has way higher limits. Plan on using it for private elementary school in addition to college so I better start soon.
My 529 account is ONE ACCOUNT, but with SEPARATE SUB-ACCOUNTS, essentially with separate beneficiaries. Much easier that way. Each sub-account is for its own beneficiary. Each sub-account has its own investing. I even have an adult (parent) as a beneficiary . . . just in case. Once beneficiaries are established, moving money back and forth is done with a mouse click as are investment selections — all with a single sign-on since it’s a single “account.”
I agree with our thoughts on getting separate 529 plans, one for each child. I took a slightly different approach to fund their education accounts. In the 1990s the 529 was really new. I wasn’t sure if it was going to last or if they would change the rules as time went on. So, instead, I opened a mutual fund for each child to serve as their college education. I funded this each month and this gave me a ton of flexibility. I was also able to pick just about any mutual fund I wanted and wasn’t locked into the funds offered in a 529. When they were old enough to attend college I then started moving money out of the mutual fund into their 529 plan. This gave me a deduction on our state income tax in MO. I then turned around and paid their college education through the 529 plan. I guess I lost a few tax benefits from the investments growing tax-free but it allowed me to use the money as needed.
As it turned out this worked out really good for me. My daughter started at a traditional college with $20K/year tuition. After freshman year she decided she wanted to go into a health field and ended up getting a certificate and associate degree from a community college. So her two years of community college cost $2K/year. She ended up with a high paying job and it cost me little money. My son, on the other hand, went four years at $20K/year to get his bachelor then another 1 1/2 years to get his masters. So I used some of the money I had for my daughter to help pay his tuition. Right now, I feel that I am out of balance between them. I plan on giving my daughter her share if they need it for a house or in my will.
If my son wouldn’t have gotten his masters I would have had extra money set aside. If it was in a 529 I would have had to hold it for future education expenses or taken a distribution and paid the penalty. With it being in a mutual fund I had flexibility to do whatever I wanted with it. To me, it was worth losing the small tax benefits for the ability to chose what mutual fund I wanted to use and the flexibility to spend the money on anything over what a 529 plan offered. Everyone has to figure out what they think will happen in 20 years and plan accordingly.
I have a separate account for each of my three boys. I opened Ali’s just last week when we got his SS card. It’s super easy to do online and my bank info is already set-up with the other two boys’ accounts. I don’t believe in co-mingling funds either. It’s more important to be fair rather than equal.
Why wouldn’t one have a separate 529 for each child? Would be interested to know.
Thanks Sam. Congrats on your daughter! (Sorry this is late; I haven’t been around for a while.)
I agree with all* of your points. The funny thing is we set up 4 for our kids, not for any of the reasons you mention, but because we were ignorant of the possibility of doing it any other way. But I’ll take dumb luck when it falls my way.
*With the possible exception of the “equitable treatment” thing being an issue. As of next year we’ll have 3 of the 4 in undergrad, and all in different universities, because we want them to go to the school that best suits their career goals while being a good fit for them overall.
Some are costing more than others, and we started the 529s kind of late in the game (closer to the “40th trimester” than the 4th!), so it’s become clear that some will outspend their 529 and some won’t.
For those who do outspend the 529, we’ll cover the rest of the cost out of pocket.
To our way of thinking, “We bought each of you the B.S. degree you wanted” is equitable treatment.
Similarly, because we started all 4 at the same time, the account for our 4th could have a considerable amount leftover. But we don’t have any intention of gifting remainders, either. Just “we bought you the B.S. degree”, same as for the others.
They do each have a “secret” savings account in their names at my wife’s company credit union that she’s been contributing to each pay period. Those will become gifts, likely at university graduation.
It was my understanding that you can set up a 529 plan basically anytime before your child is born and put your spouse down as the beneficiary. After the child is born and you have the SSN then you change the beneficiary to the child. I went ahead and opened the account at about the start of the 2nd trimester.
I’ve done this in my own name. I don’t have kids yet and I’m not married, but I figure the earlier I start saving (and save on state taxes) the better. Once I’m married, I’ll do the same for my wife until we start having children. Seems like the best way to go about it.
Impressive planning!
Hope it all works out for you.