19 Jan Do we need more than one 529 plan?

Q. Is there any reason to set up a 529 plan for each of my kids, or can I just have one for the oldest, and then change the beneficiary when it’s the turn of the younger kid?
— Saving

A. Having only one 529 Plan for multiple kids probably isn’t the best strategy.

Many parents feel that using one account to accumulate and keep all of their college savings will simplify their record-keeping, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield. “Another reason people decide to use one account is to avoid paying the annual administration fee — typically around $50 — multiple times.”

That administrative fee can usually be fee waived by setting up automatic monthly contributions – which is a great way to sock money away anyway, DeFelice said.

Down the road is when things can get more complicated, especially if your children are a few years apart.

DeFelice said most folks use the age-based investment option when it comes to 529 Plans, where the asset allocation is most aggressive when the child is younger and automatically shifts to a more conservative allocation as they near college age.

“By having all the assets in one plan, you will force the younger child to be on the older child’s glide path and potentially deprive them of the growth they might receive when the older child is ready for college,” he said. “By opening separate accounts, you can customize the right mix of stocks, bonds and cash for each child based on their specific ages.”

For example, by the time your older child is getting ready to graduate high school, you will want to limit equity exposure to most of their funds so you don’t have to worry about a stock market crash occurring right when that first tuition bill arrives in the mail. But for a sibling three to five or more years younger, you should still have a more aggressive equity allocation to allow the funds to grow until they are ready to start college, DeFelice said.

Plus, if you have will have more than one child in college at the same time, you wouldn’t be able to tap the account for the younger child if the older one is the beneficiary, said Dean Shah, a certified financial planner with Stonegate Wealth Management in Oakland.

Having one account will also limit how much you can contribute to the plan without gift tax consequences.

The current gift exclusion is $14,000, or $28,000for a married couple, which means you can give that much to your child without filing additional tax forms.

“With two or more plans, you can successfully save $28,000 per year, per child, with no tax ramifications,” Shah said.
And 529 Plans offer an accelerated gifting option.

“You have the option to deposit a one-time lump sum of $70,000 — $140,000 if married filing jointly — but you are then disallowed from contributing for five years,” Shah said. ” This allowance applies to each child, provided they each have their own 529.”

If you have available cash and are late to begin saving, this lump sum option enables the account holder to get a larger amount of cash invested and growing sooner, Shah said.

Financial aid is another matter.

DeFelice said by keeping everything in one account, the investments reserved for your younger child’s future college expenses may count against your older child’s financial aid eligibility.

“Just be aware that this isn’t clear cut, 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 being sought,” DeFelice said. “But why risk it?”

DeFelice said having separate 529s for each child simplifies your family planning. With one account, you may very well know exactly how much you have socked away for each child and that everything is meant to be divided equally.

“But God forbid tragedy strikes and you become incapacitated or worse, die prematurely,” DeFelice said. “With separate accounts there can be no doubt as to your intentions for how the money should be used, and takes any speculating on the part of family members, legal representatives, etc. out of the equation.”

If one child ends up needing more for college than the others or one child doesn’t attend college, you can transfer funds between 529 accounts without penalty as long as the beneficiaries are from the same family, DeFelice said. So if one child attends a cheaper in-state college or gets a scholarship but the other winds up at an expensive private school, you can still shift funds around as needed.

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This story was first posted in January 2016.