20 Dec How many 529 plans should Granny open?

Q. I want to start a 529 plan for my two grandchildren. Is it better to start two separate accounts or can these be shared based on what they need when they get to college? One is two years old and the other is a newborn.
— Granny

A. We love hearing about 529 plans as a gift.

If you, the grandparent, are going to be the owner, there is no financial aid or tax reason to decide to have one account or multiple, said Roy Williams, president of Prestige Wealth Management in Flemington and Millburn.

He said he would generally recommend two accounts. Here’s why.

One of the advantages of 529 plans is flexibility.

Williams said you can always change the beneficiary down the line to another eligible member of the family with no tax impact.

“Therefore, if you do set up two accounts and one of the children does not go to college, the beneficiary on the account can simply be changed to their sibling,” he said.

You should also know about the impact of a 529 plan on financial aid.

“Assets where the grandparents are the owner and the grandchild is the beneficiary are not included on the FAFSA form when applying for financial aid,” he said. “Withdrawals, however, from a grandparent-owned 529, even if the funds are used to pay the cost of education, are counted as untaxed income to the beneficiary and could impact financial aid at that time.”

There are some techniques that can be used to avoid issues with financial aid, Williams said, and these should be considered when the grandchildren are older.

The main reason why you would want to set up two separate accounts is so that you could invest the funds differently and also to have a clear delineation of how much belongs to each child, especially when withdrawals begin, Williams said.

“Typically 529s are managed based on the child’s age becoming more conservative as the child approaches college,” he said. “Since your grandkids are close in age, in the early years the allocations will be very similar but as they approach the years leading up to college the underlying allocation to safer investments should increase significantly.”

If you just have one account, it’s going to get a little tricky, Williams said.

“If the proper allocation isn’t used for your older grandchild and it is too aggressive and the markets are down, you could be potentially withdrawing from positions that are down when you don’t want to,” he said. “And the other side for the younger child, if the markets are roaring and you go to safer investments too soon based on the needs of the older child you could miss out on some needed growth.”

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