When you have two or more children, should you open separate 529 plan accounts for each child, or just one big 529 plan account? Generally, it is best if each child has a separate 529 plan account.
You can go either way, but the rule is: one beneficiary per 529 account. You might open an account for your youngest child, then transfer money into separate accounts for the other two children as they reach college age. Or you might open an account for your oldest child, pay his or her college expenses, then change the beneficiary to the next child.
A single account offers a couple of potential benefits:
- If your 529 plan charges an annual account-maintenance fee, you may be able to reduce your costs by consolidating your college savings into one account. But, first check to see if you can avoid fees by signing up for automatic contributions or in other ways.
- Keeping the 529 funds with your youngest child may increase the older children’s chances for favorable financial-aid treatment. But, this requires the 529 plan account for the younger child to be in a custodial 529 plan account, which does not allow you to change the beneficiary. If the 529 funds are in parent-owned 529 plans, all of your 529 plan accounts will be counted as a parent asset on all of the children’s financial aid applications, regardless of beneficiary, nullifying the advantage of this approach.
But, for most people it makes more sense to open a separate 529 account for each child from the outset. Here’s why:
- You can contribute more without worrying about gift tax. A $25,000 contribution to one account will require that you file a gift-tax return because it exceeds your $15,000 annual gift exclusion. Even the special five-year averaging election requires a gift-tax filing for the first year. But, if spread evenly among three 529 accounts, that same $25,000 becomes three separate gifts of $8,333, falling within your $15,000 gift allowance for each child. No gift-tax returns are needed, provided other gifts don’t push any recipient over the annual gift tax exclusion limit.
- You may wish to invest differently for each child. For the oldest child, you might want to be more conservatively invested, and for the youngest child more aggressively invested. With separate accounts it is much easier to establish and keep track of different asset allocation targets. Likewise, age-based or enrollment date investments depend on the child’s age or year in school
- Separate accounts help to keep things simpler and perhaps “fairer.” You won’t have to worry about making transfers between accounts in the future as long as college funds are used as anticipated. And consider the risk, however slight, that you might die unexpectedly. The administrator of your estate won’t have to guess at your intentions if separate 529 accounts already exist.
- Many of the states that offer a state income tax deduction or a match for your contributions place a per-beneficiary or per-account cap on the annual benefit. Check to see if your state is one of these. Multiple accounts could lead to multiple deductions, saving you more money on your taxes.
[Editor’s note: This article was originally published on September 24, 2003 and updated on October 22, 2020 by Mark Kantrowitz.]