Helping you save for your child’s education is one of our core planning services. It’s encouraging when parents come to us and want to start their first 529 plan, but confusion often arises if a second or third child comes into the picture. 

Should we continue making contributions to our current 529 plan and divide the savings among all the kids? Or should we have a unique 529 for each kid and make separate contributions?

This is one of the most common questions I receive—and for good reason. The simplicity of maintaining a single 529 sounds like a decent option, but take a closer look and you’ll see having a separate 529 plan for each of your children is almost always more beneficial in the long run.

Let’s explore why.

Customized Investment Options

With one 529 plan, you’re confined to a single investment strategy for multiple kids. However, opening a 529 plan for each child enables you to fine-tune your asset mix to fit their individual needs.

For example: When saving for college, a 16-year-old might typically have a more conservative allocation than his three-year-old brother as funds are to be used sooner.

More Paperwork Down the Road

When you open a 529 account, you can only name one beneficiary. So what happens when you have two kids?

Let’s say your kids are two years apart. Typically, you’d tap into your 529 account when your eldest child heads off to college. But once the younger child starts college two years later, you’d have to change the name of the beneficiary…and back again if you want to allocate funds to your older child.

Bottom line: This name-changing can turn into a logistical nightmare. Separate 529 plans alleviate the headache and the extra paperwork.

Tax Advantages

Contributions to a 529 account that exceed $15,000 per year (or $30,000 for couples “sharing” gifts) won’t count against your lifetime exclusion and must be reported on a gift tax return. However, you can double your potential annual limit by opening a 529 account for each individual child.

Another advantage, depending on your state of legal residence, is that some plans offer state tax deductions for 529 contributions. Accordingly, multiple 529 plans may compound these tax advantages. We recommend that you consult a tax professional in order to maximize the benefit.

Final Thoughts

I get it: doing a cost-benefit analysis of 529 plans isn’t the most exciting way to spend a Saturday afternoon. Optimizing 529 plan structure is crucial for maximizing the value of your contributions—and setting your children up for success. 

If you have any questions about 529 plans or other planning ideas, just drop me a line.