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I am looking at starting 529 plans for my kids. My question is whether I need to start one for each of them (2 separate plans), or can I just open 1 and both of them can use it?

I would assume the best approach would be two separate 529 plans, and am not even sure if you can have 1 plan for two kids. I've researched this a bit, but have not been able to find a lot of info on this particular question. Any advice would be helpful!

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2 Answers

Create one account.

You can change the beneficiary of the plan (even to nephews, nieces, yourself or your wife) as many times as you need so long as you are spending the money on valid educational expenses.

Are you 100% sure both of your kids are going to college? If you aren't really 100% sure, a single account that you can move between them is the best bet.

Also, having recently looked in 529 plans, here are some things you have probably already thought about.

  1. Have you fully funded and done the most for your retirement? Don't pay for school until you are set in retirement.
  2. Research which states have the best plans. Only buy your state if it is a great plan, otherwise buy a good plan.
  3. Buy the plan direct from the state, not through your broker. No sense paying fees for it.

Look up good 529 plans here:

http://www.clarkhoward.com/news/education/preparing-for-college/clarks-529-guide/nFZS/

EDIT:

I don't think you can worry about fairly dividing the money up. I can see your wanting to be fair but what is more important, school or fairly dividing the money?

A 529 is money only for school. Assuming your kids aren't the same age and won't go to the same school, their expenses will likely be different. The younger kid will benefit from more interest from a longer investment, but suffer from having higher costs.

So if you want to insure both kids got $50K (for example) from you by the time it is all said and done, I think you would have to make that up from your own pocket. If only one child goes to school, any money you give the other for starting their own business couldn't come from the 529 without big tax penalties.

Depending on your position and finances you could state something like "I will cover your college expenses up to $50K" and then that is that. Just monitor your 529 and shoot for having $100K in the account by the time they are both college age. That runs a risk though, because if one child doesn't go to school your money is locked up for a while or will have tax issues.

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I guess I still don't quite see the advantage... How will I keep their college money separated? Our parents and grandparents put money to their college on their birthdays (in addition to our contributions), and I'd be afraid that one kid will end up getting more than the other. –  mkchandler Dec 10 '10 at 15:10
    
Good point, I added more. Perhaps a 529 isn't the best account if you goal is creating equal piles of money. Maybe starting Vanguard "star" fund is a better deal. Probably both. –  MrChrister Dec 10 '10 at 16:51
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Thanks for updating your answer and all of your advice! I will continue to research this. I'd really like someone to counter-point, but it doesn't look like anyone will :-) –  mkchandler Dec 10 '10 at 17:22
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C'mon gang, counter point me! I fully admit my opinion isn't the best one! –  MrChrister Dec 10 '10 at 17:44
    
I accepted your challenge, two years later. Fair aside, the gifts from other relatives are completed gifts and should not be at risk of redirection to another child, my answer expands on that observation. –  JoeTaxpayer Nov 29 '12 at 23:33
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MrChrister makes some good points, but I saw his invitation to offer a counter opinion. First, there is a normal annual deposit limit of $13,000 per parent or donee. This is the gift limit, due to rise to $14,000 in 2013. If your goal is strictly to fund college, and this limit isn't an issue for you, the one account may be fine unless both kids are in school at the same time. In that case, you're going to need to change beneficiaries every year to assign withdrawals properly. But, as you mention, there's gift money that your considering depositing to the account. In this case, there's really a legal issue. The normal 529 allows changes in beneficiary, and gifts to your child need to be held for that child in an irrevocable arrangement such as a UTMA account. There is a 529 flavor that provides for no change of beneficiary, a UTMA 529. Clearly, in that case, you need separate accounts.

In conclusion, I think the single account creates more issues than it potentially solves. If the true gift money from others is minimal, maybe you should just keep it in a regular account.

Edit - on further reflection, I strongly suggest you keep the relatives' gifts in a separate account, and when the kids are old enough to have legitimate earned income, use this money to open and deposit to Roth IRAs. They can deposit the lesser of their earned income or $5000 in 2012, $5500 in 2013. This serves two goals - avoiding the risk of gift money being 'stolen' from one child for benefit of the other, and putting it into an account that can help your children long term, but not impact college aid as would a simple savings or brokerage account.

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