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Are there any benefits to having separate 529 plans for the same child but for each parent?

I am curious since only one parent can be the owner of each account. It's similar to Do I need to start a 529 plan for each child (2 separate plans), or can I just open one 529 plan and let both children use it? just across the axis of parents rather than children. Both parents are married to each other.

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  • Does it matter to your wife that you own "her" donations to your children's college funds? And vice versa? – RonJohn Sep 20 '19 at 1:08
  • @chepner the parents are still married to each other. I clarified that in the question. – Ryan Gates Sep 20 '19 at 1:16
  • @RonJohn that's a good point about one owning the others contributions. – Ryan Gates Sep 20 '19 at 1:17
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I can think of two ways that the owner of the account can make a big difference.

  • The two parents are not tax residents of the same state. Some states give a state tax deduction for the contribution, some do not. So having a specific parent make the contribution could make a difference.
  • There are multiple marriages involved. Who has control of the funds can be an important consideration, because the owner of the account has an ability to change beneficiaries and a parent may want to make sure the funds are kept separate.

Separate accounts do make it complicated. Making sure that parent A pulls the money out in time to send the money to the school before the start of the semester means that parent B has to trust them.

Tax forms when the student is in school are even more complex. The tax forms from the 529 plan (1099-Q) will list the account owner if the money isn't sent directly to the school, but they are issued to the student if the payment goes directly to the school. Of course the student will only get one tax form (1098-T) from the school, so if the parents aren't filing joint I have no idea how that gets split. If the money is sent to the parent and that parent has multiple children in school, all the withdrawals will be on the same 1099-Q, the parent then has to determine how to associated the basis and earnings compared to the numbers on the 1098-T.

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  • When you say “I have no idea how that gets split”, I can’t think of what would need to be split. If the payment is directly to a school for eligible expenses then there isn’t any income to report for the child or parent so what needs to be split? – T. M. Sep 20 '19 at 15:15
  • There might also be some benefit if they file separately (presuming the state does not double the limit for married couples) – D Stanley Sep 20 '19 at 15:55
  • The 1098-T comes from the school for each kid, it doesn't specify if tuition was from the kid, the parents, or a 529. It is used to determine what qualifies as applicable spending. Then the parents have to take the 1099-Qs and make them add up. It gets even more complex if the school includes the spring semester on the 1098, yes some schools include a different set of semesters than the 1099 does, so you have to compare them to the documents from the previous year.... – mhoran_psprep Sep 20 '19 at 17:43
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One way that separate accounts could theoretically be beneficial is for asset protection. 529 plans offer some protection in the case of claims by creditors and even in bankruptcy. Their protection isn’t perfect and the details vary by state. It’s possible if one spouse loses a judgment etc that the 529 plan they own will fail to be protected for some reason while the 529 plan the other spouse owns will stay protected. We are talking pretty small odds here so the chance of benefit for this reason is slim.

Another possible benefit is in the case of divorce where one spouse cashed in the 529 instead of saving it for college. Having two would at least split the money so there was half left. If that was a concern in the divorce I’m sure the account could be split in the divorce proceedings. Having two accounts does prevent the non owner spouse from liquidating the account they don’t own before a court can rule on the assets.

529 plans also, by way of being completed gifts, remove assets from the donors estate. I can’t see a way that having separate accounts owned by each spouse would be of benefit for estate planning but it’s possible. The contribution could come from either spouse and thus be out of their estate so I don’t see how separate ownership would matter.

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  • I must have an admirer. Downvotes without commenting doesn’t help anything. – T. M. Sep 20 '19 at 16:50

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