529 (college saving) account for multiple kids

Question

I have a 529 account for my 3-year-old. We just discovered we're expecting another baby. Is it better to open a new 529 for the new baby or just keep contributing to one and then split it later on?

Answer 1

In my opinion, this is probably a personal choice.

With no extra paperwork, you and your spouse can each gift $15000 per child. Unless you are planning to gift more than $30K combined, one acct, to keep it simple, is enough.

If, on the other hand, your total gifting will exceed this, the simplest approach is to use the 2 accounts, and not need to use the 5-year "gift ahead" provision, or credits against your lifetime estate tax.

The 529 I have (in MA) has no annual fee, so aside from a bit of extra paying attention to another account, 2 accounts wouldn't have bothered me.

Last - there are credit cards that offer a 2% cash back right into the 529 acct. We are in the endgame, my daughter a junior in college, and these rewards will have paid for over 3 semesters at her school. Members might object to a products promotion, it's easy enough to search and find this.

Answer 2

With that close an age gap it would probably make sense to use separate 529s. Technically you can transfer funds and even change the beneficiary from one sibling to another, but if both are in college at the same time you would probably want to let both of them use 529 money at the same time.

Also, with multiple accounts you have more flexibility over the investments that each are in (especially when you get closer to college time and want to reduce the volatility in the accounts), it gives each child their own "savings" bank that they can track (and even add to), and it allows for personalized contributions from other family members rather then one big pot that is commingled.

Answer 3

Separate accounts may be better if you live in a state where 529 contributions are deductible from your state income taxes.

OP did not list a state, but you may need separate accounts to claim the deduction for both children. In Maryland the deduction is "per account"[1] or "per beneficiary", and each account can typically only have one beneficiary at a time. So you would need a separate account for each child to get the full tax deduction.

[1] https://maryland529.com/basics-of-529-college-savings-plans/tax-advantages-of-529-plans

Answer 4

Are there different people that would be interested in contributing for different kids? This is generally only an issue if your first kid is from a prior marriage/ relationship. If there is a group of people related to one kid and not the other, having separate plans probably makes it easier for them to contribute.

How concerned are you about equality between the two kids? If you have separate accounts, there is a risk that one kid ends up with a meaningfully different amount when they start attending school. If you get a few early bull market years when the older kid has a much larger balance due to having many more years worth of contributions, it's not out of the realm of possibility that the older kid would end up with twice as much as the younger even if you made the same contributions over time. Similarly, if you're moving the older kid into more conservative bonds when the market rallies, the younger kid could end up with significantly more. You could move money around if it became clear that was an issue but that can be complicated if the kids are old enough to know about their account. If you have a single account, you can split it much closer to when you're going to be drawing money out and when the kids are old enough to have conversations about goals (i.e. is the goal to give equal dollar amounts to both, to cover an equal fraction of the expected family contribution for both, to pay for the same number of years for both, etc.) and logistics (i.e. what happens if post-split the younger one sees a bigger rally than you were expecting, what happens if the younger one sees a downturn, what happens if someone wants to take a gap year or if someone wants to go to grad school). Personally, this is the overriding consideration in my mind-- having one kid get substantially more help because their birth happened to coincide with a better market than their sibling has the potential to create a whole lot of familial strife.

What goals do you have for using these accounts to teach your kids about personal finance? If you envision, say, encouraging your kids to track their balance over time or to contribute personally to the account (perhaps with a parental match) when they're old enough to earn some money on their own, that's much easier if each one has separate accounts. If you envision wanting to have conversations early on about making college choices with an eye to affordability (i.e. suggesting they spend their first two years in a local community college before transferring to the bigger school, looking at how much they can save by taking AP/ IB/ dual enrollment classes in high school, talking about realistic budgets and loan amounts if they're looking at Expensive Private U), that's likely easier with separate accounts too.

How much flexibility are you going to want in investments? From an accounting perspective, it's easier to have separate accounts where you slowly move each one to a more conservative balance as the beneficiary gets closer to college. You can do the same thing with a single account recognizing that you've got two simultaneous savings goals but it'll be easier for most people to think of separate accounts.

Of course, if you're lucky enough that you'd hit a contribution limit for a single account then of course you'd want separate accounts. If you're putting away more than $30,000 a year for your childrens' education, none of these considerations likely matter too much because you're going to have more than enough to fully fund both kids.