Parents should start saving as early as possible to get the maximum benefit from their 529 college savings plan. That means enrolling in a 529 plan when their first child is born, or even sooner. After all, there are only 18 years until college – and only 18 years to take advantage of tax-free compounding.

But what happens when baby number two comes along? Many parents set up automatic contributions based on their budget and how much they can afford to save. So, what’s the best way to split up the funds for siblings?


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Parents should start saving as early as possible to get the maximum benefit from their 529 college savings plan. That means enrolling in a 529 plan when their first child is born, or even sooner. After all, there are only 18 years until college – and only 18 years to take advantage of tax-free compounding.

But what happens when baby number two comes along? Many parents set up automatic contributions based on their budget and how much they can afford to save. So, what’s the best way to split up the funds for siblings?

One question I often hear from Savingforcollege.com readers is:

Can I use the same 529 plan account to save for multiple children?   

The answer is “yes”, you can use the same account – but that doesn’t always mean you should. At first, it might seem easier to continue making contributions to the same 529 plan account, but you may run into some hiccups as your children get closer to college age.

Here’s why:

  1. 529 Plans Can Only Have One Designated Beneficiary

Parents who use one account to save for multiple children could run into problems when it’s time to take distributions to pay for college. 529 plans only allow one designated beneficiary, which means you can only use the funds to pay for one child’s college expenses at a time. Withdrawals used to pay for a sibling’s tuition will be considered non-qualified, subject to income tax and a 10% penalty on the earnings portion.

You can get around this if there is a large enough age gap between your children and you won’t be paying their college expenses at the same time. After the first child finishes college (or as soon as you’re done using the 529 plan to pay for it), change the beneficiary to the second child.

  1. Age-based Investment Options

Most 529 plans offer age-based portfolios that automatically change allocations based on the age of the beneficiary. Generally, the portfolio is heavily weighted toward equities when the child is young and shifts toward more conservative investments when they get closer to college age. Age-based portfolios are a popular option for busy parents who prefer a hands-off approach to investing.

But remember – 529 plans only allow one beneficiary. That means the age-based strategy can only be tailored to one child. Using the same plan for multiple children can make it difficult to select the appropriate investment mix.

  1. Receiving And Tracking Gifts

529 plan contributions make great birthday, holiday and graduation gifts. Many plans now offer gifting platforms that can be personalized for each beneficiary. The account owner can share the page with friends and loved ones via email and social media, with instructions on how to make a secure electronic gift. Having separate accounts makes it easier to ask for gifts and keep track of what each child receives.

  1. Allowing Kids To Help

As your children get older, they may want to start saving some of their own money from babysitting or other part-time jobs. And when it comes to college, your children may have very different plans. Some may want to attend an expensive private school, while others might not be sure about college at all. By having separate accounts, your children can each set individual goals to work toward.

  1. Gift Tax Exclusion

529 plan contributions are considered gifts for tax purposes, and up to $15,000 (in 2018) per beneficiary qualifies for the annual gift tax exclusion ($30,000 for couples). But remember, 529 plans can only have one beneficiary. If a grandparent wants to contribute $15,000 this year to each child’s college savings, there would have to be separate 529 accounts.

However,  there is an option to spread a large 529 plan contribution as if it were made over five years. This would allow the grandparent to contribute up to $75,000 to a single beneficiary this year without triggering gift taxes or affecting their lifetime gift tax exemption ($11.18 million in 2018). But, if the two children had their own 529 plan account the grandparent would be able to contribute $30,000 this year, or $150,000 if using the 5-year gift tax election.

Grandparents sometimes use 529 plans as an estate planning strategy, since they are able to remove a large amount from their taxable estate and still retain control of the assets. A grandparent can also open a 529 plan account in their own name for each beneficiary.

  1. State Tax Benefits

Over 30 states offer a tax credit or deduction for 529 plan contributions, and some states allow you to claim the tax benefit per beneficiary. In Ohio, for example, residents are eligible to deduct contributions up to $4,000 per each child’s Ohio 529 plan, with an unlimited carry forward. So, an $8,000 deduction for two kids, a $12,000 for three kids, and so on. But, Ohio parents who save for all three children in one account are limited to a $4,000 state tax deduction per year.

  1. Death Or Divorce

In the event something happens to the 529 plan account owner, the successor owner may not know if the plan was intended for more than one child, since only one beneficiary is named.

This can also cause problems when parents get divorced. 529 plans generally have just one account owner, and that account owner (not the child) has control of the assets. That means one parent has the ability to change the beneficiary on the account or take a non-qualified distribution to pay for something other than college. If you have a 529 plan for each of your children, you can specify in the divorce decree that the funds should only be used to pay for college expenses for the named beneficiary.

If you already started saving in one account for multiple kids, it’s not too late to make a change. Keep the original account for your oldest child, and open a new 529 plan for each sibling. Distributions rolled over to another plan with the same beneficiary or for the benefit of a qualified family member (including siblings) are not taxable.

Remember to explore all of your options when looking for a new plan – many are available nationwide. If your state has a limited tax benefit, or offers a matching contribution, consider using that plan for one child and looking at other options for their siblings. If you’ll be using a 529 plan to pay for K-12 tuition expenses you should also consider separate accounts for college and non-college costs.

 

This article was written by Kathryn Flynn from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.

Thomas J Cooper, CFP®, CPPT profile photo
Thomas J Cooper, CFP®, CPPT
Certified Financial Planner, Fiduciary
NAMCOA (Naples Asset Management Company®, LLC)
Mobile : 352-857-7273