Why You Should Have A Separate 529 Plan For Each Child

When my wife was in her third trimester, we began to brainstorm about all the things we needed before our daughter was born:

• Name for birth certificate and Social Security #
• Sleeping arrangement
• The type of crib, bassinet, and sleeping devices to use
• The various size diapers, bottles, nipples, swaddles, hats, nose aspirators, clothes, socks
• The safest car seat
• New tires and recently performed car maintenance
• Childcare help

Once we got done with the basics, we moved onto education and finances. Because we already have a son in preschool, if our family remains in good standing, his school policy is siblings automatically have a spot when it’s time to enroll. I think this policy is pretty standard across all schools.

With preschool concerns out of the way, we focused on paying for our daughter’s education through a 529 plan. To keep things simple, my initial thought was to add my daughter to my son’s 529 plan. Alas, after doing some research, it’s probably better to have a separate 529 plan for each child.

If you are faced with the same dilemma, here are the reasons why a separate 529 plan for each child makes more sense.

Why It’s Better To Have A Separate 529 Plan For Each Child

While it sounds easier to manage a single 529 plan for multiple children, having only one plan actually complicates things.

Timing Issue

Let’s say your children are 2.8 years apart, like my children. When your eldest enters college, you can use the single 529 plan to pay for his college education expenses. Easy peasy.

However, when your second child enters college, you then need to change the beneficiary to your youngest in order to use the funds. Then when you need to pay for your eldest’s final year in school, you’ll have to switch back the beneficiary.

All this switching can be very cumbersome. Further, if you plan to use the 529 plan to pay for grade school tuition up to $10,000 per year, beneficiary switching would create even more of a headache.

Therefore, if you still want to have one 529 plan for two or more children, it’s best your children be at least 4 years apart and not attend private grade school. The further apart they are in age, the better.

Investment Strategy Issue

While having children at least 4 years apart makes having one 529 plan more reasonable, it makes having one investment strategy for multiple kids less ideal.

The general investment philosophy for 529 plans is to gradually get more conservative the closer the child gets to college. A 529 plan 18 years away from getting tapped can take more risk than a 529 plan one year away from getting tapped. The last thing a parent or child wants is to see a 529 plan get demolished when it’s time to be used.

With one 529 plan, you’d most likely invest with the oldest child in mind. As a result, the plan may have too conservative of an allocation for your youngest child or children.

With a 529 plan for each child, you can customize your investment allocation accordingly.

Equitable Issue

By opening a separate 529 plan for each child and contributing the same amount to each plan, you can always tell your children you treated them equally when it came time to fund their education.

With only one 529 plan split among multiple children, the issue of fairness may rear its ugly head. What if you had one child attend an expensive private university that ate up 80% of the funds? Would your second child be bitter that only 20% of the funds were available to only pay for a public university? Or would your second child not think anything of it? Hard to say!

My sister attended Smith College that cost about $23,000 a year to attend from 1992-1995. I went to The College of William & Mary that cost $2,800 a year to attend in 1995-1996.

After college, out of curiosity, I asked my dad whether I could have the 4-year tuition difference, which equated to about $80,800. He told me, “Sorry son, I used part of your college savings funds to pay for your sister’s graduate school education.”

I wasn’t disappointed by his response because I had just landed a good job post-graduation and was kind of just joking around. One of the reasons why I chose to attend a public college was so that my parents wouldn’t haven’t to spend so much on my education. I was already grateful to have gotten through college without any student loan debt.

But if I knew then that I wouldn’t get the extra funds by going to a public university, maybe I would have at least asked for financial assistance to get a nicer car. Driving around in a $1,800 Toyota FX16 hatchback with a dented door was kind of embarrassing.

Tax Implications

Depending on where you live and what plan you choose, you may get to deduct a portion of your 529 plan contributions. Therefore, having a 529 plan for each child could increase your tax deductions. Unfortunately for us, California doesn’t have any 529 plan deductions.

Another reason for opening a 529 plan for each child is being able to lower your estate value. Given the lifetime gift tax exemption, at $11.58 million per individual is so high today, most people won’t be concerned about this threshold when they pass.

However, if you have been fortunate enough to have accumulated so much wealth, then opening a 529 plan for each child increases your ability and other people’s ability to contribute $15,000 a year per person tax-free. Never forget about a grandparent’s ability to also contribute!

An individual can also superfund each 529 plan by up to $75,000 as long as the gift is reported and treated as if it were spread evenly over 5 years. In other words, once you superfund a 529 plan with $75,000, you are not allowed to contribute the gift tax exclusion amount ($15,000 for 2020) until the 6th year.

If your estate value is over the lifetime gift tax exemption, the value of a $75,000 contribution equals $30,000 in tax savings at a 40% tax rate.

More Clarity

I’ve always said it’s best to have specific financial accounts set up for specific purposes e.g. 401(k) for retirement, house downpayment fund, etc. This way, there is never any ambiguity about the money’s purpose. It’s when we start co-mingling funds that the temptation to “cheat” or slack off arises.

By having a 529 plan for each child, you reduce ambiguity in case of a divorce or untimely death. To provide further clarity, most parents should also create a revocable living trust.

A Separate 529 Plan Each Child Is Best

If you are an eager beaver, there’s one last roadblock to setting up a 529 plan for a child. We tried to set up a new 529 plan for our daughter during the third trimester but couldn’t because the application asked for her Social Security number.

It takes between 4-6 weeks to get your child’s Social Security # in the mail. But by the time you get the Social Security #, you might be so sleep-deprived that opening a 529 plan may be the last thing on your mind.

Just rationalize to yourself that you’ve got years to let your child’s 529 plan compound. If you don’t set up your child’s 529 plan by the 4th trimester, don’t stress too much. However, you should eventually get it done.

Related:

Determining How Much To Contribute To A 529 Plan

Three Things My Estate Planning Lawyer Recommended Everyone Must Do

Readers, anybody decide to just have one 529 plan for multiple children? If so, please explain why. Are there any other reasons why having a 529 plan for each child makes more sense?

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