Does each of my children need their own 529 plan?

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Q: I have 3 kids and want to open a 529. Do I have to have 3 dif­fer­ent 529’s?

–Mary, Texas

A: It all depends on how far apart your chil­dren are in age and when you plan to use the funds – but typ­i­cally sep­a­rate plans are the bet­ter choice.

There are sev­eral rea­sons for this but two of the biggest are:

  1. Ben­e­fi­ciary designations
  2. Invest­ment allocations

Let’s look at each of these items indi­vid­u­ally to see why I think sep­a­rate plans are likely a bet­ter choice.

  • Ben­e­fi­ciary Des­ig­na­tions. One of the ben­e­fi­cial attrib­utes of 529 Col­lege Sav­ings plans is that the owner (pre­sum­ably you in this case) has the flex­i­bil­ity to change the ben­e­fi­ciary from one fam­ily mem­ber to another. How­ever, one slight draw­back of these plans is that they can only have one ben­e­fi­ciary at a time. For you, this means if you only use one plan but have more than one child in col­lege at the same time, only one of their costs can be paid from the plan.

 

  • Invest­ment Allo­ca­tions. Many 529 plan par­tic­i­pants will elect to use an age-based invest­ment allo­ca­tion model. These mod­els are built such that the invest­ment port­fo­lio inside the plan is more aggres­sive when the child is younger then becomes more con­ser­v­a­tive as col­lege approaches. Con­se­quently, if you use an age-based approach, your chil­dren are spread out in age, and you plan to use an older child’s plan to pay for a younger child’s edu­ca­tion costs, you may end up sac­ri­fic­ing poten­tial growth oppor­tu­nity for the younger child. This could hap­pen because the invest­ments in the older child’s plan will be more con­ser­v­a­tive under the age-based approach.

So, while some sit­u­a­tions will allow for one 529 plan for mul­ti­ple chil­dren, my expe­ri­ence is that one plan per child is typ­i­cally the bet­ter approach.

Thanks you for your ques­tion and best of luck to you and your family!

Scott

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Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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