By Sarah Stewart Legal Group, PLLC
A 529 Plan is a savings plan for families’ future educational expenses. There are limitations to the plan, as the money can only go to qualified educational expenses.
The plan allows parents who contribute to the plan to have tax benefits for their contributions. The extent of the tax benefit depends on the state in which the family resides. Any funds contributed to the account can be taken out, tax-free, for qualified educational expenses for the child named as the beneficiary of the account.
Though historically, the disbursements were used for post K – 12 education, recently, tax laws were changed to allow states to permit use of the funds for K – 12 education.
The earlier families begin to contribute to their 529 plans, the greater the growth over their child’s childhood. If you haven’t established a plan for your children, and want your children to attend college, or fund other qualified educational experiences, start your plan today to take advantage of compounding interest.
But what if you have two children? Should you have a plan for each child? Here are some considerations to help you make that decision.
(1) 529 Plans Only Have One Beneficiary
The 529 plan is structured in such a way that you can only use the account for one person’s educational experiences at a time. If you have children far enough apart in age that they won’t be using the fund at the same time, one fund may work. However, if you have two or more children who would need to access funds during the same time period, you will want to have more than one account.
(2) Investment Options Based on Age
Many plans offer investment options that change as the child ages (generally becoming more conservative). If you have more than one child you hope to use your plan for, you may need to reconsider this type of investment approach as it may not allow you the flexibility you need for two or more children of differing ages.
(3) Gift Contributions
529 plans allow friends and family members to contribute to the fund as a holiday or birthday gift for the child. Having one account for more than one child can make gifting difficult.
(4) Children’s Contributions
As children age, they may decide to work to add to their fund. If there is more than one child on the account, tracking contributions will be difficult.
(5) Gift Tax
Any contributions to a 529 plan are subject to the gift tax exemption. Each year every individual has up to $15,000 they can gift to others without having to deduct that amount from their overall estate tax exemption. If there are two 529 accounts, with two beneficiaries, family and friends can count $30,000 in the exclusion instead of only $15,000 for one account. If you have wealthy family or friends who would like to contribute, consider how their contributions could fit into their estate plans.
(6) State Taxes
Many states allow a deduction for their 529 plans. Some states even allow that deduction per each account. Check your state’s laws to see if you can receive a tax break for having more than one 529 account.
(7) Life Changes
Life happens. If you become divorced or die, the successor may not know the account was intended for more than one beneficiary. Additionally, when you go through a divorce, the Orders may state that the account can only be used for a named beneficiary.
If you started one account and want to break it up, don’t fret. Open another account for the other beneficiary and rollover the funds. Rollovers for the same beneficiary or a qualified family member are not taxable.
Shop around to look for the state benefits that fit your situation best. If you are looking to use the funds for K – 12 education, find a plan in a state that best suits your needs and consider having another account for education after 12th grade.