A 529 college savings plan invests money for your child’s education over time, and contributing early and often to a 529 plan can significantly reduce your out-of-pocket costs for college. It’s also possible for your child to be the beneficiary of multiple 529 plans, cutting back their education costs even more. However, having multiple 529 plans is not always the best strategy; in many cases, it’s better to consolidate all contributions to a single account.
Can you have multiple 529 plans for one child?
You can have more than one 529 plan for one child, and your child can be the beneficiary on multiple 529 plans owned by other relatives. There isn’t any legal issue or concern with having two 529 plans for the same beneficiary, so if you want to, you can.
Benefits of multiple 529 plans
Having more than one 529 plan has its upsides, including:
- Save more money. Every state has a balance cap for its 529 plan, but having plans in multiple states allows you to save up to each plan’s maximum. For instance, if you’ve met the $235,000 limit on Georgia’s 529 plan, you can save an additional $550,000 with Virginia’s plan.
- Use different investment strategies. If you have a clear investment strategy, having multiple 529 plans allows you to diversify your investment mix and take advantage of a wider variety of options. For instance, you could open up one plan that is relatively aggressive in its investments and open another that’s more conservative.
- Maximize tax deductions. Many states offer tax deductions on contributions to their 529 plan. You may choose to contribute to your state’s 529 plan up to the tax-deductible limit, then contribute your remaining funds to another state’s plan that has better benefits.
Drawbacks of multiple 529 plans
More than one 529 plan for the same child can have its downsides, too:
- Could risk oversaving. Withdrawing your earnings from a 529 plan is tax-free only if they’re used for eligible education expenses. If you invest heavily into multiple 529 plans and your child doesn’t end up needing all of that money for their education, you’ll be hit with a 10 percent penalty and income taxes on amounts you withdraw for other purposes.
- Face more fees. All 529 plans come with fees — annual maintenance fees, account maintenance fees, sales fees and more. Those fees will stack with each plan you have.
- Complicate the process. The more 529 plans you open, the more you’ll have to keep track of. One of the benefits of a single 529 plan is that it’s fairly low-maintenance; having multiple accounts means that you’ll have to track several investment accounts, contend with more paperwork and plan your contributions and distributions more carefully.
Can you combine two 529 plans?
It is possible to combine two 529 plans into one by rolling over a 529 plan from an old account into a new one — similar to a Rollover IRA. To do so, you’ll submit a rollover request to your old plan holder. Your new plan holder will help with the transfer.
While combining two 529 plans into one is allowed, the IRS has some rules on frequency: You’re allowed only one 529 rollover every 12 months for the same beneficiary.
What are good alternatives to 529 plans?
While 529 plans are one way to save for your child’s future education, they’re not the only way. There are some other options, like:
- Roth IRA. Roth IRAs and 529 plans are very similar, but 529 plans are more restrictive in that they can be used only for education expenses. Roth IRAs are intended for retirement savings, but you can withdraw funds for education expenses without penalty. If you don’t think that your child is going to college or you want to give them a plan B if they want to take another route, a Roth IRA is worth considering.
- High-yield savings account. If you don’t have a lot of tolerance for investing risk, you might want to try a savings account. The savings rate of return is much lower than that of typical investments, but you’re not going to lose money as you could with the stock market.
The bottom line
Having a 529 plan for your child is a great way to save for their future college education. If you have the means and plans to help them attend college, this is a great step to ensuring that they take out as little as possible in student loans.
You can have multiple 529 plans for your child, but that doesn’t always mean that you should. Instead, explore all of your avenues for saving and investing for your child’s future before settling on multiple 529 plans.