Do I need a 529 plan for each child?

As you think about your children’s futures, you might find yourself wondering what kind of adults they’ll become. What will they study at college, and how will you pay for it? This can be a big concern for parents with multiple children. If you’re using a 529 savings account to save for college, do you need a 529 for each child? How many 529 plans can you have? Should you open only one and then use the funds for each child as needed?

Here, we’ll explore the pros and cons of having a single 529 savings account intended to be used for multiple beneficiaries, or for more than one of your children.

Understanding 529 plans

First, here’s a little background on 529 plans. They can be a great way to help you save for college. There are two types: A 529 education savings plan and a 529 prepaid plan. Today, we’ll focus on the 529 education savings plan.

Is one 529 plan enough for multiple beneficiaries?

Do you need more than one 529 for multiple children? It depends on your situation. It usually makes more sense to open separate accounts, one for each child or beneficiary. And keep in mind that your beneficiaries can include more than just your children.

Pros of having a single 529 plan for multiple beneficiaries

Tracking is easier

If you have only a single 529 account for all your education funds, it's less to keep track of. This means less paperwork and potentially lower fees. For example, if your 529 provider charges $15 per year just to maintain the account, you would be paying $15 for one account or $30 for two.

Meet funding minimums

Another benefit of having just one account is that it may be easier to meet account minimum funding requirements. For example, if the 529 plan you are interested in has a $250 minimum investment and you only have $250 to invest, you can’t open two accounts and put $125 in each. However, some account minimums are lower. For example, the Texas College Savings plan minimum is only $25.‍ ‍ ^{See note 1} Many providers reduce their investment minimum requirement if you sign up for monthly automatic contributions.

The cons of having a single 529 plan for multiple beneficiaries

Now, let’s look at some cons of just having one account. Keep in mind that these cons aren’t about having a 529 account in general, but whether one account is enough when saving for multiple beneficiaries.

If the 529 is a custodial account, which means, an adult has control of it until the student is at least 18 years old, you can’t change the beneficiary. So, you can’t use the funds for another child. This might be fine if you only have one child, but if you have more, you’ll need more than one 529.

Having just one account also makes it harder to separate funds. What if a grandparent gifts $500 each year to both grandchildren for their education? If all the funds are combined in one account, how do you ensure that you don’t accidentally spend money meant for one grandchild on another? Doing so could lead to family squabbles, especially if one child needs to take out a loan to cover college expenses while the other doesn’t.

But changes in the Free Application for Federal Student Aid, or FAFSA®, form make it advantageous for grandparent-owned 529 plans. Distributions from grandparent-owned 529 plans are no longer reported as untaxed student income on FAFSA. Therefore, a grandparent can open a 529 account and put the child as the beneficiary, and it won’t affect their financial aid eligibility.

Here’s another con: A single 529 account can only have one beneficiary at a time. If your kids are at similar ages and might be in college at the same time, this will create difficulty in using the assets for each at the same time. While it’s true that you can change the beneficiary, it does create extra paperwork and difficulty if the tuition bills are due at the same time.

Also, if all the funds are in one account, you can't tailor your investment strategy to match each child's timeframe. For example, if you have two children with a wide age gap, one child will be entering college much sooner than the other. You'd want the older child's 529 plan to be conservatively invested since you'll need the money sooner and won't want to take on too much risk.

Your children's different stages in life mean they have different risk tolerances for their 529 plans. One child is looking for growth, while the other is looking to make the money last. Having their college funds in separate 529 accounts means you can tailor the investment portfolio to each child's needs.

Having multiple accounts can also affect financial aid. The FAFSA® form requires that you report parent- and student-owned 529 plans as assets, which can impact financial aid to differing amounts. Currently, the parent only needs to report 529 accounts for which the student is the beneficiary. Here’s an example of how that works:

Let’s say that you’ve saved $100,000 for the education of your two children. If those funds are in one account valued at $100,000 with child 1 as the beneficiary, you will report $100,000 as 529 plan assets when child 1 fills out their FAFSA® form. If you split the funds between two accounts, $50,000 for child 1 and $50,000 for child 2, child 1’s FAFSA® form will only report $50,000 in 529 parental assets.

This can impact the amount of financial aid offered because more assets are available to pay for education. That's just one of several considerations to keep in mind when you're trying to maximize your financial aid.

Mixing and matching savings strategies

Most families aren't able to fully save enough to pay for all of your children's college expenses. You will probably rely on a mix of strategies to help pay for college. You might save some in a 529 plan, use some other savings, apply for scholarships, and then cover the rest with a loan.

The decision to open separate 529 accounts for each child versus one single account will depend on your family's financial situation. But overall, being able to manage your investment strategy based on the child’s time horizon and keep money for each child separate are the main reasons to open separate 529s for each child.