Should You Have One 529 Account for Two Kids or Separate Accounts?
The decision to have one 529 account or two for your children can often seem confusing. Especially when considering the long-term benefits and flexibility of each option. In this article, we will delve into the pros and cons of each approach, and provide guidance based on expert opinions to help you make an informed decision.
Understanding 529 Accounts
A 529 plan is a college savings plan that allows you to save money for future higher education expenses. These plans are sponsored by states and offer tax benefits, such as tax-free growth and withdrawals for qualified education expenses. Common types of 529 plans include prepaid tuition plans and college savings plans.
Separate 529 Accounts for Each Child
The most traditional approach is to have a separate 529 account for each child. This method aligns with the principle of individual financial responsibility and ensures that each child's college savings are kept separate and distinct.
Advantages of Separate Accounts
Sovereign Savings: Each child's account is independent, meaning that in case of unexpected costs or financial needs, one child's savings do not impact the other's. This is particularly beneficial if one child has a high-income job or receives financial aid.
Flexibility: You can designate specific funds for specific semesters or years. For example, if your child needs to pay for a particular semester but the other child's expenses are low, you can easily access the funds without worrying about violating any plan rules.
Taxes and Penalties: Since each account is individual, you can avoid any penalties for withdrawing funds for non-qualified expenses, as long as you remain within the limits set by the IRS.
However, one potential downside is that if one child's college costs are lower than expected, you might end up with leftover funds that you cannot easily reallocate to the other child without penalties.
One 529 Account for Two Kids
Another approach is to consolidate both children's savings into a single 529 account. This can simplify the management process, but it also brings potential drawbacks to consider.
Advantages of One Account
Cost Efficiency: Maintaining a single account can save you from the administrative fees associated with managing multiple accounts. These fees can add up over time and impact your overall savings.
Easier Accessibility: Managing a single account can be more streamlined, especially for families with multiple children. You can more easily track and allocate funds across different years and colleges.
Flexibility in Reallocating Resources: If one child's college expenses are unexpectedly lower, you can more easily adjust the funds to support the other child without incurring penalties. This can provide greater financial flexibility and adaptability.
Expert Opinion: Joe Hurley
Joe Hurley, CEO of EdWealth, advises that setting up multiple 529 accounts for siblings attending college at the same time can offer significant advantages. According to Joe, the key benefit is the ability to pool resources and maximize the spending power of your savings. This method can be particularly advantageous if your children are close in age and likely to be going to the same college at the same time.
"Having multiple accounts can be a smart strategy, especially if you're saving for two children who are likely to attend the same college. By pooling resources, you can take advantage of the higher contribution limits and maximize your savings over time," says Joe Hutley.
Conclusion
The decision to have one or more 529 accounts ultimately depends on your personal financial situation and your goals for each child. While separate accounts offer flexibility and sovereignty, a single account can be more cost-effective and offer greater financial flexibility in certain scenarios. It's important to carefully consider your options and consult with a financial advisor to tailor a strategy that best meets your needs.
Ultimately, the key is to choose a strategy that aligns with your long-term goals and provides the greatest flexibility for your children's education. Whether you opt for one or multiple accounts, the most important factor is to start saving early and consistently to ensure your children are well prepared for the financial demands of higher education.