How Many 529 Plans Can a Child Have?
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Summary:
A child can have multiple 529 plans within one state or across different states to help pay for his or her college education. There are currently no rules and regulations limiting the amount of 529 plans one can have. However, a 529 plan cannot support more than one beneficiary at a time.
Whether you’re using a Coverdell education savings account for their K-12 education or plan on setting up a 529 plan before your child starts attending college, American education takes a lot of forethought. Fortunately, a child’s college expenses are considered qualified higher education expenses under a 529 account.
529 plans are a popular way to invest money for your child’s future while also reaping the tax benefits that comes with such an account. But what if you have more than one child? What if you plan on moving with the same child to a different state? Luckily, there are no rules for having multiple 529 accounts in different states for a child’s education.
Depending on the strategy, multiple 529 accounts can help you diversify your investments, aggregate plan limits, and defer the payment of taxes. However, it’s important to note that there are specific pros and cons that you must take into account, before deciding whether you want multiple 529s.
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Single and multiple 529s
How many 529 plans can a child have? Currently, there are no restrictions to having multiple 529 accounts in either one state or different states. You can have multiple 529 accounts in one state or multiple 529 accounts in other states for a single beneficiary. Furthermore, if you have multiple children, you can have multiple accounts in one state or different states.
However, it must be noted here that each 529 account can only have one beneficiary. However, if you have two children you can switch the beneficiary of the 529 plan over time. You can also have the same beneficiary for multiple 529 accounts.
Say, for example, you have two children, three years apart. As your oldest child is getting ready to graduate college, the younger of the two is just starting to attend college. This means that you would probably be inclined to transfer the beneficiary of the existing account to the younger child.
In some cases, you might feel it better to set up two 529 accounts in the same state or in different states (one for the oldest child, and one for the younger child). In fact, you would be able to set up those two 529 plans in different states as long as there is only one beneficiary for each plan.
Tax considerations
529 plans are able to grow tax-free but are only free from taxes levied by the federal government, such as federal income tax and federal capital gains tax. However, they are still liable for state taxes unless the state has a state income tax deduction associated with 529.
Although you can only deduct the state income taxes from the state that you are currently living in, there are some other things that you might want to keep in mind.
Better state deductions per beneficiary
Different states have different tax deductions related to the 529 plans. However, some states will actually base the tax deductions on each beneficiary rather than just the whole plan value. Therefore, in states that offer tax deductions per beneficiary, it’s better to go with multiple plans.
Different state tax deductions
In the American federal system, every state has different rules. If you are considering setting up plans in multiple states, you might want to consider if you can use plans from different states for your tax deductions if you are the account owner. Here are some current examples.
Any states in red allow you to include 529 plan contributions from any state on your tax forms. That means you can include a 529 plan in Colorado on your state income tax form even if you like in Pennsylvania.
However, any states colored in blue only allow you to include those deductions if you contributed to a 529 plan within that state. So, if you reside in New Mexico but have a 529 plan in California, you cannot claim the 529 tax exclusion on your New Mexico state taxes.
Any states not colored in do not offer state income tax deductions for 529 plan contributions.
Fees vs. tax
Another thing to consider is the fees of a 529 as opposed to the state tax deductions. This can be directly related to the child’s age.
For instance, when the child is younger, you’ll want to look for a 529 plan with lower fees to maximize your net returns. When the child grows older and closer to college age, you’ll likely find it more beneficial to focus on a plan with a greater state income tax benefit.
Aggregate plan limits
Different states will have different plan limits regarding how much you can contribute towards a 529 plan. For people with lots of children and a lot of high college expenses on the horizon, it might be a smart idea to max out the aggregate plan limits for multiple states. The state of Missouri has a large aggregate plan limit of $325,000.
Georgia, on the other hand, limits contributions to $235,000. If you have five kids and you live in Georgia, it might make a lot of sense for you to set up plans in different states. This way, you can contribute significantly more. Also, in the case of Missouri specifically, you are able to claim state tax deductions through 529 plans you might have in other states.
States with the highest aggregate 529 plan limits
| State | Aggregate plan limit |
|---|---|
| Arizona | $519,000 |
| New York | $520,000 |
| Rhode Island | $520,000 |
| California | $529,000 |
| New Hampshire | $542,000 |
| Missouri | $550,000 |
States with the lowest aggregate 529 plan limits
| State | Aggregate plan limit |
|---|---|
| Georgia | $235,000 |
| Mississippi | $235,000 |
| North Dakota | $269,000 |
| Connecticut | $300,000 |
| Oklahoma | $300,000 |
| Hawaii | $305,000 |
| New Jersey | $305,000 |
| Delaware | $350,000 |
| Kentucky | $350,000 |
| South Dakota | $350,000 |
| Tennessee | $350,000 |
Diversification
Different 529 plans will have different options for investing in a combination of assets, such as stocks and bonds. You can set up different 529 plans with different investment options and investment objectives. That way you can diversify your portfolio and limit risk.
For example, say you live in Missouri, which has a strict contribution limit of $325,000. You might set up another two plans, one in Iowa and another in Colorado. You can have the one located in Iowa be relatively more risky, heavy on stocks. Using your Colorado account, you can allocate your portfolio so that it is heavy on solid, blue-chip bonds. Thus you are able to diversify your risk and still take advantage of the Missouri state deductions, saving you more money.
Furthermore, you can set up the risk allocation on your different 529s to cover the different time periods for your children. You might want a more risky plan at the beginning, followed by a more conservative plan once the child becomes older.
Looking for a 529 plan that might allow you to diversify while taking advantage of all the deductions that might be available? Here are some of our top advisers to help.
Prepaid vs. standard
Many states will offer a pre-paid plan if you already know the college your child will attend and you would like to ensure you are covered for it. However, different states have different rules regarding how this money should be allocated. Many pre-paid plans are only able to be used for tuition and exclude things such as computers and lodging.
Thus, it might be smart to have both one pre-paid plan, with another standard plan to make sure you can withdraw money for allqualified education-related expenses.
Downsides of multiple plans
As with most things in life, there are downsides and upsides to every investment strategy and structure. Here are some of the risks you should consider.
- Minimum investment contributions. Depending on the 529 plan you have, you may have to maintain a different minimum investment contribution. You may come across a situation where you only have enough money to cover one plan’s investment contribution, in which case opening a second 529 plan is not feasible or logical.
- More paperwork and regulations. Different states have different rules, regulations, and paperwork, each of which come with specific requirements when setting up and maintaining a 529 plan. This can be difficult to manage. Furthermore different plans might charge different accounting fees to maintain the account, resulting in a higher bill if you’re maintaining multiple accounts.
- Too much money in a 529 can be an issue. As money is limited to qualified education expenses, you are only allowed to withdraw the money for those qualified expenses. If you have multiple accounts with a lot of money in them, you could incur significant fees when you attempt to use the money for different purposes other than education.
FAQs
When should you consider multiple 529 accounts?
You should consider having multiple 529 accounts if you have multiple children, want to contribute a ton of money, and want to take advantage of favorable tax treatment within certain states.
Can you combine two 529 plans?
Yes, you can combine two plans into one. You do this by rolling over one plan into another one, similar to how you would roll over an individual retirement account (IRA).
Is multiple 529 accounts the way to go?
Although it is up to each person’s individual situation, it’s probably smart to at least look at the option of having multiple 529s, either for one child or multiple children. You may even find you can get a better deal outside of your own state.
Key Takeaways
- 529 plans are government investment accounts that let you grow money with no federal income or capital gains tax. Some states also offer additional state taxe breaks when you invest in a 529 plan.
- You can have a 529 account in any state in the U.S. or even multiple accounts in every state.
- You can set up multiple accounts for one beneficiary, or multiple accounts for multiple beneficiaries. However, there can only be one beneficiary per account.
- Different states have different rules for state tax deductions for a 529 plan, so be sure to review your state’s rules before creating an account.
- Aggregate plan limits, taxes, and diversification should all be considered when looking at investing in multiple 529s.
- Having multiple 529 plans definitely has its advantages, but get ready for more paperwork, fees, and accounting.
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