More than One Child? Does Each Need a Separate 529 Plan?

If you have more than one child, you do not need a separate 529 plan for each child. One benefit of 529 plans is that they can be transferred from one beneficiary student to another, offering flexibility for parents with multiple children. However there are also downsides to consider in using one 529 plan for all your children, such as potentially reduced tax benefits compared to using multiple plans.

529 College Savings Plan Basics

A 529 college savings plan can offer numerous advantages in planning for college. Contributions grow on a tax-deferred basis, and withdrawals are tax free when used for qualified higher education expenses at eligible colleges and universities.

A 529 college savings plan is a state-sponsored savings option that can be used to pay for college, in addition to tuition costs for each year at an elementary or secondary public, private, or religious school.

The latter option was introduced in the 2017 Tax Cuts and Jobs Act (TCJA), which was written to actively encourage the use of 529 plans.

There are two primary participants in a 529 plan: the account owner and the beneficiary. Typically, the parent is the account owner and makes contributions to the plan.

The child who will eventually receive money from the plan to pay for high school or college is the beneficiary. It’s simple enough, but having multiple children who plan to attend college can complicate establishing a 529 savings account.

How Many 529 Plans Do You Need?

Technically, you could have just one 529 plan for all of your children, says Taylor Jessee, founder of Impact Financial in Henrico, Virginia. There is, however, one very important rule to know about how these plans work.

“A 529 plan can only have one beneficiary,” Jessee says. “You cannot name multiple beneficiaries, like with an individual retirement account (IRA).”

So if you have five children, you would only be able to select one of those children to be the beneficiary for the plan, and you would be allowed to take distributions from the plan to pay for college expenses only for that beneficiary, regardless of whether your other children are also in school.

However, there’s a silver lining: As the account owner, you have the option to change the beneficiary at your discretion.

Changing 529 Plan Beneficiaries

Changing the beneficiary of a 529 plan from one child to another is simply a matter of filling out the appropriate paperwork. Depending on which state’s 529 plan you’re enrolled in, you may be able to find these forms online to download and complete or request that the plan mail a copy to you. From there, you fill out the forms with your new beneficiary designation and submit them.

“A 529 plan will work for any member of your family,” says Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan.

There are two reasons why you may need to change the beneficiary to another child. The first is if the original beneficiary completes college and no longer needs the money in the account to pay for school. The second is if the original beneficiary decides not to go to college or doesn’t finish their degree. You could add the next-oldest child to the plan and take distributions to pay for that child’s college expenses and so on down the line.

According to Foguth, as long as the funds are used for the family, there are no tax consequences for changing the beneficiary.

Pros and Cons of Having One 529 Plan

Pros Explained

• Simplification: When you have one account, it is easier to make deposits and manage the account.
• Easier to plan yearly investments: When you plan your investments for a 529 plan, you can plan them more easily when they are not spread out among multiple accounts.
• Easier to manage withdrawals: You can make withdrawals more easily when you have one account.

Cons Explained

• Time to change beneficiaries: With children close in age, the administrative legwork of changing beneficiaries can become a hassle.
• Must manage contribution limits: You must monitor how much you contribution for each child when you have one plan.
• Taxation: State tax deductions and credits are higher when you have multiple accounts instead of one 529 plan.

Benefits of Using a Single 529 Plan to Save for College

If you’re on the fence about whether to have one 529 plan to cover all your children, it helps to weigh the pros and cons. On the pro side, having just one 529 account to manage can help you keep things simple financially.

It may be easier for you to plan out how much money you want to contribute to the plan each year compared to trying to spread out contributions across multiple accounts. Likewise, distributions from the plan may be easier, as there’s only one account from which to withdraw.

When You Should Consider Multiple 529 Accounts

While having a single 529 account for college may be convenient, there are some good reasons to consider multiple 529 plans instead. For example, Jessee says the administrative legwork involved in changing beneficiaries can become a hassle if you have to do it every (or every other) year because your kids are close in age. In that scenario, you may find it easier to set up a plan for each child so that you don’t have to make so many beneficiary transitions.

Also, you may find that you’re not able to divvy up the money in the account equally if one child’s cost of attending college is higher than another’s—or if you have only a small window of time to replenish the account before the next beneficiary needs a distribution for school.

Having multiple 529s can also yield another tax benefit if you live in a state that offers a deduction or tax credit for contributions. More than 30 states currently offer a tax break for 529 plan savers, which could help you save money at tax time.

Managing Single or Multiple 529 College Savings Plans

If you’re planning to use just one 529 account to pay for college, Foguth says to think logically and assign your oldest child as the beneficiary first. “If they don’t use the funds, then they can be passed down, as long as it stays in the family,” he says.

Jessee says that if you’re using a single 529 plan to pay for college, consider your investment choices carefully. “You’re only allowed to change your investments twice per year in 529s,” he says. “If you have multiple kids but are only using one 529, this may make it more difficult to manage the funds according to each child’s age and years left in college.”

For example, as the beneficiary gets closer to college, you may want to adjust your asset allocation to be more conservative to minimize the potential for losses. However, that could affect the returns that are generated for the next beneficiary on the list. Having multiple 529s allows you greater control in tailoring investment options to each child’s time horizon.

Finally, planning a strategy for saving and spending your college savings, whether you have one 529 plan or several college savings plans, is important. Pay attention to the fees involved in your plans. Specifically, consider the expense ratio for the underlying investments in the plan so you know how much of your returns you may be handing back in fees each year.

Post-Education Tax Options

Although 529 plans are intended for educational expenses only, some recent legislation has opened up options for any money that isn’t spent.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in December 2019, added one more qualified use for a 529: A lifetime maximum of $10,000 can be used to pay off student loan debt. However, if the beneficiary has siblings, it can be $10,000 per sibling.

Most recently, the SECURE 2.0 Act of 2022 added another potential use for the funds: a tax-advantaged Roth IRA. As long as the account is more than 15 years old, up to $35,000 of the money can be rolled into a Roth IRA for the beneficiary only.

Frequently Asked Questions (FAQs)

The Bottom Line

Having multiple 529 plans is a good fit for some families, while others find that just one plan suits their needs better. When planning out your college savings strategy to include a 529 savings account or accounts, keep one more thing in mind: what happens to any leftover money if your children don’t use it all for college? Remember, this money is intended to be used for qualified education expenses. If you use it for any other purpose, you’ll pay a 10% penalty along with income tax on the earnings.