Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective
02.10.2009
Piggy Bank

Creative Commons License photo figure credit: ken +

Reader Jenn asks:

Are you planning to open a second 529 Plan for the new baby or maintain one account for both kids? We opened a 529 when we had kid #1 but when kid #2 came the financial planner we consult with said we can use the same plan for both kids?

Hi, Jenn, thanks for the great question.  Prior to your question I had not ever considered this and had plans to set up separate 529 accounts for each of our little dears.  I did some research on this and found a number of pluses, minuses, and rules that have swayed my ultimate decision:

Rules that seem to apply to this question:

  • “Each beneficiary must have his/her own account. Siblings or cousins can’t share an account. You can, however, roll any remaining portion of an account over to another child once the account’s beneficiary has completed college.” (source)
  • “If the child doesn’t want to go to college, you can roll the account over to another family member.” (source) You can also split the account into multiple beneficiaries.
  • “There are no restrictions on who can open an account for whom. You can open an account for your child, a friend’s child, a relative, the paper boy, or even yourself.” (source)

Advantages of saving separately for each child:

  • In our case, all of the money contributed to the plans, at least for the foreseeable future, will be money that has been given to the kids as birthday, Christmas, and other presents, so it’s more equitable to keep the accounts separate.
  • Individual accounts can be better tailored to the time horizon for each child — different investment choices can be made depending on age.
  • If it applies, you can contribute more in total before incurring the federal gift tax.
  • If you should die, the childrens’ guardian will know exactly what you intended.
  • Some states allow you to take a bigger tax deduction if you save in multiple accounts.

Advantages of saving jointly for more than one child:

  • You can start saving before you ever have kids, reducing the overall amount of saving that you have to do. (See The Beneficiary Loophole.)
  • Some plans charge a maintenance fee for each account.  A $25 annual fee per child would really ding our child’s account.
  • It’s simpler to deal with a single account than many.

One thing that doesn’t seem to matter at all is the amount of interest and compounding.  For the same investment choices, it does not matter whether you have a certain amount of money in one account or 100 accounts. J.D. at Get Rich Slowly demonstrated this recently.

For me, the only genuinely compelling reason to have just one account seems to be the idea that you can save before you have kids, but since we missed that boat already, it doesn’t apply.  So the bottom line is that I will be opening a new account for our new daughter.

I’d like to hear our readers’ thought and comments on this topic!

3 Responses to “A 529 Plan for Each Child?”


  1. DAD Says:

    I am curious to know if there is any tax advantage for “other than parents” donations to a child’s 529 account


  2. Kimberly Says:

    what made you decide to open an account? I always wanted to for our now 1 year old, but I’m scared b/c of the economy - why do you continue with an account? thanks!


  3. MITBeta Says:

    DAD: Each state has one or more 529 plans, but you can sign up for a plan in any state. Some state plans allow you to deduct contributions on your state income taxes. The plan in Massachusetts does not have a provision for state income tax deductions. For this reason, I have chosen a plan with lower fees in another state, specifically the Ohio College Advantage plan.

    Kimberly: We opened the first account almost 2 years ago, before the current financial crisis. But we still keep adding contributions since our daughter still has 16 years before college starts. This is plenty of time to grow the money that we are putting in now. Even better, the stocks that we’re buying now are on sale.


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