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Funding a 529 Plan for one child is relatively simple: Determine how much college is likely to cost, how much you can afford to contribute… and start socking money away. But what if you have two − or more − children? What is the best way to save money for college using 529 Plans?
The possibilities might seem endless; here are five basic strategies you can use, and a brief analysis of the positives and negatives of each strategy. And don't worry; as long as you're saving for your kids' education, you are doing the right thing.
Strategy Number One: Create Separate Accounts Funded Equally
This strategy is simple: Set up as many 529 Plan accounts as you have children, and each year contribute an equal amount to each Plan. It's simple and easy, and should let you take advantage of tax breaks offered in your state, since many states allow you to take a tax deduction for funds placed in each child's account. The problem, of course, is that unless your children are twins (or triplets), the accounts will end up unequally funded. One way around that outcome is to set up accounts as soon as each child is born and contribute an equal amount to all accounts; when each child is ready for college his or her account will have the same amount as the other kids'. This is a great strategy for parents concerned about "fairness" and treating their children equally.
Strategy Number Two: Create One Account Now, Add More Accounts Later
Some 529 Plans have high minimum funding thresholds; if you can't afford to meet the minimum funding requirement for two or more plans, setting up and funding one plan now lets you take advantage of tax breaks while you build up enough funds to set up a second (or third, etc) account.
The only real negative to this approach is that you will have to create different accounts at different times (which, if you think about it, isn't that much of a hassle). If you have limited means, this strategy is a great way to get going, start building up college savings, and enjoy tax benefits.
Strategy Number Three: Create One Account, Changing Beneficiaries Later
Money placed in a 529 Plan can be re-designated for another beneficiary. If you want, you can set up one account so you minimize paperwork and fees, and change beneficiaries as necessary. The problem is you may miss out on maximizing tax benefits, since some states allow you to take benefits for multiple children each year. If your children are more than four years apart − and especially if one child is significantly older than another − this approach makes good sense. The key is to plan ahead for each child's needs; if you use too much of the account to pay for one child's education expenses, there may not be an equal amount left for the next child.
Strategy Number Four: Create Multiple Accounts and Aggressively Fund the Oldest Child's Account
The theory behind this approach is that the older child will start school sooner and will need more money sooner. The closer to college age the child, the more money per year must be placed in the account. If you time your funding amounts correctly, both kids could end up with the same amount in their respective accounts.
At the same time this approach may feel unfair… especially if your financial situation changes and you find yourself unable to fund the younger child's account appropriately. If there is a significant gap in ages, or if the oldest child is within a few years of attending college, this approach may feel safer since smaller amounts placed in the younger child's account have more time to grow based on investment earnings.
Strategy Number Five: Create Multiple Accounts and Aggressively Fund the Youngest Child's Account
This strategy is the opposite of the strategy above; in this case you will aggressively fund the youngest child's account. This approach makes sense if you feel college costs will continue to spiral higher and higher at a faster rate than inflation. If you feel that will occur, your youngest child will need the most money to pay for college since costs will be significantly higher when his or her turn rolls around.
The problem, of course, is that your oldest child may not have sufficient funds available. This outcome is less of a concern if you feel confident your oldest child will qualify for scholarships or achievement-based aid. Otherwise, "setting up" the youngest child may pay off if he or she will attend college when you are close to retirement age; funding that account fully could keep you from having to draw on retirement or other savings at a time when you least want to.
Which strategy should you choose? Think about each child as an individual: Weigh their interests, needs, etc. Then think about your current financial situation and try to predict your future financial situation. Weigh all these factors − and get professional guidance if you are still unsure.
If You Are a Grandparent
The strategy for grandparents is a little different. Most experts recommend setting up separate 529 Plans for each grandchild. You can tailor each plan to each grandchild; if your grandchildren live in different states, use a 529 Plan in that state if there are tax breaks for withdrawals or if the state gives preferential treatment to state residents when awarding state grants. Plus you can ensure your intentions are clear; if you pass away, your successor on each account can ensure there is no confusion − or dissension − about how your wishes will be carried out.