529 plans are a strategy that many use to save for a loved one’s college education. Although most people are familiar with the benefits of a 529 plan, there are some lesser-known benefits of having multiple 529 plans for one child.
For many, simplification of their investment strategy is their number one goal. If this is the case for you, this strategy might not make sense. However, if you are looking for creative ways to make the most of tax planning while saving for college, this idea could be a great option to consider. Here are some of the factors to consider when deciding if it makes sense for you to open multiple 529s for one beneficiary. As with all tax planning strategies, we recommend including your CPA in the planning process.
Opening Multiple 529s – Improved Risk Management
A few years back, the 529 plan rules shifted slightly. Investors now have the option to pay for private school tuition for K-12, in addition to qualified college expenses using 529 funds. With this beneficial shift, also came the balancing act of planning for multiple timelines for one child.
Typically, we recommend shifting to a more conservative investment strategy as we approach the years that education expenses are coming due. However, with the different time horizons associated with paying for private school versus college expenses, it may be beneficial to consider utilizing different risk profiles for each goal.
This is where multiple 529 plans could come in handy. You could have one 529 plan with a customized risk approach to save for elementary, middle and high school tuition and another 529 plan with a risk strategy to save for college expenses.
Additional Tax Benefits
Depending on which state you reside in, the state tax deduction for contributing to a 529 might be capped per taxpayer, per beneficiary or per account. If your state tax benefit is capped per account, it may be beneficial to open multiple 529s. This would allow you to potentially receive a higher state tax deduction.
Keep in mind that all 529 plans are aggregated for tax reporting at the state level. Therefore, to utilize many of the benefits noted, you would need to open the secondary 529 in a state where you do not reside.
Investment Diversification
Each state’s 529 plan has slightly different fund offerings as well as fund managers. Investing in multiple 529s can allow you to obtain additional investment diversification.
Keep in mind that most 529 plans have a wide variety of investment options and asset classes. However, if you notice that your current 529 plan does not include an investment option that you believe would add value to your strategy, adding a secondary 529 plan could be a useful solution.
Potential for Increased Fees
Each 529 plan has its own unique set of fees. This can include annual fees, trading fees or administrative fees. When weighing the pros and cons of setting up multiple 529s for one child, make sure to factor in any increase in cost due to 529 plan fees.
Staying Organized
With each additional account you open, there is a bit of time and maintenance involved. Keeping track of extra statements and working with multiple companies could become a potentially challenging aspect of maintaining multiple 529s.
As you can probably tell by now, college savings strategy can range from a simplistic approach to a deliberate and carefully crafted plan. Depending on your unique situation, employing a college savings goal into your overall financial plan can allow you to prepare in the most efficient and effective way possible
If you are in the process of determining your best options to prepare to pay for college, schedule a call with a member of our team. We will help you develop a customized strategy that meets your needs and weighs all your available options.
In addition, consider checking out Episode 66 of our 52 Pearls Weekly Money Wisdom podcast hosted by Financial Planner Melissa Fradenburg, CDFA®. In this episode Melissa interviews fellow Financial Planner Jill Carr, CFP®, CPA about some tips and tricks when it comes to preparing to pay for college.
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Melissa Joy, CFP®, CDFA® is President and Wealth Advisor at Pearl Planning. Reach out for a call today at 734.274.6744.