Our son was just born, and we also have a daughter who is 2 1/2 years old. We have a 529 college-savings account for her. Can we save for college for both kids in the same 529 account, or do they each need their own account?
You could save for both of your children in your daughter’s account and then make your son the beneficiary later, but it’s generally better to open separate accounts. “A separate account for each child makes it easier to keep track and invest appropriately,” says Stuart Ritter, a certified financial planner with T. Rowe Price, which administers 529 plans.
Opening separate accounts can help you target the investments for each child’s time frame. You generally invest more aggressively for young children (focusing primarily on stock funds), then gradually shift to more-conservative investments as college gets closer, so you don’t have to worry about a market downturn shrinking your savings when you’re about to pay the college bills.
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Whether you shift the investment mix on your own or you invest in an age-weighted fund, which automatically reallocates the investments over time based on the year your child plans to go to college, the process gets complicated if you’re investing for different time frames in one account. It isn’t as much of an issue for you now because your kids are only 2 1/2 years apart and you’re investing for the long term for both of them. But it becomes more important as the college date gets closer, especially for kids who are further apart in age.
You may also get a bigger tax break if you have separate accounts. Some states base the tax break on the number of beneficiaries. In Maryland, for example, each account owner can deduct up to $2,500 in contributions per beneficiary from their Maryland taxable income each year. If you save for both of your kids in one account, you will be limited to the $2,500 deduction for the year (although you can carry over excess contributions for up to 10 years). If you have separate accounts for each child and contribute to both, you can deduct up to $5,000 per year. Go to www.savingforcollege.com to find out about your state’s rules.
Having separate accounts also makes it clear how much money you’re setting aside for each child. “If something were to happen to the parent, people would be left wondering why there is only one 529 account instead of two,” says Joe Hurley, CEO of Savingforcollege.com.
Check whether there are extra fees to open separate accounts, and see whether you can get some fees waived. The Maryland College Investment Plan, which is administered by T. Rowe Price, charges a $10 annual fee for each account but waives the annual fee if you sign up to make regular contributions from your paycheck or bank account.
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