I don’t wish to complicate your financial life — and signing up with more than one 529 plan for your child will do just that — but there could be some good reasons for spreading your college savings among two or more 529 plans.
- You may want the benefits of both a prepaid tuition plan and a savings/investment plan. Most of the states’ prepaid tuition plans, as well as the Private College 529 Plan, cover only tuition and mandatory fees. You can add a 529 college savings plan if you wish to cover other eligible expenses. Having a prepaid tuition plan in addition to a college savings plan can also provide a hedge against tuition inflation.
- You’ll gain some income tax flexibility. By establishing multiple accounts, you’ll have the flexibility to pay college bills from the account with the most growth first, thus assuring maximum tax savings. If money ever has to come out of your 529 plan subject to tax (i.e. as a non-qualified withdrawal), you’ll want to take it from the account with the least growth. Note: Your accounts must be in different states. All accounts you have in the same state for the same beneficiary are aggregated for tax purpose.
- Your state may offer a state income tax deduction or tax credit capped at a certain amount. Your “favorite” 529 plan could be one from a different state, yet you may still want to take advantage of the maximum tax deduction available for using your own state’s 529 plan. Allocating your contributions between both states may be the solution.
- Your state’s income tax break for contributions to a 529 plan may be per beneficiary or per account, as opposed to per taxpayer. If you have a 529 plan for each child, you may be able to claim a larger state income tax deduction or tax credit.
- You are saving for private elementary or secondary school expenses in addition to college costs. Since the time horizon is different, the risk profile for each set of investments should be different.
- Your state may require that you be “vested” to be eligible for a particular benefit. A small number of states offer a scholarship, resident tuition rates, or other benefits, but only if you participate in the state’s 529 plan for a minimum time period. Maintaining a small balance in your state’s 529 plan can ensure eligibility for any such benefit, even if the majority of your savings go into another state’s 529 plan.
- You’ve moved from one state to another, but can’t rollover your old 529 plan to the new state’s 529 plan because your old state treats an outbound rollover to another state’s 529 plan as a non-qualified distribution.
- There may be a trade-off between a state income tax break on contributions to your state’s 529 plan and lower fees on an out-of-state 529 plan. When the child is young, low fees matter more. When the child enters high school, the state income tax deduction or tax credit will have more of a financial impact.
- You may be seeking more diversification. Most of the 529 savings plans do a good job in offering diversification among equity and fixed-income asset classes. But, while some programs employ mutual funds from multiple fund families, many use a single investment manager for all investment options. If you are satisfied with the fund family in a single-manager plan, that’s fine. But, if you want to diversify your investment among different managers, you may decide to use more than one 529 plan.
- You want an FDIC-insured investment option, stable-value portfolio or other specific type of conservative investment, but your state’s 529 plan doesn’t offer them.
Creating multiple accounts can involve higher total fees, depending on the state. Managing those accounts can also mean additional paperwork headaches and uncertainties, so be sure your reasons for doing it are sound.
[Editor’s note: This article was originally published on May 13, 2006 and updated on October 23, 2020 by Mark Kantrowitz.]