Should Each Child Have Their Own 529 Plan?

Congratulations on the newest addition to your family!  As you start reworking your family budget, you may want to consider opening a new Ohio 529 Plan account to save for your newborn’s future higher education. While it’s not necessary, the benefits of a 529 plan can be best used if each child has their own 529 account. Why? Here are a few reasons.

Maximize All The Tax Benefits Of Ohio’s 529 Plan

529 plans allow for higher education savings to grow in a tax-advantaged manner. Separate 529 plans for each child would maximize these benefits which include tax-free contributions and earnings and tax-free withdrawals when used to pay qualified higher education expenses.

For Ohio residents with an Ohio's 529 Plan, CollegeAdvantage, account, there’s an additional tax advantage. Ohioans can deduct their 529 contributions from their Ohio taxable income, up to $4,000 per year, per beneficiary, with unlimited carry forward.

In other words, an Ohio resident can take up to a $4,000 deduction from their state income taxes for each 529 plan with a different beneficiary. So if an Ohio account owner has three Ohio 529 plans for three children, they can maximize this tax benefit up to $12,000 per year. The unlimited carry forward for the state income tax deduction means that $4,000 per year is not a contribution cap. The taxpayer can continue to subtract $4,000 per year, per beneficiary, from their Ohio taxable income until all the Ohio 529 Plan contributions have been deducted.

Take Advantage Of 529 Plans Tax-Free Withdrawals

When opening a 529 college savings plan, the account owner has to select one beneficiary for the college savings account. A family can choose to have only one 529 account which contains all the college savings for their children; however, only the named beneficiary will be able to take advantage of tax-free withdrawals from the 529 account to cover their qualified higher education expenses.

For the other non-beneficiary children whose funds are included in a single account, any account distributions made for their college costs would be subject to a 10% federal penalty as well as federal, state, and local taxes.

In addition, the 529 withdrawal could only be sent to the account owner or the named beneficiary. The 529 withdrawal cannot be directly sent to the school for an individual that is not the named beneficiary.

Follow Different 529 Investment Plans For Different Ages

Based on a child’s age, different 529 investment plan strategies should be considered. For instance, if a child still has a long time before attending college, then a 529 plan could include a more aggressive investment strategy, to potentially reap higher returns with the increased risk. Additionally, the longer the time period before college, the longer the 529 account can grow with the power of compound interest.  

On the flip side, if a child is close to needing the 529 account funds for college costs, then a more conservative investment strategy can be adopted so the accrued funds aren’t susceptible to stock market volatility.

If all the college savings funds for multiple children are kept in a single 529 plan, it may be difficult to modify the investment in a way to benefit each child, according to the time they have before needing the funds for their higher education.

Ohio's 529 Plan, CollegeAdvantage offers ready-made age-based portfolios as well as ready-made risk-based portfolios to tailor a 529 college savings plan to the individual needs of the beneficiary.

Benefit From Gift Tax Rules

Having individual 529 accounts for each child also allow family members to maximize federal gift tax benefits, since 529 plan contributions are considered gifts to the beneficiary. Per federal 529 laws, individuals can invest up to $15,000 ($30,000 for married couples) per beneficiary without incurring any federal gift-tax consequences. Additionally, an individual can even contribute up to $75,000 per beneficiary in a single year ($150,000 for married couples) and take advantage of five years’ worth of tax-free gifts at one time. By having multiple accounts for multiple children, an account owner can avoid triggering the federal gift tax.

For grandparents who are considering gift tax implications while evaluating their estate planning, 529 plans can be smart way to insure that a gift is used for a highly valuable asset — a higher education with the least amount of student loan debt. For further information, consult a tax adviser or estate-planning attorney.

Lessen The Impact On Financial Aid

529 plans are considered an asset when filing the Free Application for Federal Student Aid and are a component in determining the Expected Family Contribution (EFC). The EFC represents what a family can be expected to cover for higher education expenses. The difference between the total cost of enrollment and the EFC represents the remaining costs that might be subsidized through need-based federal student aid.

Current federal guidelines state that if a student is a dependent and the 529 account is owned by a parent, then the 529 plan account will be considered the parent’s asset and will be calculated up to 5.64% of its value when determining the EFC.

Pooling college savings for multiple children in one 529 plan will make this account bigger; therefore, it will have a larger impact on EFC. By spreading the college savings through multiple 529 accounts for each child, the asset will be smaller and have a smaller effect on the EFC.

Easy Transfer Of 529 Funds

Another benefit of having multiple 529 accounts for multiple children is the ease of transferring funds from an individual 529 account to another. If a child finishes their higher education without using all the funds in a 529 plan, the account owner has the option of changing the current beneficiary to another member of the family. Therefore, the 529 funds already set aside for one child’s college expenses can readily be used by another. 

By the way, saving for college in Ohio’s 529 plan does not mean that those funds can only be used in Ohio. 529 plans can be used nationwide at any school that comes after high school, including four-year colleges or universities, two-year community colleges, vocational or trade schools, certificate programs, or graduate schools that accept federal financial aid. 

With Ohio’s 529 Plan, CollegeAdvantage, there is no fee to open a Direct 529 Plan account or multiple Direct 529 Plan accounts so families don’t have to pay first to start saving for college.

Interested in opening an Ohio 529 plan? Visit CollegeAdvantage.com to start saving for future college expenses today. Even small amounts can add up to big savings over time by saving regularly through automatic contributions or payroll deduction. A 529 college savings plan is an excellent alternative to student loan debt.

Someday your child is going to college. Someday starts at CollegeAdvantage.com.