Why owning multiple 529 plans for a child may make sense
Key takeaways
Diversification
Each plan has different investment options and fund managers. Having more than one plan can give you more choices.
Tax benefits
A 529 plan may have state tax breaks. At distribution time, having more than one plan may help manage any taxes.
Drawbacks
Multiple 529 plans for a child can add extra complexity, take more time to manage, and mean more fees.
You’re ready to start saving for a child’s education with a 529 college savings plan. Did you know you can have more than one 529 plan for a child? There are some potential benefits to doing that — some drawbacks too. Here’s what to keep in mind about having multiple 529 plans for a child.
Many 529 plan choices
A 529 plan is typically state sponsored, meaning the state chooses the fund manager and the investment options. Each state manages 529 plans differently, so it can be beneficial to shop around. You can open a 529 plan from any state — you don’t have to live there. Aside from state income tax benefits, some states offer other incentives for in-state residents, so it always makes sense to check out your state’s plan.
Diversification features
Owning multiple 529 plans for one child can help diversify the investments. Each plan typically has several investment choices, including age-based investments. If you want a particular investment and your state plan doesn’t offer it, another state may. For instance, you may want guaranteed, principal-protected, or FDIC-insured bank options. You may also prefer a particular fund manager. Having multiple plans also lets you diversify among different fund companies or managers.
Tax advantages
When contributing: It typically makes sense to consider taking advantage of state tax deductions for 529 plan contributions. Some states offer a state tax deduction for contributing to any 529 plan — in state and out of state. Others allow state tax breaks only on contributions to the in-state 529 plan. Some states don’t have a state tax deduction for contributions. Other states’ income tax break is per account, not taxpayer. Use our tax benefits by state map to see what each state offers.
Should you always base a decision on tax breaks? In general, if a child is young, lower fees are more important. That gives more of the investments the opportunity to grow without being reduced by fees. If the child is older, a tax break may be more advantageous. A financial professional can help you determine what makes sense for your situation.
When withdrawing: Having multiple accounts can be a benefit when it’s time to take distributions to pay for education costs. You may want to take money from the plan with the highest growth first in case you end up having to take a non-qualified withdrawal later. If you do need to take a non-qualified withdrawal, when the earnings are considered taxable income and subject to a 10% tax penalty, it may make sense to take it from a 529 plan with the lowest earnings1.
Fees
Fees do vary by plan. Some 529 plans have an annual fee or an enrollment fee when you open an account. Since most plans offer mutual funds or exchange-traded funds (ETFs), they have investment fees. There can also be management fees from the 529 plan asset manager.
Owning two types of 529 plans
If you’re confident about where the child will go to college, consider a 529 prepaid tuition plan. You buy “units” or “semesters of tuition” certificates at today’s tuition prices that can be used to pay for college at a future date. It can also make sense to have a traditional 529 plan too, which can be used to pay for room and board, books, and other student expenses, which aren’t covered by a prepaid 529 plan.
Drawbacks of multiple plans
It’s important to consider the possible drawbacks of having more than one 529 plan for a child. Multiple plans will likely mean more fees. It will also take more time to manage them since you’ll be getting multiple statements and making contributions to multiple plans.
You can change your mind
If you do end up owning multiple 529 plans for a child, you can change your mind and consolidate them through a 529 plan rollover. It typically involves filling out a form with the plan manager. In most cases, plan owners don’t have to pay taxes on a 529 plan rollover. The IRS allows one tax-free rollover per beneficiary within a 12-month period, but additional rollovers within that year are subject to a 10% penalty.
Making a decision
There are pluses and minuses to having more than one 529 plan for a child. A financial professional can help you decide what’s appropriate for your situation.
Learn more about saving for college in the ABCs of Education Savings. Learn about Invesco’s CollegeBound 529.
Footnotes
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1
Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain withdrawals are subject to federal, state, and local taxes.
