Individual 529 plans: What are the benefits?

Should each child have their own 529 account? This is a common question clients may ask when looking ahead to their children's college education. While one plan can be used for multiple beneficiaries, maintaining individual accounts does offer benefits. Here are some reasons your clients should consider a separate account for each child.

Each child deserves the same opportunity

Setting up one 529 savings account per household may seem appealing, but it comes with shortcomings.

One is psychological: Sharing college funds with siblings could result in less buy-in or ownership from each child. With an individual plan, each child knows they have a special account to fund their dreams and aspirations. They may be even more motivated and goal-driven.

Another is practical: In a “one-account” scenario, the first child uses 529 plan funds for their educational expenses. What's left goes to the remaining children. But when all the costs are tallied, there may not be any funds left.

Individual accounts can have different investing strategies

A 529 plan offers many investment strategies. Investors may choose an age-based strategy that is more aggressive when a child is young and becomes more conservative as a child approaches college age. If a younger sibling is lumped into an older child's plan, the younger child may be on a shorter time horizon than necessary. They could miss out on the growth potential their older sibling enjoyed.

529s can help children plan for their future

Each child is unique and so are their needs, dreams, and desires. One student may want a college education, while another may prefer a trade or technical school. Fortunately, 529 account funds can be applied toward many types of schools.

Whatever the educational path, 529s offer options to fund it. Account owners should be encouraged to have regular, open, and honest conversations with their beneficiaries. Planning ahead can make for interesting and practical financial learning experiences.

Changing the 529 plan beneficiary can be a smart choice

Flexibility is a major benefit of 529 plans. For example, beneficiaries can be changed easily. Here are some situations in which changing the beneficiary may make sense.

• Scenario 1: The first beneficiary has made full use of their 529 account to pay for their educational needs. Although another sibling could have their own 529 account, they could benefit from both accounts.
• Scenario 2: The first beneficiary simply doesn't use or need funds for a qualified expense.

A 529 plan can be used to jumpstart retirement savings

A 529 account may have money left over after post-secondary education is complete. If another child can't benefit, the unused funds can be applied to graduate school or loan repayment, or even transferred to a grandchild. 

Those funds may also be transferred to a Roth individual retirement account (IRA) for the beneficiary once certain guidelines are met.¹ This new feature adds flexibility to 529 plans, encouraging families to continue saving without fear of wasting funds.

Closing thoughts

Individual 529 plans may make sense for families with multiple children. This approach helps give each child the same opportunity and allows an investor to follow multiple investing strategies simultaneously depending on the beneficiary's age. It can also help a child plan for their future.

But starting early and staying flexible are key. Open lines of communication throughout the process will contribute to the success of the 529 savings plan experience.