Meg from Missouri wrote in about 529 plans and her generous in-laws:
I recently discovered your podcast and am really enjoying it. I have a 529 question that I am having trouble finding the answer to. My husband and I have a 5-year-old, 3-year-old, and 1 year old. My in-laws have been wonderful and opened 529 plans for each of our kids on their 1st birthday. They contribute $600/year to each child. We are beyond lucky to have such a generous family. My husband has finally finished his medical training. We have purchased a home and are now able to start contributing to the 529 plans.
My question is … Can a child have more than one 529 plan? We live in Missouri. Our in-laws opened 529 plans that are not associated with our state of residence. Can we open 529 plans that would allow us to take advantage of tax benefits for the state of Missouri or can a child only have one plan?
Thank you for your help.
Thanks for writing in Meg!
I am super intrigued by your question and honestly, I did not know the answer right off the bat. In my research, I came across a great article in US News and World Report about how Grandparents can help with the cost of college.
I figured I would invite the author of that article, Farran Powell to join us today to help us answer your question.
Andy Hill: Let's help Meg out, Farran. Can a child have more than one 529 account?
Farran Powell: You can have an infinite number of 529 accounts for each child. And in fact, if you're looking at investing in 529 savings accounts some even recommend having more than one.
You can see how one is performing and you know since her children are pretty young she can say, “You know I have this Rhode Island one versus one that's Tennessee sponsored and they're both 529 savings. And gee, the Rhode Island one seems to be doing better. I think I'll go with them for my overall strategy moving forward.”
So you're not really bound to your state. You are bound to the rules of your state when it comes to taxes.
Related Article: Why More Parents are Getting 529 College Savings Accounts
How does being a resident in Missouri affect this situation?
Well, the good news for Meg is that if she decides to go with an account for example in Utah, and that would be a 529 investing savings account, she could still get the state tax deduction because Missouri is one of those generous states like Arizona, Kansas, Montana, and Pennsylvania. They all allow their residents to get the state tax deduction regardless of where the 529 is located.
Do you think Meg's in-laws went about the process correctly? What could they have done differently?
They could have gone for the gift tax. It wasn't clear to me from the question is who was trying to get the state tax deduction here.
Are the grandparents trying to get the state tax deduction with a 529 account? Or are they trying to help their kids? I don't understand why they wouldn't have created a checking account or put it into a checking account and use it as gift money.
You can now give up to $15,000 per child underneath the IRS rules. (as of 2019)
What other ways can Grandparents contribute to their Grandkids future?
When it comes to financial aid, one of the ways grandparents can help is by paying the tuition because it's not going to show up in terms of the nuclear families financial aid forms in terms of their estimated family contribution. So it's one way to make that dollar work a little bit more.
What is the difference between pre-paid college tuition and a 529 Plan?
Going with a savings 529 versus your state's prepaid plan is you generally have more flexibility. For example, with the Florida Prepaid state plan, you might be limited in terms of what schools you can go to with it whereas you know with 529 investing it's just an account. It's holding the money like a piggy bank. We'll have more of those options of which schools to go to potentially by going that route.
It also adds a layer of flexibility in terms of the type of investments. You can be fairly aggressive with a child. For example, with Meg, she has a 1-year-old, a 3-year-old and 5-year-old. She could put some of her children especially in age-specific accounts so they work like Target Date accounts.
Related Article: Retirement Target Date Funds: Pros and Cons
They tend to be more aggressive with the type of investments they pick when a child is younger and they tend to be much more conservative at these age-specific accounts when it comes to a child who's in high school or middle school for example.
So that's one way to go is to look at how different 529 savings accounts perform comparatively for that age and being very careful about comparing plans based on the age ranges.
Another way to look at it is to look purely at a 529 investing account that may be tied to an ETF because those tend to have fewer expenses carried. And for that option you know families can look at U-Nest which has partnered with the Rhode Island state-sponsored plan and has an ETF.
Meg, I hope my chat with Farran helps you with your situation. I’m so glad to hear that you’re surrounded by such generous in-laws that want to see your kids have a bright future … because with the cost of college rising and rising for our kids, it’s gonna take a village to pay for it.
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