|Question: I have two children. Should I open one 529 account for both children or one 529 account for each child?|
From both a paperwork and account fee standpoint, opening one account makes sense. And though a 529 account can have only one beneficiary, you can change the beneficiary as needed--just be sure to check the plan for any limitations on the frequency of changes. So, for instance, after your first child finishes college, you could change the beneficiary to your second child. Keep in mind, though, that a change in the beneficiary may cause gift taxes and generation-skipping transfer taxes.
If you do decide to open just one 529 account and intend to choose an age-based portfolio (one whose asset mix grows more conservative as your child gets older), it may make sense to name your younger child as the beneficiary. This will give you the most aggressive investment allocation, which may maximize the growth in the account. Then, when you need the money for your older child's college expenses, you can change the beneficiary to your older child. Or, you could simply transfer (or roll over) the account money to an account with your older child as beneficiary.
Section 529 plans differ when it comes to rules about partial rollovers, so check the rules of any 529 plans that you're considering. In some cases, you may need to transfer money to a different state's 529 plan. Again, check on any potential withdrawal limitations before you open an account. Keep in mind, too, that although you intend to fund the college education of two children, the total amount you can contribute is limited by the contribution maximum imposed by the single 529 plan.
Yet opening just one 529 account if you have two children may have a gift tax downside. The money you contribute to a 529 account is considered a gift to the beneficiary. Ordinarily, you are free to gift up to $13,000 per year, per beneficiary. Otherwise, you'll be required to complete a federal gift tax return and report a taxable gift. However, a special rule allows you contribute up to $65,000 to a 529 account and avoid gift tax by spreading the gift evenly over five years. (Note: You must use up your applicable exclusion amount of $1 million before you're liable to pay gift tax out of pocket.)
In any case, you'd probably be able to accumulate more funds for your kids if you opened two separate 529 accounts. That way, you'd be able to give $13,000 to each child per year ($26,000 maximum) instead of depositing $13,000 into only one account. And, if you take advantage of the $65,000 special election for each child's account, the funds may grow even faster.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.