529 account with multiple beneficiaries (kids)

[Andy L]

I have a 529 college investment question.

Facts:
I have a 4 year old for whom we've established a 529 account about 4 years ago. We also have a 1 year old that we have not started an account for. We also are thinking of having a third kid.

The 529 account has been doing great. We make monthly contributions.

Question:

Should we simply increase our monthly contributions with the goal that this one account would benefit all 2 (maybe 3 kids) OR should we set up separate accounts for each kid? Or does it matter? I could foresee a difficulty of dividing the money in the account between the kids (but I think that would be a good "problem" to have.)

Thanks,
Andy

 

[Matt]

I have a 529 college investment question.

Facts:
I have a 4 year old for whom we've established a 529 account about 4 years ago. We also have a 1 year old that we have not started an account for. We also are thinking of having a third kid.

The 529 account has been doing great. We make monthly contributions.

Question:

Should we simply increase our monthly contributions with the goal that this one account would benefit all 2 (maybe 3 kids) OR should we set up separate accounts for each kid? Or does it matter? I could foresee a difficulty of dividing the money in the account between the kids (but I think that would be a good "problem" to have.)

Thanks,
Andy

I'd recommend at least 1 account per kid... I say at least because you could have a matrix owner system in place (Dad>Kid acct1 Mom>Kid acct2) the main reason is just in case one of them doesn't go to college you would find it easier to close out that plan. Below is a more elaborate strategy.

Elaborate Holdings for 529

Two accounts $10,000 in each, you want an 80/20 Stock/Bond mix (for example)
This would equate to total holding of $16K Stock $4K Bond

• 529 #1 Owner Dad, Beneficiary Daughter - holds Bonds/Stocks 60/40 ($6k/4K)
• 529 #2 Owner Mom, Beneficiary Son - holds Bonds 100/0 ($10K/$4K)

By creating these substantially different individual holdings (that add up to the same total risk tolerance of 80/20) you can make the accounts act 'differently' based upon the market.

Note the only reason that I propose the following is to give you better 'options' when it comes to canceling a 529 account and pulling out the money without penalty. IE should you budget for all kids, but then one doesn't need it.

If, on the other hand you just had vanilla:

10K in each, 80/20 in each... both accounts would move in exactly the same way when the market moves. There wouldn't be an opportunity here to 'back out' of the losing investment, unless everything just dropped. The purpose of holding a mix of assets is that to some extent there should be some inverse correlation - IE when your stocks drop your bonds raise... how much that happens in current conditions is debatable, but the fact is if you structure accounts strategically you allow for the opportunity.

FWIW I have maybe 5% bonds in my 529 plan, but when I contribute to my son I will fund:

Mom>Son (Stock fund 1)
Dad>Son (Stock fund 2)

And have different holdings in each. (I'm just at funding Mom>Son for now and will add the second fund this year).

Note that the ability to change beneficiary within the immediate family means that you aren't giving a child an inferior portfolio for growth, you'd simply swap it over to them.

 

[dshah9380]

Love the indepth analysis, Matt. However, I have a question. Won't the 529 contribution prevent the kids from getting financial aid because their networth is significantly larger.

Would it make sense to open the 529 plan in the name of parents/grandparents and use it to fund kids education and not count as their own income/net worth ?

 

[Sesq]

I have separate accounts for each kid. For FAFSA purposes 529 accounts are treated as assets of the parents and included in the expected parental contribution at something like 5-6%. If the account was an asset of the grandparent, the year money was drawn from it would be deemed income to the kid and dinged at an outrageous clip for the following year's aid calculation. One solution for grandparent funding is to have their contributions pay for senior year tuition, then the "income" doesn't matter.

If the OP isn't maxing all their retirement accounts they may prefer to choose to use Roth IRA's (in particular) to save for college since retirement assets are excluded from FAFSA.

 

[Matt]

Love the indepth analysis, Matt. However, I have a question. Won't the 529 contribution prevent the kids from getting financial aid because their networth is significantly larger.

Would it make sense to open the 529 plan in the name of parents/grandparents and use it to fund kids education and not count as their own income/net worth ?

You can only use it for your education if you are beneficiary. The purpose of splitting accounts was to be able to liquidate it without penalty (and then use it directly if you like..) as you could liquidate the account with least growth or possibly a loss.

Generally, if owned by Parent for Child the value of a 529 plan is multiplied by 5.64% when calculating eligibility on FAFSA. So using the $10K example $564 would count as an asset.

A Grandparent (or other non parent) owning for the child wouldn't need to be reported for FAFSA in year 1, however if they were to support the education by paying for it via the 529 the amount would need to be declared for year 2 and would have greater impact than the 5.64%.

 

[Matt]

If the OP isn't maxing all their retirement accounts they may prefer to choose to use Roth IRA's (in particular) to save for college since retirement assets are excluded from FAFSA.

While not on FAFSA they are reportable on CSS I believe.

 

[Matt]

I have separate accounts for each kid. For FAFSA purposes 529 accounts are treated as assets of the parents and included in the expected parental contribution at something like 5-6%.

Actually a very good, basic point as to why to have one for each kid... If you had a mega 3x size of 529 with enough for all kids, the first child would be reporting 3x 5.64% for FAFSA too...

 

[smittytabb]

I am going to go against conventional wisdom here. If you have enough saved for each child, they will not qualify for financial aid, but they might not need it either. And if they need to go to graduate school, I would rather loan them the money myself with interest (have done this with two of my children) than have them get involved with the current set of options. I have four children who are out of college debt-free which is a huge gift I hope they recognize is getting rarer and rarer. And there are always merit based scholarships. My youngest took advantage of one of those.

 

[Matt]

I am going to go against conventional wisdom here. If you have enough saved for each child, they will not qualify for financial aid, but they might not need it either. And if they need to go to graduate school, I would rather loan them the money myself with interest (have done this with two of my children) than have them get involved with the current set of options. I have four children who are out of college debt-free which is a huge gift I hope they recognize is getting rarer and rarer. And there are always merit based scholarships. My youngest took advantage of one of those.

What are you doing to account for the tax advantages (possible state deduction+tax free growth for QHEE) of the 529 in your model?

 

[smittytabb]

What are you doing to account for the tax advantages (possible state deduction+tax free growth for QHEE) of the 529 in your model?

Good point. At this point it is moot as we are done with college education funding...but something to consider. Getting on a plane headed way south...

 

[Sesq]

Actually a very good, basic point as to why to have one for each kid... If you had a mega 3x size of 529 with enough for all kids, the first child would be reporting 3x 5.64% for FAFSA too...

I don't actually think it matters if you split the accounts in terms of the first kid. All the 529 plans are an asset of the parent and when the first kid goes to college the parents "contribution" will be 5.64% of the parent's available assets. All the 529 plans are an available asset, so the first kid will inevitably be granted the lowest "need" based scholarship allotment.

There are advisers out there that will structure assets to avoid FASFA, which is generally pay down the mortgage, move assets into a "business", and best of all for the advisor, buy a great big annuity or life insurance contract. My understanding is these tricks don't work for the schools that use CSS Profile.

The whole college funding process is marred by this variable pricing, as you layer in the merit scholarship process, where list MSRP isn't the "out the door" price. Used car salesmen would blush.

My kids will go off to school in about a decade. I am saving aggressively and hoping that technology disrupts the business model. I sure as heck don't donate to my alma-maters though.

 

[Matt]

don't actually think it matters if you split the accounts in terms of the first kid. All the 529 plans are an asset of the parent and when the first kid goes to college the parents "contribution" will be 5.64% of the parent's available assets. All the 529 plans are an available asset, so the first kid will inevitably be granted the lowest "need" based scholarship allotment.

Yep, you are correct.. wishful thinking on my behalf there.

 

[Sesq]

I meant to mention, my only purpose for splitting the accounts is to be equal between the kids. If I paid them all into one account and something happened to me some one may think that wishes were to play favorites. My kids are 3 years apart and one of the things I think about is sequence of returns impacting the amount each has available, as well as the impact of education inflation changing how much is available to each kid.

A part of me would like to incent my kids to consider the sticker price in choosing their schools. And if there was $$$ leftover they would have that available for grad school, for their kid's education, or perhaps they could cash it out down the road. I am not sure if I can devise a system that would balance out stuff like inflation and sequence of returns though.

 

[Matt]

I meant to mention, my only purpose for splitting the accounts is to be equal between the kids. If I paid them all into one account and something happened to me some one may think that wishes were to play favorites. My kids are 3 years apart and one of the things I think about is sequence of returns impacting the amount each has available, as well as the impact of education inflation changing how much is available to each kid.

A part of me would like to incent my kids to consider the sticker price in choosing their schools. And if there was $$$ leftover they would have that available for grad school, for their kid's education, or perhaps they could cash it out down the road. I am not sure if I can devise a system that would balance out stuff like inflation and sequence of returns though.

So if you built your 529s to allow for non QHEE withdrawal without penalty (per my above example), and in tandem held a certain amount of assets in taxable you could potentially swap tactics:

Cash out 529 plan (no growth, no penalty)
Fund education via LTCG appreciated assets.

This would mean you could shift the Cap Gain liability from your balance sheet. Assuming of course it wasn't directly correlated with the 529 and underlying market.

Example: http://www.forbes.com/sites/troyonink/2013/07/30/college-tax-strategy-wipe-out-25000-of-capital-gains-per-year/