By Natalie Cordova, Executive Director, The Education Plan of New Mexico
April 18, 2023
As a mother of three children, I know first-hand how valuable it is to save for future costs, such as education. There are different ways to save for your child’s future education, but one of the options, a 529 plan, may be the best fit. A 529 plan is a tax-advantaged education savings plan created by Congress to help individuals build education savings. There are a variety of 529 plan options across the nation, and you can consider opening a 529 plan in your home state, if offered, or another, depending on the benefits.
Parents and grandparents share common questions about how to save for multiple children: “If I have more than one child, do I need multiple 529 plans?” and “When should I—or can I—start saving in a 529 plan?” With three kids in high school and elementary school, I can personally relate to these questions.
How Many 529 Plans Do You Need?
A 529 plan allows for one beneficiary at a time. So, if you need to build education savings for multiple children, you have options with 529 plans—open an account for each child or change the beneficiary on a single account as each child reaches college age.
In most cases, it’s helpful to open a separate 529 account for each child instead of having a single account and changing the beneficiary as each child needs the funds. I find it easier to track each child’s savings and plan accordingly with a separate plan for each. Here are just a few reasons for this:
- Age-based investment options are available in most 529 plans. This structure is geared toward each child’s age and anticipated high-school graduation age of 18. The age-based investments are generally geared towards greater investment growth/risk at a younger age, and steadily taper off closer to age 18 with more conservative investments utilized.
- There may be additional incentives based on state tax benefits for each beneficiary, rather than one singular account for multiple beneficiaries.
- The gift tax exclusion can be maximized with separate accounts for each beneficiary. One account for multiple beneficiaries would limit the amounts contributed into a 529 plan for gift limitation purposes.
When to Open an Account for Each Child
Wondering ‘when’ to start saving for a child’s future education? The best advice is almost always as soon as you are able. You can start saving even before you have children if you choose.
Keep in mind, to open a tax-advantaged 529 plan, you need to name a beneficiary. Those opting for a jump start may open an account and name themselves as the beneficiary until the child is born, and then change beneficiary name after birth. If you prefer to wait until your child is born, you can set up an education savings account in your child’s name once you have their social security number.
Why start so early? If you open a 529 in your child’s name during the first years of their life, you can build up a nice balance by the time they turn 18, even with modest monthly contributions. Here’s a hypothetical example of how this slow and steady approach wins the race. Start saving when your child is born, investing just $25 monthly in a tax-advantaged 529 plan. Though actual results will vary, you would have contributed $5,400 after 18 years. At an annual rate of 5%, you would have $8,730 in your child’s 529 account.
That extra $3,330 in earnings accrues thanks to tax-advantaged compounded growth.
If you are not able to start early, don’t worry! It’s never too late to start saving for future education costs, every little bit helps.
Rolling an account over from one beneficiary to another.
Whether you opt for separate accounts for each child, or a single account that will be shared between children, you can change the beneficiary on an account to another relative of the beneficiary at any time. If you have two separate accounts and one child doesn’t use all of the funds, you can change the beneficiary on the account to the second child. If you have a single account, you can change the beneficiary as each child needs the funds.
Typically, you can change the beneficiary from one child to another online by filling out a beneficiary change form or printing it and submitting it by mail.
About the author:
Natalie Cordova, a Certified Public Accountant, became the Executive Director of the New Mexico Education Trust Board in 2022. She previously served as the Deputy State Auditor for the State of New Mexico. In a career dedicated to government service, Cordova has also served as CFO for the New Mexico Office of the Attorney General and the Public Employees Retirement Association. The Education Trust Board is the governing body for New Mexico’s 529 education savings programs, including The Education Plan (New Mexico’s direct-sold 529 plan) and Scholar’s Edge (the state’s advisor-sold 529 plan).