Can I Have More Than One 529 Plan?

A 529 plan is a tax-advantaged investment account for education expenses. These plans allow money to grow free from federal taxes, and withdrawals are also tax-free when used for qualified educational costs, such as tuition, fees, and room and board at eligible institutions. Additionally, 529 plans can cover K-12 tuition, apprenticeship programs, and student loan repayments.

Having Multiple 529 Plans

The Internal Revenue Service (IRS) states there is no federal limit on the number of 529 plans an individual can establish. A single person can be the beneficiary of multiple 529 plans, even if owned by different individuals.

Multiple plans might be considered when different family members wish to contribute to separate accounts for the same beneficiary. Another reason could involve exploring diverse investment strategies or seeking varied state tax benefits.

Managing Contributions Across Multiple Plans

While there are no federal limits on the number of 529 plans, managing contributions across multiple accounts involves adherence to gift tax rules. Contributions to 529 plans are considered completed gifts for federal tax purposes, and for a single beneficiary, contributions from one donor to all 529 plans are aggregated when determining gift tax implications.

The annual gift tax exclusion allows a donor to contribute a specific amount to any individual each year without incurring gift tax. For 2024, this amount is $18,000 per recipient, increasing to $19,000 in 2025; married couples can effectively double this. If contributions exceed this exclusion, the donor must file IRS Form 709, and the excess counts against their lifetime gift tax exemption.

A special rule, known as the five-year election or superfunding, allows a donor to contribute up to five times the annual exclusion amount in a single year to a 529 plan. For 2024, this is $90,000, and for 2025, it is $95,000. This strategy treats the lump sum contribution as if it were spread over a five-year period, effectively using five years of annual exclusions at once. Donors utilizing this option cannot make additional gifts to that beneficiary for the next four years without triggering gift tax consequences.

Distributing Funds from Multiple Plans

Qualified distributions from multiple 529 plans remain tax-free at the federal level, provided the funds are used for eligible educational expenses. Qualified expenses encompass tuition, fees, books, supplies, equipment, and certain room and board costs. Maintaining accurate records of expenses is important for demonstrating compliance with IRS rules.

If multiple plans exist for the same beneficiary, account owners might strategically choose which plan to draw from first. This decision could be based on factors such as investment performance, aiming to withdraw from the plan with the highest growth for maximum tax advantage, or considering any state-specific tax benefits. Distributions should ideally occur in the same calendar year that the qualified expenses are paid to ensure tax-free status.

Non-qualified distributions, where funds are not used for eligible educational expenses, face different treatment. The earnings portion is subject to federal income tax and a 10% federal penalty. Original contributions, made with after-tax dollars, are not taxed or penalized. Some states may also impose additional taxes or recapture previously granted state tax benefits on non-qualified withdrawals.

Considerations for Multiple Plans

Establishing multiple 529 plans can offer strategic advantages, particularly concerning state tax benefits. While federal tax benefits are consistent across all plans, many states provide income tax deductions or credits for contributions to their own state’s 529 plan. Some states, known as “tax parity states,” extend these benefits even if contributions are made to an out-of-state plan, allowing account owners to potentially maximize state-level tax savings.

Diversifying investment options is another reason individuals might open multiple 529 plans. Each state’s plan offers a unique selection of investment portfolios, including age-based options, static portfolios, or individual fund choices. Having more than one plan allows access to a broader range of investment managers and asset allocations, potentially aligning better with diverse risk tolerances or time horizons, especially for different beneficiaries with varying financial timelines.

Opening separate plans for different beneficiaries, such as children or grandchildren, simplifies tracking and management. This approach allows for tailored investment strategies based on each individual’s age and expected college enrollment date. Multiple plans can also facilitate gifting strategies, enabling various family members to contribute to distinct accounts for a beneficiary, which can be advantageous for financial planning and gift tax management.