Ask the grumpies: How to save for multiple kids’ 529s?

First Gen American asks:

Once our mortgage is done again, we’ll swap that out with a 529 auto deposit option that comes out of both paychecks….which brings me to another question…Should we funnel a ton now into older kid and worry about younger kid later (he’s 4 years younger) or should we fund both at the same time now? I’m assuming we can roll over older kid’s excess into younger kid if we over deposit but then if we die before kids do, an uneven distribution would screw things up for kid 2. Not sure what to do yet.

I have also spent some time thinking about this.  I am not sure it actually matters that much.

Yes, if you have too much money for kid #1, you can easily transfer the leftover amount to the second child.  (An added wrinkle–if you undersave for DC1, will you take from DC2’s account?  You can, but would you be willing to?)

A quick check on the internet suggests that the 529 does not automatically go to the child who is named on its behalf– you can name a beneficiary.  It is also something that you can talk about with an attorney for a trust if you do not have a successor that you trust not to just liquidate it at a loss.

We have target-date accounts for our children in their 529s, so it makes sense in terms of risk to fund them separately.  That means DC1’s account has less risk in it right now (a larger bond to stock ratio) than DC2’s does because DC1 is closer to college.  But I’m thinking of them as separate buckets and we’re aiming to fully fund 4 years at a private school given that we’re not expecting much financial aid.

If you’re not thinking of them as separate buckets, then you might want to think of it as if you are going to “retire” and you know you’re going to be alive for 8 years after “retirement” and then suddenly “die” (if you’re planning on funding post-college education, or your DCs might take more than 4 years to graduate, then you might want to add some years to that).  What kind of investment portfolio would be optimal in that scenario?  It’s going to depend on your risk aversion, but you probably could pick a single fund that would fit your risk preferences given that scenario.

In terms of how we’re funding, I don’t actually think that our method of putting in $X/month to each child’s fund is necessarily optimal.  It would make better sense while we have excess cash to put in lump sums right now and stop contributing later (allowing for more tax preferred earnings).  But $X/month/kid is predictable and is easy to fiddle with should our situation change.

The important thing that gets brought up in the comments when we talk about this kind of situation is the perceived fairness of the situation by the kids.  Pick some rule that seems fair for both kids and stick to it.  If you have to make adjustments, make sure that you adjust for the other kid as well.  For us, we’ve decided that fully funding tuition without loans is what we consider fair, so we will be ignoring the actual costs and financial aid for the schools.  Our kids will get college paid for by us no matter what college they choose.  Other people choose a specific dollar amount (though I hope they adjust it for inflation!), or may have a rule like, “we will pay up to the cost of state school X”.  What you don’t want to do is pay full freight for one kid and force the other to take out loans for the full amount because that can lead to them writing about how you don’t love them on money forums, and nobody wants that.

Grumpeteers– How do you think First Gen should save for two kids’ college?

16 Responses to “Ask the grumpies: How to save for multiple kids’ 529s?”

  1. chacha1 Says:

    I’m just so impressed with parents who actually DO save for their kids’ college, all I can do is [bow].

  2. Sarabeth Says:

    I’ll bite. We put the same amount into both kids’ accounts, even though one will presumably hit college 3 years sooner. We think of them as a single pot of money, and would have no problem shuffling between the two in order to maximize overall efficiency. We will offer the same level of financial support to both kids, unless something goes horribly wrong, so we figure it doesn’t matter what money comes out of which account. We do need to update our wills again – I will have to ask the lawyer how to handle the 529s. If we die prematurely, though, the amount of money in the 529s will pale in comparison to the life insurance money, so a small discrepancy doesn’t keep me up at night.

    • nicoleandmaggie Says:

      Thanks! That is a good idea about updating the wills and talking to a lawyer. What we’ve done in our will is handed all of the financial responsibility over to my sister, but given the children to DH’s brother (who has a wife and two kids). We’re on the same page in terms of money so I trust her to make decisions for my kids should we die before they get out of college. (And they’ll have all that life insurance money too!)

    • Sandy L Says:

      Good point about the life insurance. A few thousand difference won’t matter with life insurance money coming in. That makes me feel better.

      Question. Is fair the same $ amount or 4 years of education? What if one goes to expensive school and the other state school?

      Thanks for all the comments. Good food for thought.

      • nicoleandmaggie Says:

        I think you just need to let them know the rule in advance so they can make choices based on it. My little sister’s school cost a lot more than mine did (mine was better endowed and I got lucky with scholarships after starting) but I don’t feel any ill-will because I knew the rules going forward.

  3. Sunflower Says:

    I’m in Canada so it is likely different here. I have two young kids (1 and 3) so we are starting to save now. Our federal gov’t has incentives for saving in an RESP (registered education savings plan). So we contribute $2500/yr per kid and they top up another $500/kid (it’s a 20% top up to a max of $500, so we do the max)…. so we are saving about $6k/year right now. It’s in a joint RESP account so it can be used by either kid in the future. No idea what either of them will end up doing but we are hoping that this money will cover all costs related to education for them when they get there. Who know what tuition etc will look like in 18-20yrs time so we are planning ahead. :)

  4. Revanche @ A Gai Shan Life Says:

    “Pick some rule that seems fair for both kids and stick to it.” – Definitely this.

    With just the one kid right now, this is an intellectual exercise but if we ever had more/fostered/adopted kids, I would want to do something for them equally too. Since we don’t get tax breaks or incentives, I tend to think it would be simpler to fill up one 529 with both kids named as beneficiaries and open a second one if I max out the limits of the first one.

    That’s on the assumption that we’ll be doing the best we can to cover as much of undergraduate as possible, without loans, and it seems to be fair to say, you each get a set fraction of the total amount we set aside for school. Make your decision on which school you go to, with associated costs, wisely.

    • nicoleandmaggie Says:

      I’m not sure that you can name both kids as beneficiaries? I guess in your will you could make it clear that’s what you wanted in case you die, but in the absence of your premature demise, I think you’d pick the oldest and then transfer to the youngest? I’m not 100% sure though.

  5. Shannon Says:

    It’s interesting that you’re aiming for 4 years of private. We’re not sure what to do on that front. On the one hand, it makes sense for us too as we won’t be looking at financial aid, and it’s already clear to us that there will be no sports scholarship winners in this house. On the other hand, if the kid (or kids) decides he wants public, then we’ve over saved. And the deal in our families for us was – parents pay for undergrad, but you’re on your own for grad. We’ll probably give our kids the same deal, so I don’t think we’d roll excess into grad school. So we’ve been aiming for full 4 years public (which would give us about 2 years private or so), then funding the rest through ramped up savings while they’re in school. Granted, we realize we’re lucky that we have the ability to save, but there’s still so much uncertainty that it makes it difficult to figure out what the right path is.

  6. nicoleandmaggie Says:

    Update: Oddly, my SIL just talked to my DH about this very topic. Her 403b advisors advised her to have only one 529 plan for her oldest kid. (I just looked into who her financial advisors are– the majority of links are about how AXA scams their employees(!)… but they also scam a whole lot of teachers. )

    Which brings me to another reason you might want to have two accounts. Your relatives who want to donate probably don’t want to donate 2x as much to the oldest kid, especially when he’s a boy and the youngest is a girl. Even if you plan to use the pot as one pot, other people who are contributing to your 529 may want those accounts to be separate. (Especially if they know that the $50/year that they put into that 529 account isn’t going to pay for all of the incidentals for the eldest and will be gone long before the youngest starts school.)

  7. A small rant about bad retirement options | Grumpy Rumblings (of the formerly untenured) Says:

    […] She told us that her financial advisor at work had told her not to open a second 529 plan.  I wondered at the quality of that advice as we’d recently done an ask-the-grumpies post on that very topic. […]

  8. Ewan Says:

    We have 529s, but only as a tax vehicle – they’re unlikely to cover the cost of college, but we plan to do so. [Although I am tempted by the concept of only paying for As and Bs – any thoughts?] Being able to graduate debt-free was key to both of our financial health, so it’s an important goal (and should have enough $$ now set aside to achieve, happily). If one or both want to go to med school or some similarly-expensive path, we’ll have to think about our desires again!

    • nicoleandmaggie Says:

      I’m not in favor of paying for grades, although some people say it’s worthwhile. I prefer my kids to be intrinsically motivated rather than extrinsically and I don’t want to punish them for taking difficult classes. It’ll probably depend on what motivates your kids once they get to be that age.

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