3 Factors in Using College Savings for Multiple Children

Reyna Gobel
U.S.News & World Report LP

Karen Cooper's two children took different higher educational paths: Her daughter just graduated from an expensive private school, while her son attends a community college. All the money for tuition is coming from the California family's pockets, and her son's tuition is much cheaper.

How does she make her children feel like they are being treated equally? She gave each child money from the family's college savings according to their school choices, but she also considers how money has already been spent on each child to decide how much she will spend in the future.

"We've told our daughter, she's on her own for grad school," Cooper says. But she's open to paying for additional education for her son, depending on her family's financial obligations and abilities at the time.

Many parents want to give to their children evenly, and it's ultimately a personal choice, Cooper says. But it's also important to consider education costs based on each child's choices, she says.

In addition to fairness, consider the following factors that can affect how and to whom savings in the tax-advantaged college investment accounts known as 529 plans are distributed.

[Take these steps to start using 529 plan savings.]

1. Potential tax penalties: If any 529 plan money goes unused, any growth on the account is taxed as income as well as charged a tax penalty, says Andrew Alter, a certified public accountant and certified financial planner whose firm has offices in New York and New Jersey.

Withdraw funds for qualified education expenses from the account with the highest earnings for the older child, Alter says. This way if some of the 529 plan money isn't spent on education, parents will pay less in tax penalties than on the plan with the smaller earnings.

For instance, if one plan has grown at a 7 percent rate and the other plan grew at a 5 percent rate, spend the money in the plan with the 7 percent interest rate first.

[Learn how to allocate college savings for multiple children.]

2. Account beneficiaries: Only one name is listed as the person allowed to use the funds in a 529 plan at a time, known as the account's beneficiary. But the account owner, normally the parent, can change the beneficiary once per year.

That ability comes in handy in two cases: when one account has grown more than the other, and once the eldest child has finished his or her education.

In the first case, the account owner could change the beneficiary more than once. For instance, one account had higher earnings but then went down in value. The other account had more growth because of a different investment mix. It would make sense to switch the account that now has higher earnings to the older child.

When the older child finishes his or her education, of course, it's best to switch the beneficiary to the younger sibling's name. The younger child can then use funds from both 529 plan accounts.

[Find out how to juggle multiple 529 college savings accounts.]

3. Accounts from other families members: It's common for grandparents to open accounts on their grandchildren's behalf, says Dan Thomas, a California-based certified public accountant and personal financial specialist.

When parents are considering which 529 plans to distribute funds from, it's important to know the total amount that's available. Sometimes parents don't know about accounts opened by grandparents, aunts or uncles, he says.

Ask family members about open 529 accounts before the child's first year of college.

College funding is a continual planning process that involves assessing and reassessing educational funding needs, says Thomas. Evaluate annually how to manage 529 contributions and withdrawals based on scholarships awarded, each child's goals and the earnings on each account.

Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.