When Jacek and Laura Lazarczyk had their son Luke in 2002, they opened a tax-advantaged 529 college savings account for him through their state, Illinois.
Then friends told them about Upromise, a rewards program for online, retail and credit card purchases that allows parents to put those rewards into a different, Nevada-based 529 plan account. They opened one of those for Luke as well.
In 2005, the couple had their second son, Adam – and opened a state 529 plan account for him, as well as a Upromise account.
Now, the couple juggles multiple 529 plans, but they have a strategy. As the children age, the plans will automatically adjust to reduce stock-based investments in favor of safer investments.
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Jacek Lazarczyk relies on the plan managers to make the investment choices. "I don't think I can ever be smarter than the market, so I don't pretend," he says. The couple contributes regularly to their state plan, which offers a tax deduction.
The Lazarczyks are far from the only family with multiple 529 plan accounts. Joe Hurley, founder of Savingforcollege.com, says, "The most common reason for having multiple accounts is believing an out-of-state plan works best for the investor, but the in-state plan offers a state tax deduction or credit."
One reason the out-of-state plan might work better is if a family moved and there's a cost for transferring funds to a new plan, says Mike Fitzgerald, chairman of the College Savings Plans Network. The state parents moved from could expect tax deductions and credits to be repaid, he says.
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For instance, if someone saved $1,000 on their annual taxes because of 529 plan contributions, this amount could be recaptured on a future tax return. "That's the way we do it in Iowa; that's the way they do it in most states," Fitzgerald says.
Then, for future contributions, open a plan in the new state, Fitzgerald says. This way, state tax deductions and credits aren't reclaimed by the old state, and families can benefit from state tax deductions and credits in the new state.
For the Lazarczyk family, the out-of-state plan is their Upromise 529 plan. They don't make regular contributions, but they leave the reward earnings – from online purchases and a percentage of their credit card charges – in the Upromise 529 account. The family has saved $3,000 between the two boys' accounts from Upromise rewards.
The family hasn't planned which account to withdraw money from first for future qualified education expenses. Lazarcyk says they're just trying to accumulate as much as possible.
Financial expert Hurley recommends using the plan with the most earnings first, in case there are leftover funds after all qualified educational expenses are paid.
If a student doesn't use all the money for education, the account owner would have to pay federal taxes on the earnings, and the IRS would charge a tax penalty of 10 percent on the withdrawal.
For example, the student is going to a college that costs $16,500. The student's family opened two 529 plan accounts 10 years ago. One was opened with $10,000 and earned 5 percent annually; the other account was opened with $5,000 and grew 3 percent annually. The first account is now worth about $16,300. The other account is worth more than $6,700.
Since the degree only costs $16,500, the family should withdraw money from the plan with the greater earnings, with a total of $16,300, to avoid taxes on withdrawals from that account. Then they could cash out the second account and pay less in taxes because of lower earnings and a smaller tax penalty because of the account's overall lower value.
While there are reasons to open more than one 529 plan account per child, Hurley doesn't recommend opening dozens.
"I have had 529 accounts in 33 different states," he says. "I don't recommend it. One or two is sufficient for anyone else."
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