Who should own a 529 plan?
If you have young children (or grandchildren), you may be thinking of ways to save for their future educational needs. You might consider a 529 plan, which offers tax advantages and other benefits. But a 529 plan also brings with it a key question: Who should be the owner?
You could choose to own the 529 plan yourself and name a child or grandchild as the beneficiary. And as the owner, you’re free to name another family member as a beneficiary if the original one chooses not to use the 529 plan assets for qualified educational purposes. You can also designate a successor owner, so that the assets won’t have to go through probate if you pass away.
As an alternative, you could establish a custodial account (commonly called UGMA or UTMA). In a custodial account, the 529 plan is owned by the minor child, who is also the beneficiary, and the child gains full control of the account once he or she is of legal age (usually 18 or 21). Until the child reaches this age, you, as custodian, control the account and you can designate a successor custodian to step in if you become incapacitated or pass away. Generally, the beneficiary cannot be changed unless the child passes away.
The end results of a custodial 529 plan are similar to those of a traditional, parent-owned plan. The ownership model won’t affect the amount accumulated in the plan, and the custodial and traditional arrangements will have the same impact on the beneficiary’s eligibility for need-based financial aid. In both a custodial 529 plan and a traditional 529 plan, the assets are reported as parental assets on the Free Application for Federal Student Aid (FAFSA). A maximum of 5.64% of parental assets are looked at for financial aid calculations, compared to 20% of student assets.
So, which is preferable – a traditional or custodial 529 plan? There’s no one right answer. But keep a few points in mind:
- Taxes – If you move UGMA/UTMA assets into a custodial 529 plan, you could incur taxes. Before making this decision, consult with your tax advisor.
- Beneficiary’s control of assets – Upon reaching 18 or 21, a child gains control of a custodial 529 account and can use the assets for any purpose. If the money isn’t used for qualified educational expenses, the child will incur taxes and penalties.
- Grandparent ownership – Grandparents can choose to own a traditional 529 plan account or open a custodial 529 plan account for a grandchild. A grandparent-owned 529 plan’s distributions could hurt a student’s eligibility for need-based federal financial aid, but distributions from a custodial 529 plan account are not reported on the FAFSA. However, if you’re a grandparent, and you’re considering opening either type of 529 account, you might want to check with a school’s financial aid office well before the money is needed.
Think carefully before deciding on the ownership of a 529 plan and get the help you need from your tax professional and financial advisor. A 529 plan can be a valuable tool, so you’ll want to maximize its benefits.
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PSA: Who should own a 529 plan?
TBA: May 24, 2021
If you have young children, you might consider investing in a tax-advantaged 529 education savings plan. But who should be the owner?
You could own the 529 plan yourself and name a child as the beneficiary. And as the owner, you’re free to change beneficiaries and to designate a successor owner in the event of your death.
As an alternative, you could establish a custodial 529 education savings plan. In this arrangement, you, as custodian, control the plan, but the minor child owns it and is the beneficiary.
A traditional, parent-owned 529 plan and a custodial 529 plan will typically have the same impact on financial aid packages. But with a custodial 529 plan, your child gains control of the assets upon reaching legal age. If the money isn’t used for qualified educational expenses, the child will incur taxes and penalties.
So, think carefully about the issue of ownership and consult with your tax professional and financial advisor. A 529 plan can be a great education-savings tool, so you’ll want to get the most from it.
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