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.
Brian Killea has been a Financial Advisor with Edward Jones for 3 years and has 20+ years industry experience. He is proud to have lived in New Providence for 14 years with his wife Jennifer and two children. Through these articles Brian will share insights on how to make sound financial decisions for long-term success. Reach out to Brian and start a conversation via: (908)517-1080, Brian.Killea@edwardjones.com, linkedin.com/in/brian-killea-6b0b2732 , and visit website. This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIPC
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones. Member SIPC.