Who Legally Owns a 529 Account

Q. Do financial advisors recommend investing in 529 plans? One. Many financial planners, accountants and other financial advisors recommend 529 plans to their clients as a program that can meet their college planning needs. You may want to consult with a consultant to see if the 529 plans are best for you. Some parents simply save money for their minor children`s school fees in a deposit; These accounts become the property of children as soon as they reach the age of majority, according to state laws, which are usually 18 or 21 years old. At this point, parents lose control. Unlike these child accounts, Section 529 plans are not irrevocable gifts: the parent or other account holder retains control. Most 529 plans do not allow co-ownership, meaning only one parent can hold the account. In the event of divorce, a parent could have full control over a child`s college savings. The parent who is the account holder could: Q. Can a beneficiary have more than one account? A. Yes.

Since only one account holder can be named per account, family members can open their own account for the same beneficiary. Keep in mind that the impact of a 529 plan on the calculation of financial aid may vary depending on the relationship of the account holder with the student beneficiary. If the Account Holder is not the beneficiary`s parent, the Account Holder may also switch to a parent or other owner at a later date if necessary. When opening the account, the account holder must also choose a successor holder, someone who can take over the administration of the account in the event of the death or incapacity of the account holder. Q. What is a 529 College Savings Plan? One. A Section 529 University Savings Plan is a tax-efficient, government-administered investment program approved under Section 529 of the Internal Revenue Code. These plans allow members to save money in an account where income increases without federal income tax and, if used to pay for “eligible college expenses” and other eligible expenses, including up to $10,000 in student loans and expenses related to certain K-12 tuition. Federal income can be withdrawn tax-free. In many states, a participant may receive special government incentives, including state tax treatment that reflects federal tax treatment, tax deductions/credits, and/or other state tax benefits, depending on participation in their state`s programs.

If a 529 plan is used to pay for anything other than eligible education expenses, such as tuition, fees, books, consumables and equipment, K-12 tuition, or student loan repayments, it is considered an unqualified distribution. But only the portion of income from an ineligible distribution under Plan 529 is subject to income tax and a 10% penalty. A 529 plan holder never pays tax or penalty on the contribution portion of the payment. Most prepaid plans also require the beneficiary to participate in the plan for at least three years before using the account to pay for higher education. In addition, the beneficiary must generally be 15 years of age or younger at the time the account is opened, which gives the plan a minimum of time to begin investing the assets of the account in anticipation of the beneficiary using the plan to pay for their education. Q. How do I change the beneficiary of an account? One. Each 529 plan provides all the forms needed to change the beneficiary in an account.

Contact your 529 plan to determine the specific requirements and forms required to complete this procedure. Depending on the relationship between new and old beneficiaries, changing the beneficiary of an account may trigger a taxable event, which may also include a penalty, gift tax, or both. The recipient is the person whose future eligible graduate expenses can be paid from the account. Although the beneficiary enjoys the benefits of a 529 college savings plan, he or she has no administrative authority over it. There is an exception – if the account holder is also the beneficiary of the fund – in the case of an adult returning to higher education, an alternative degree or continuing education. Among other things, some of the elements that determine a student`s eligibility for assistance are resources owned by students and parents. In general, the amount of assistance a student receives may be reduced by the amount of certain types of funds owned by parents and/or students. For example, a custodial account (where the child is the owner of the account and the parent acts as guardian of the account) is considered an asset of the student, while a 529 plan is considered a parental asset (although the student receives the benefit of the funds, the parent is the owner and retains control of the account). Q. How do I open a 529 plan? One. To learn more about a specific 529 plan and open an account, you can contact the state that administers the program directly. CSPN provides information and links to plan websites and toll-free numbers to contact state plans.

Most states offer residents the option to invest in the plan directly through the state. These plans are often referred to as “direct selling” and are usually offered with relatively low fees and no sales commission. For those looking for professional advice on how to invest in a 529, “sold by advisors” programs are offered by many government plans. Advisor Sold programs provide professional investment advice and services with standard sales commissions. Q. Are there any restrictions on 529 plans and education savings accounts? R. Individuals can contribute to both 529 plans and Coverdell Education Savings Accounts. The Reconciling Economic Growth and Tax Relief Act, 2001 allows contributions to the Coverdell Education Savings Account to cover K-12 education costs on a tax-deductible basis. Individuals can benefit by funding a $529 plan for the child`s tuition and using the Coverdell Education Savings Account for elementary and secondary education expenses. Note that the annual contribution limit for Coverdell accounts is $2000 per beneficiary. Q.

Can more than one person contribute to a prepaid student account? A. Yes. In general, anyone can contribute to an account. Prepaid lessons are a great gift idea for grandparents, other family members, and friends. You should contact your state`s program to determine the specific process for making additional contributions to the account. Unless the divorce decree provides otherwise, a former spouse who is the account holder of Plan 529 can legally make distributions for ineligible expenses and use your child`s college fund. You can also pass your child`s beneficiary to their stepson. Although the balance of grandparents/third party property is not reported to FAFSA, all withdrawals from assets held by a third party are reported to FAFSA and will be counted for the student as untaxed income.

For example, suppose a grandfather wants to pay his granddaughter`s $50,000 for his granddaughter`s second year of university from the 529 plan he has for his benefit. During the granddaughter`s first FAFSA applications, she will not declare the grandfather`s balance 529. But when she files future FAFSA applications, she will have to report the $50,000 distribution as student income, which reduces aid by up to 50%! In this $50,000 example, this means a potential reduction of $25,000 in aid.