What Is a 529 Account?


Updated April 12, 2023 · 5 Min Read

What Is a 529 Account?

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Many parents create a 529 account to save for their child's college education. They may create an education savings or prepaid tuition plan. They then register it in their home state. These accounts feature financial benefits. Most states consider investment profits tax deductible. Also, account holders can choose different investments within the account.

However, there are some 529 plan drawbacks. Account holders must make a $500-$1,000 minimum initial contribution. They also face penalties for withdrawals unrelated to education. Some states limit investors' freedom to choose investments.

So, who owns a 529 plan? Is there an age limit? Read on for answers to typical questions about 529 accounts.

Who Can Own a 529 Account?

The person who opened the 529 plan owns the account. A parent, grandparent, or future college student may become a 529 account holder. The account owner controls the funds, chooses investments, and distributes money to the college student.

People open a 529 plan in their state of residence by selecting a plan type and completing an application. They then choose how to fund the plan. One option is setting up automatic monthly contributions from a checking account.

Types of 529 Plan Ownership

Most 529 account holders are parents, grandparents, or students. Each affects financial aid eligibility in different ways. The following sections explain the plans' similarities and differences. Financial advisors can also provide information about each plan.

  1. 1

    Parent-Owned 529 Account

    Families with two married parents may open a sole or joint 529 account. The 529 impacts financial aid, as the owner must report 529 assets when they complete the FAFSA and CSS Profile. Doing so may increase their expected family contribution (EFC). However, the FAFSA marks down 529 investments to 50% of their value. This means they make less of an impact on financial aid eligibility than job income.

    A higher EFC and lower financial aid package may not affect parents' out-of-pocket costs much if their 529 investments performed well. The FAFSA does not consider 529 withdrawals as income.

  2. 2

    Student-Owned 529 Account

    A student-owned 529 account works in much the same way as a parent-owned account. Students follow the same procedures when completing the FAFSA and CSS Profile. They do not report withdrawals as income.

    Parents considering setting up a student-owned 529 account in their minor child's name should research potential tax consequences. These UGMA/UTMA 529 accounts appoint the child as the owner with the parent as the custodian. UGMA/UTMA 529s allow parents to create a second 529 for their child. However, the FAFSA may consider this account a student asset. EFC rises as a result.

  3. 3

    Grandparent-Owned Account

    Grandparents opening a 529 account get the same tax advantages and investment flexibility as parent- and student-owned accounts. Also, since a grandparent owns the account, parents do not list it as part of their assets on the FAFSA and CSS Profile. The government does not tax withdrawals as long as they go toward tuition and fees.

    Before opening an account, grandparents should know that the government considers any distributed money as student income. This policy could reduce the student's financial aid eligibility. Also, a 529 affects grandparents' Medicaid eligibility. This is because the government classifies it as a financial asset.

What Is a Successor Account Holder?

A parent or grandparent creating a 529 appoints a successor account holder in the event of their death. The government allows adults with U.S. residency to act as a successor. The successor gains the same power as the person who opened the account. Successors can make investment decisions, withdraw money, and appoint a beneficiary. The account owner should trust their potential successor.

Successors who control a 529 plan become the account holder. They complete the FAFSA for the student attending college. As a result, EFC and financial aid eligibility may differ considerably from previous years.

Can a 529 Plan Have Multiple Beneficiaries?

A 529 account holder may assign only one beneficiary at a time. This rule limits some families with multiple children in college. These families may decide to create more than one 529 plan. However, families with children attending college at different times may change the 529 plan's beneficiary.

Most states allow 529 account holders to change a beneficiary by submitting some forms. States' official 529 websites describe the process and provide the relevant documents. The government does not impose additional fees or taxes on parents or grandparents making a change as long as the 529 benefits a family member. A 10% penalty applies otherwise.

Can a 529 Plan Have Joint Owners?

The rules concerning joint ownership vary by state. Some states allow married couples to become joint owners for their child or grandchild. Advantages of joint ownership include not relying on a successor in the case of one partner's death. Even if the couple should divorce, both people retain account control.

Divorce may result in problems for joint 529 account holders and their beneficiaries. Completing the FAFSA and CSS Profile becomes more complex, affecting EFC. Couples researching joint 529s should talk to a financial advisor. They may learn that sole ownership works best in their situation.

Is There an Age Limit for 529 Plans?

The federal government does not impose age limits for 529 plans. But parents and grandparents cannot set up a 529 plan for an unborn child. This is because beneficiaries need a Social Security number. Adults may create a student-owned 529 plan and start saving for their education at any time. Those who do not use all of their 529 may transfer any remaining funds to a relative.

States may impose more regulations. These may include penalties for withdrawals before the beneficiary reaches a specific age or withdrawals for K-12 education-related expenses. These violations result in a 10% penalty and a higher federal income tax bill.

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