Custodial Vs. Individual 529 Plan

The 529 plan is an investment vehicle people use to finance higher education. There are two types of 529 plans, prepaid college plans and college savings plans. A college savings plan can be either custodial or individual. At least one 529 plan is sponsored in all 50 states and the District of Columbia.

The Basics of 529 Plans

The 529 plan is a legally qualified tuition plan, authorized by section 529 of the Internal Revenue Code, which was created to save money for future college expenditures. Earnings from the investment grow tax deferred and the distributions are tax free – so long as they are used for qualified higher education expenses.

Custodial 529 Plans

A custodian 529 plan is designed for a specific minor. As the name suggests, the plan is managed for the minor's benefit by another individual. Every state has its own unique laws to govern custodial accounts. Every state has enacted the Uniform Gifts to Minors Act and all states, with the exception of South Carolina and Vermont, have adopted the Uniform Transfer to Minors Act.

How the Custodial 529 Plans Function

The custodian establishes the account for a minor and manages it on the minor's behalf. Contributions are not limited to the custodian; anyone can contribute up to $14,000 per year as an irrevocable gift. When the minor reaches the mandated age, the assets in the 529 plan transfer to a new account, which the beneficiary now controls. Should the beneficiary use the money for non-educational purposes, the beneficiary will have to pay ordinary income tax plus 10 percent penalty. The transfer of assets from the custodial to the individual 529 account may cause a tax reported gain or loss and a possible sales charge.

Individual 529 Plans

An individual 529 plan is a tax advantaged, financial investment which allows individuals to save money for college for a beneficiary, be it a child or an adult. The investment grows and is withdrawn for educational expenses federally tax free. Just like custodial 529 plans, anybody can contribute up to $14,000 annually to the plan as an irrevocable gift. Should the intended beneficiary not attain higher education, the account holder can swap out the intended beneficiary for one of that person’s relatives without tax implications. Should the new beneficiary be unrelated to the original, tax penalties may be incurred.

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About the Author

Charles Infosino is an authority on regional entertainment and author of "The Unofficial Guidebook to Paramount's Kings Island." Infosino earned his Bachelor of Arts in international relations from SUNY New Paltz and his Master of Business Administration from Northern Kentucky University. He is a bankruptcy specialist III for one of the largest banks in the world.

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