Individual and custodial 529 accounts are two common ways to save for college, but each offers differing benefits for families.
Individual 529 Accounts
An individual 529 account is the most common type of account. The person who opens the account is the account owner, and the student is the beneficiary.
The account owner can:
- change the student (subject to IRS rules)
- change the account owner
- add designated survivors and other authorized individuals
- make investment decisions
- make withdrawals for qualified expenses
- decide what to do with any unused funds
The account owner also receives the tax benefits of having an individual 529 account. Depending on who owns the account, there may be some impact on the student’s eligibility for need-based financial aid and how the account is reported on the FAFSA.Related: Impact on Financial Aid
Custodial 529 Accounts
A custodial 529 account is less typical and is usually created when transferring funds from a custodial bank or brokerage account under applicable UTMA/UGMA rules.
The most important thing to understand about a custodial 529 account is that the student is both the account ownerandbeneficiary.
While the student is a minor, a custodian controls the account until the student reaches adulthood (typically 18 or 21 years old, depending on applicable state law). The custodian:
- cannot change the student or account owner
- must manage the account for the benefit of the student (as per their fiduciary duty)
- can make withdrawals for qualified expenses
- can add designated survivors and other authorized individuals
When the student reaches adulthood (under applicable state law) they can take control of the account and begin to manage it.
With a custodial 529 account, the student receives the tax benefits of having a 529 account. Custodial 529 accounts may have some impact on the student’s eligibility for need-based financial aid and are often treated as a student asset on the FAFSA.
