What’s the difference between opening a custodial account and a 529 for our son’s college fund?

Asked by John

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Answered by Barry Rabinowitz, Financial Adviser in Plantation, FL
There is a big difference. A 529 has special tax rules, whereby if the funds are used for tuition, laptops, etc, all growth can be withdrawn income tax free.
Also, in certain states, you may also get an income tax deduction. For all or part of your investment.
If not used by the beneficiary, you can also use the monies for qualified education expenses. Once again, all growth can be withdrawn income tax free.
In addition, you are the owner of the account, whereby in custodian account the beneficiary becomes the owner at majority.
There is no guarantee he will use the monies for educational purposes. He can withdraw the monies and take a vacation or buy a sports car.

| 08.23.13 @ 00:23
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 06:26
Answered by Michael Keeler, CFP®, CLTC in Las Vegas, NV
Another feature of the 529 plan is you can change the beneficiary. I have a 529 plan for each of my sons. If one decides not to go to college, I can make my other son the beneficiary of his 529 plan.
Or, if I want, I can take the money out for myself and pay taxes and a 10% penalty on the gains. In my mind, that is a small price to pay for control of the money. I tell my kids, "If you don't go to college, I'm buying a convertible!" | 08.28.13 @ 16:47
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 06:26
Answered by Gregg Himfar, Financial Adviser in Carlsbad, CA
The custodial account becomes property of the minor at the age of majority - this is the biggest difference in my opinion. UGMA or UTMA accounts have tax benefits too, but aren't tax free when used for college related expenses. Custodian accounts are assets of the minor when computing financial aid. 529 plans are assets of the parent - thus making them more friendly for aid purposes.

Now you have it. | 07.21.15 @ 22:54
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$commenter.renderDisplayableName() — {comment} | 12.08.16 @ 06:26
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