What Is a 529 Account?

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.

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.

Additional Resources

• IRS 529 Plans Q&A
• U.S. Securities and Exchange Commission
• Saving for College: Is Your Institution 529 Eligible?
• my529.org