529 Plans: Custodial versus Individual

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Opening a 529 college savings account can be a smart move if you’d like to save for college on a tax-advantaged basis. One thing to consider when opening a 529 plan is whether it should be a custodial or individual account. While both allow you to save for college costs and enjoy some tax breaks, they differ in terms of who has control of the account and the assets in it.

529 Plan Basics

A 529 plan, also referred to as a qualified tuition plan in the Internal Revenue Code, is a tax-advantaged education savings vehicle. There are two types of 529 plans: college savings accounts and prepaid tuition accounts.

With a 529 college savings account, you contribute money for future education costs. That money grows tax-deferred and can be withdrawn tax-free when used to pay for qualified education expenses. That includes things like tuition, fees and room and board. Prepaid tuition plans, on the other hand, allow you to set aside money for college at locked-in tuition rates.

Every state, except for Wyoming, and the District of Columbia offer at least one 529 plan. You don’t have to be a resident of a particular state to contribute to that state’s plan. Each state plan can establish its own annual and lifetime contribution limits. Money held in a 529 plan can be invested in mutual funds, index funds and other securities.