Should I Put a 529 Account In My Child's Name?

Tags: 529 plans, College PrePaid Plans

It may seem the logical way to set your child up for future is by putting a newly established 529 Plan in your child’s (the future student’s) name. But making them the account owner is not in anyone’s best interests.

As the parent or legal guardian, you should be the owner of the account with your child as the beneficiary.

The justification for this account ownership decision will matter if your child decides not to go to college.

What if he or she designs a technological innovation in your garage one summer only to scoff at the prospect of taking the traditional route of attending classes and studying. In that event, you may simply change the beneficiary.

Additionally, since that money was earmarked to fund a college education and your 18-year-old changes his or her mind, the money will then not become theirs to use as they wish, like funding their trip around the world.

If they were the account owner, they would have the rights to that cash. With you as the owner and a beneficiary adjustment, the money’s original purpose will remain intact.

Sticking to the Plan

If all goes as expected with the 529 Plan being consistently funded, and your child is eagerly anticipating her first semester in college, a student as an account holder could still likely raise a red flag.

Today there are multiple scholarships and financial aid opportunities to which your student may apply. The awarding of many of those programs is predicated on need. Assets in his or her name could ultimately cost them – in being granted those monies and may even cost them in taxes that could potentially have been avoided.

Overall, the investment options integral to a 529 College Savings Plans provide flexibility: of the tax-free and conservative-aggressive tolerance kind. Adjustments made over those first eighteen years that take multiple factors and your budget into consideration, can yield the financial freedom you seek.

Speaking of tax-free, that status applies to the eventual withdrawal of funds for college for what are considered “qualified education expenses”. These include, as one would expect, the costs for living in the dorm, applicable fees, tuition, and books.

As we covered in a previous post about the Benefits of Using 529 Plans in Estate Planning, to withdraw from a 529 for a non-qualified education expense, there is a 10% penalty on the amount, and the amount withdrawn is reportable income, so therefore taxable. There are circumstances where this can be advantageous if you intentionally over-fund the account. With any type of financial planning, your goals, set against a backdrop of reality should remain the prevailing objective.

At the end of the day, an authentic discussion about your needs, with a financial professional to offer the insight – and the perspective to outline the plan, will help to manage your expectations.

If you would like help choosing and investing in a 529 or College PrePaid Plan, please contact me at derek.pilecki@gatorcapital.com or (813) 282-7870. While we believe a college education is important, we also understand it is expensive, and the process is daunting.

We do not charge fees for helping with 529 Plan accounts. We get two benefits from helping you: 1) as parents ourselves, we feel good about setting you and your child on the correct path to pay for college and 2) it enables us the opportunity to begin a discussion about your other investment needs. 

If you have a question beyond the scope of this article, feel free to visit our “Ask Us a Question” page or leave a comment below so we may assist you with your specific situation.

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