Whose Name Should A 529 Account Be In?
September 24, 2015With school back in session, you may be thinking about putting away some money for future education expenses in a 529 savings plan.These accounts can be invested and used tax-free for post-secondary education expenses. However, one question that many people take for granted is whose name the account is in. After all, the account doesn’t have to be in the name of the contributor or the beneficiary (the student). Here are a few things to consider:
1) Is the money coming from a minor child? If you’re transferring money from a custodial account in the child’s name, the 529 account also has to be a custodial 529 account in the name of that same child. The good news is that the account is treated as a parental asset for financial aid, which means that it would only reduce financial aid eligibility by up to 5-6% vs. 20% if it were treated as an asset of the child. The bad news is that you can’t change the beneficiary so there’s a little less flexibility compared to a non-custodial 529.
2) Who can get a bigger tax break? If you’re trying to decide between having the account in the name of a parent in a state like California, where there is no tax deduction for 529 contributions, or a grandparent or other relative who would get a deduction in another state, the latter might make more sense. (This assumes the non-parent’s 529 plan is still a good option overall. If you’re not sure, see if the plan is listed in the Dean’s List or Honor Roll in Howard Clark’s guide to 529 plans.) To make sure the owner gets the tax break, other contributors can gift money to the owner and have them contribute directly to the 529 plan
3) Will the student need the money before the last two years? If you do decide to open an account in the name of someone other than the child or parent, the 529 assets won’t count at all in determining financial aid eligibility. However, withdrawals from the account will count as income to the child, which can reduce financial aid eligibility by as much as 50%. However, new rules essentially allow you to withdraw from the account in the last two years of school without impacting financial aid so just make sure there’s enough money somewhere else to cover the other years.
When it comes to education planning, the main focus tends to be on how much to save, where to save it, and how to invest those savings. Those are still the most important questions. But if you decide to open a 529 savings plan, don’t forget whose name it should be in too.