Custodial vs Individual 529 Account: A Guide to Savings and Planning

If you're a parent or grandparent looking to save for a child's education, you're likely considering a 529 plan. One of the first decisions you'll need to make is whether to choose a custodial or individual 529 account.

A custodial 529 account is managed by an adult on behalf of the child, and the child's name is listed as the beneficiary. This type of account is often used for younger children.

Individual 529 accounts, on the other hand, are managed by the account owner, who can be a parent or grandparent. This type of account allows the owner to control the account and make changes as needed.

Both types of accounts offer tax benefits and can be used for qualified education expenses, such as tuition, fees, and room and board.

The main difference between custodial and individual 529 accounts lies in who has control and ownership of the account. The custodian acts as the account owner in a custodial account.

In a custodial account, the student is considered the account owner, but the custodian has control over the account until the custodianship terminates. This means the custodian makes decisions about how the money is used until the account is turned over to the student.

A comparison chart highlights the differences between custodial and individual 529 plan accounts. Here's a summary of the key differences:

Both types of accounts offer tax benefits, including tax-deferred earnings and tax-free earnings for qualified higher education expenses. However, the account owner and control differ significantly between the two options.

A custodial 529 plan account is similar to an individual 529 plan account, but the student is both the account owner and beneficiary.

The account owner controls the account, but in a custodial 529 plan, the student is the account owner, and a custodian manages the account until the student reaches the age of majority.

A custodian is typically a parent or grandparent who manages the account for the beneficiary's benefit, but they cannot change the beneficiary or account owner.

The custodian's role is to manage the account until the student reaches the age of majority, at which point the student can take over control of the account.

An individual 529 plan account is the more common type of 529 plan account, where an adult individual is the account owner, and the student is the beneficiary.

The account owner makes investment decisions involving the 529 plan, and when the beneficiary enrolls in college, the account owner can take withdrawals to pay for qualified education expenses.

The student in a custodial 529 plan becomes the account owner when they reach the age of majority, which can be age 18, 19, or 21, depending on the state.

When considering custodial vs individual accounts, it's essential to understand the pricing associated with each.

There are no account open or maintenance fees with some accounts, but other fees may still apply. The Schwab 529 Education Savings Plan, for example, has no account service fee or enrollment fee.

The portfolio fee for the Schwab 529 Education Savings Plan includes a program management fee plus underlying fund expenses, with annual total portfolio fees ranging from 0.20% to 0.82% depending on the investment selected.

Reviewing all account fees and minimums is crucial to making an informed decision. You can find comprehensive details on fees and expenses in the Schwab 529 Education Savings Plan Guide and Participation Agreement.

A custodial 529 plan account is a type of account that allows you to save for a child's education expenses while maintaining control over the funds until the child reaches the age of majority. You can create a custodial 529 plan account if you want to retain control until the beneficiary reaches the age of majority without needing to be the account owner.

The custodian of a custodial 529 plan account retains control until the beneficiary reaches the age of majority, at which point the beneficiary is legally entitled to take control of the account and may become the account owner. This is in contrast to a parent-owned 529 plan account, where the parent retains control.

A custodial 529 plan account has the same financial aid impact as a parent-owned 529 plan on the beneficiary's eligibility for need-based financial aid, but it is not reported as an asset on the beneficiary's sibling's FAFSA. This can help partially shelter the assets and reduce the impact on financial aid eligibility.

You can also use a custodial 529 plan account to keep the account's existence a secret until the beneficiary reaches the age of majority. This can be useful if you want to save for a child's education expenses without the child knowing about the account.

Here's a comparison chart of the differences between a custodial 529 plan account and an individual 529 plan account:

Annual contributions to a 529 plan are subject to the gift tax exclusion limit ($19,000 in 2025) and may incur federal gift taxes if contributions exceed this limit.

The kiddie tax can make a big difference in how you think about custodial account withdrawals. The first $1,100 in gains in a minor's account is tax-free, and the next $1,100 is taxed at the child's tax rate.

This means that if your child has no income, they can take up to $2,200 in profits per year totally tax-free from a custodial account. This is a key point to consider when comparing custodial accounts to 529 plans.

In our experience, parents often opt for custodial plans because of the built-in flexibility. Funds can be withdrawn at any time as long as they're used for the benefit of the child.

Here are some examples of uses of funds from a custodial account that aren't eligible from a 529 plan:

If the minor doesn't end up attending college, 529 plans can go to waste. But custodial accounts can be used for a variety of purposes beyond just college expenses.

Contributions to a 529 account are treated as a completed gift to your beneficiary, but you'll still have control over the account.

As the account owner, if you die with money remaining in the account, it won't be included in your estate for federal estate tax purposes.

However, if you make a large contribution and die within five years, a prorated portion of the contribution will be subject to estate tax.

The kiddie-tax can give custodial accounts a tax advantage over 529 plans. The first $1,100 in gains in a minor's account is tax-free, and the next $1,100 is taxed at the child's tax rate.

This means that if your child has no income, they can take $2,200 in profits per year totally tax-free from a custodial account.

The tax implications of 529 plans are more straightforward, but also come with a catch: if the minor doesn't attend college, the funds can go to waste. However, they can be rolled over to another 529 plan for a different beneficiary.

A key estate tax benefit of 529 plans is that contributions are generally treated as completed gifts to the beneficiary, but the account owner still has control over them. This means that if you die with money remaining in your account, it won't be included in your estate for federal estate tax purposes.

A custodial 529 plan and an individual 529 plan owned by the student's parent have the same impact on eligibility for need-based financial aid.

The only difference occurs when an individual 529 plan account is owned by someone other than the student or parent, in which case it's not reported as an asset on the FAFSA.

A custodial 529 plan account that the student's sibling owns is not reported as an asset on the student's FAFSA since it is an asset of neither the student nor the student's parent.

On the other hand, an individual 529 plan account that the student's parent owns is reported as an asset on the student's FAFSA, even if the beneficiary is someone other than the student, such as the student's sibling.

Here's a breakdown of how 529 plan assets are counted for the Expected Family Contribution (EFC) in the FAFSA formula:

It's essential to note that financial aid programs offered by educational institutions and other nonfederal sources may have their own guidelines for the treatment of 529 plan accounts.