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Who Controls the Funds in a Section 529 Education Plan?

Who Controls the Funds in a Section 529 Education Plan?

Section 529 qualified tuition accounts offer a number of attractive benefits for families that want a tax-advantaged way of saving money for college or graduate school. The limits on the amount that can be invested for education is quite high. They vary from state to state, with some states determining what the maximum account holdings can be based on the four-year-costs of the most expensive schools in the country, and others basing the thresholds on the average cost of an in-state school. This has resulted in limits ranging from over $200,000 – which is the most common – to almost $500,000. Combine this with the fact that deposits can be made by so many people, and that the monies deposited into the accounts are not irrevocable gifts, this flexibility raises questions regarding who controls the funds.

One of the reasons for contributors to a 529 plan to be concerned about control is that they want to be certain that their gifts will be going to college costs. 529 plans offer an advantage in this area compared to the more traditional custodial accounts, which transfer to the named child's control once they are legally deemed by their state's laws to be adults. By comparison, the 529 account remains under the control of the account owner, whether that is the child's parent, grandparent, or other interested party.

The contributions are not considered irrevocable gifts, and they do not transfer to the child's name.  Though the person who opens the account can authorize other individuals to have access for contribution purposes, the account owner is the only person authorized to take money out. They have the ability to switch the named beneficiary if the child does not need the money in the account as long as the switch is to another person who is a family member. This can include the original beneficiary's siblings, nephews and nieces, some in-laws and a spouse of any family member. It cannot, however, be assigned to the original beneficiary's spouse.

The ability to transfer funds in this way means that the account owner is able to determine where money for education is most needed and use it accordingly. There are many reasons why the original beneficiary may not use the money. If they choose not to attend college, or attend a college that costs less than the amount that is in the account, the money can be used for a sibling's more expensive schooling.  As long as the money is transferred within the same generation, or even transferred to an older family member. The only limitation that has a tax impact is that you cannot use the money for a beneficiary who is in a younger generation, as this would be viewed as a taxable gift. Doing so would trigger the need for a gift tax return.

Investing for your child or grandchild's educational future takes careful planning and a thorough understanding of the Section 529 rules. If you'd like more information contact a tax professional to discuss your options.

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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