Traditional vs. Custodial 529 Plans

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What is a 529 Plan?

A 529 plan is a tax-advantaged savings and investment account designed to help families save for future education expenses. The funds in a 529 grow tax-deferred, and withdrawals for qualified education expenses (e.g., tuition, books, and room and board) are tax-free.

Typically, parents open a 529 plan and designate a beneficiary, such as their child, whose education expenses will be covered by the plan. These accounts are administered by states and can be opened through a state’s administrator or certain financial institutions (e.g., Fidelity, Vanguard, Schwab, or Wealthfront).

Benefits of a 529 Plan

• Tax-Free Growth and Withdrawals: Earnings grow tax-deferred, and withdrawals for qualified educational expenses are tax-free.
• Growth Potential: Funds are invested in market-based portfolios, such as mutual funds or age-based options that automatically become more conservative as the beneficiary approaches college age.
• Flexible Beneficiary Designation: If the original beneficiary doesn’t use the funds, parents can change the beneficiary to another family member (e.g., sibling, cousin) without penalty, ensuring the funds remain beneficial to the family.
• Estate Planning Benefits…