529 Plan
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans are sponsored by states, state agencies, or educational institutions. They are authorized by Section 529 of the Internal Revenue Code. Earnings in a 529 plan grow tax-deferred, and withdrawals are tax-free if used for qualified education expenses such as tuition, fees, books, and room and board.
Custodian
The custodian, or account holder, is the person who opens the 529 plan and controls the money in the account. Often, it makes sense for the custodian to be the child’s parent.
If you make your child the account holder, the assets in the account will be more heavily factored into federal financial aid formulas. Hence your student may be awarded less financial aid.
Due to changes to federal student aid forms beginning with the 2024 to 2025 academic year, students no longer have to report cash support on their FAFSA. This means distributions from a grandparent or other non-parent-relative’s 529 plan will not impact financial aid.
Beneficiary
Child's name, who is going to benefit from the money in this account. If you have more than one child, you might want to set up separate accounts for each.
Changing Beneficiary
If the child decides not to go to college, you can preserve the tax benefits by changing the name of the beneficiary, which is allowed once per year. You can designate any other relative — a lucky niece or nephew, perhaps — or you might decide that you’ve always wanted another degree.
Non Qualified withdrawl
In case you can't find anyone that can benefit from this money, you can still withdraw the money for any use, although you’ll have to pay the applicable income tax as well as a 10 percent penalty on money the fund earned. The penalty is waived if the beneficiary attends an academy that’s a branch of the U.S. service or gets a scholarship.
On death
If you were to die or become legally incapacitated, the successor account owner assumes all rights and responsibilities for the 529 account. The successor can be, but does not have to be, a spouse.
It is important to pick a successor account owner who you can trust to fulfill your wishes.
In case you do not assign a successor, in many (not all) 529 plans, the beneficiary (or the beneficiary’s guardian if the beneficiary is still a minor) is named the account owner by default.
Naming a successor account owner lets the 529 plan account transfer to the successor without having to go through probate, which can cause delays.
The choice of successor owner can affect the financial aid treatment of the 529 plan. If the successor is the student or spouse, it will be treated more favorably than if the successor is someone else.