Is The Transfer Of Custodial Account Funds To 529 A Smart Choice?
First of all, there is not a particular federal governmental or set establishment that can rule on whether the transfer of monies from a custodial account to a 529 account can even take place. This is the decision of the state—each sets its own regulatory laws concerning such a transfer. A person can decide whether the transfer is a good idea by using a calculator such as the 529 Planner or the 529 College Saving Plan Estimator. This instrument will assist you in deciding how or whether to make an investment into a 529 plan, a custodial account, or even a Coverdell account. Even funds from retirement accounts can be shifted into a 529 savings account. Now, let us look at the differences between savings accounts and decide where your money is best invested to be properly used for your child’s education. Should you actually transfer funds from a custodial account to a 529 savings account? A 529 savings account plan is and planned by each individual state. These monies can be extracted from the account tax free as long as the money is being used for college or university expenses. This account is under the parent’s supervision and control and the beneficiary child can be changed to another beneficiary if the initially named child decides not to go to college. Regarding a custodial account, it is owned by the child and the income in this account is not tax free. The custodian can’t take back money invested in the account nor can the owner of this custodial account be changed to another owner. Generally, when the child reaches 18 in some states or 21 in other states, the control of a custodial account automatically goes to the child unlike the aforementioned 529 plan which the parent can control whether or not the child has reached adult age. Along with a transfer from a custodial account to 529, there are certain restrictions. The beneficiary cannot be changed and the Uniform Transfer to Minors Act that regulates the custodial account cannot be violated by the custodian. The assets must be used for the child’s benefit and education. Also, the money still transfers to the control of the child at adult age specified by the state. About Coverdell accounts, the main difference in this and a 529 account is that money can be taken out to help with even elementary or high school expenses as well as college expenses. All assets that are invested in a Coverdell account must be withdrawn prior to the beneficiary reaching age 30. Now, getting back to whether it is a smart choice to transfer cash from a custodial account to a 529 savings plan, perhaps and perhaps not. Usually the reason behind such a transfer is to give control of the funds to the parent; however, this is not going to happen. The child still ultimately has control over the account when he reaches a certain age despite the transfer. The money can only be used for the education of the child.
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