529: A Comparison Between College Accounts And Custodial Accounts

* Maximum contribution of a 529 plan is around $55,000 per beneficiary. This is in any 5-year period to avoid federal gift tax. In comparison to 529 plan, maximum contribution in a Custodial account is $11,000 per year per beneficiary. This is again to avoid federal gift tax.

* The tax imposed on earnings in a 529 college saving plan is kept aside to be paid later. In other words 529 plans are tax-deferred. In comparison to 529 plans, earnings in a custodial account are taxable at the parent's income tax rates.

* 529 college saving plans are federally tax-free for qualified expenses. On the other hand in a custodial account the sale of the assets are liable to capital gains which are to be paid by the custodian or beneficiary.

* For withdrawals that are non-qualified there is a ten percent penalty in a 529 college saving plan. Compared to this, in a custodial account there is no penalty as such.

* In a 529 plan, state tax deduction of contributions varies by state. It depends on the functioning of the state. Whereas, in custodial accounts there are no such deductions.

* Talking about the estate tax benefits in a 529 college saving plan, funds are not taken as a part of the investor's taxable estate. In comparison to the 529 plans, in custodial account basically there are no benefits if the donor dies while being a custodian.

* The control of the account is in the hands of the owner. He controls his assets. While in a custodial account, the assets are transferred to the child after he reaches maturity.

* There are beneficiary changes allowed in 529 college saving plan. While in comparison to this, there are no beneficiary changes in a custodial account.

* In 529 college saving plan, money is attributed to the parent and not to the child. While in a custodial account, funds are attributed to the student.

* Talking about the use of assets, assets can be used in a 529 plan at any accredited institution. Funds can be used for any secondary program in the U.S. In comparison to 529 plans, in a custodial plan, use of assets is not restricted to just educational expenditures. Funds can also be used for other expenses of the child but not of parent.