Who Maintains Control Over a 529 Plan?

Facebook icon Twitter icon Print icon Email icon
Rob Zodda

By Rob Zodda

June 11, 2024

Saving for college means more than just stashing money in a savings account — at least, it should mean more than that! With all your different options for saving and investing, it’s important to understand how they each work, their tax benefits, and their differences. 

Some of the main factors to be aware of with any college savings method are who controls the 529 plan, who is the account’s designated beneficiary, and what rights they have. 529 college savings plans have an added layer of responsibility because often, those individuals or groups maintaining the account are NOT those who will ultimately benefit from or withdraw from the account. So, let’s dive into 529 Plan roles and responsibilities. 

Role of the 529 Plan Account Owner

This part’s simple enough. The account owner is the person who opens a 529 plan. The owner can be just about anyone over 18 who wants to save for college expenses (or another form of qualified tuition program, like enrollment in an apprenticeship program or even k-12 tuition).

Mostly, parents open 529 plans for their children, but grandparents can open them for their grandchildren. Adult learners can even open 529 plans for themselves.  

Responsibilities of the Account Owner

The account owner’s first responsibility is to choose the right 529 plan for them. There are many options, so the account owner needs to research and choose the brokerage firm or direct-sold plan they think is best for the situation. More than 30 states have 529 plans with income tax deductions for residents. However, you don’t need to use your home state’s plan; your beneficiary will not be limited to schools in that state. 

A key part of opening a 529 plan is naming a designated beneficiary. That’s the person whose higher education you’re investing for. A beneficiary can be a child, extended family member, spouse, or yourself.

The great thing about 529 plans is that you can change the beneficiary at any time. If you want to start investing in your future child’s education as early as possible, you could open a 529 plan with yourself as the beneficiary until they’re born, or as long as you’d like, and then make them the beneficiary.

After choosing the brokerage and opening a 529 plan, the account owner generally makes most of the contributions to the account. The best way to do this is to automate it with recurring contributions from your paycheck or bank account each month — or as often as you’d like.  

Like with any other financial account, the account owner will have an online login to check their account balance, monitor its performance, and make any changes. But don’t let this intimidate you — you don’t need to be overly hands-on with your investment options if you don’t want to be. You can choose an age-based investment strategy that becomes less risky as your beneficiary approaches college age, similar to what many people do with their 401k.

When it comes time to start paying for college or higher education expenses—the account owner can make withdrawals from the account tax-free, as long as the money goes toward qualified higher education expenses.

Role of the 529 Beneficiary

Just like the name suggests, the designated beneficiary is the one who benefits from a 529 college savings plan that was opened on their behalf. If that’s you, congratulations! It’s great that the people in your life value your education enough to plan and invest in it.

The designated beneficiary of a 529 plan has fewer concrete steps to take. If you know you’re the beneficiary of a 529 plan, you can do your part by keeping an open and honest conversation with the plan’s account owner. Let them know what your goals are for after high school. Here are a few things to think about:

  • Do you think you’ll go to college?
  • Will you stay in-state or go out-of-state?
  • Do you know the average Cost Of Attendance (COA) at the schools you’re interested in?
  • Are you considering trade school or apprenticeship programs?

Depending on who the account owner is for your 529 plan, you might want to keep them in the loop about other steps you’re taking to pay for school. Some things you might want to share with them:

  • Do you have any college savings from a part-time job?
  • Have you applied for scholarships?
  • Have you applied for financial aid via the FAFSA (Free Application For Federal Student Aid)
  • Are you open to borrowing? Student loans are a common part of financial aid offers. 

Rights of the Beneficiary

The account owner always maintains control of the 529 plan account, even after the beneficiary reaches college age or becomes an adult. The account owner can withdraw funds or change the designated beneficiary at any time.

The account owner can also choose to use only a portion of the funds for the beneficiary. For example, if a parent had a 529 plan with their oldest child as the beneficiary, they could choose to use only a portion of those funds for the oldest child and then change the beneficiary to their youngest child when it was time for them to go to college.

Limitations of Beneficiary Control

As the beneficiary, it’s great that people are invested in your education. But legally, you don’t have control over the 529 account. All ownership stays with the account owner. 

When it comes time to withdraw the funds for qualified expenses, the account owner can move them to the beneficiary’s bank account. However, paying the school directly from the 529 account might be easier, for a clear record that the funds were used appropriately. 

In some cases, when the beneficiary reaches the age of majority (in most states, that’s 18), they gain control of the account — but that’s only with a different type of plan called a custodial 529 plan. 

Custodian or Trustee

Accounts owners and beneficiaries — seems pretty straightforward, right? Well, with saving for college, it’s never so cut and dry. That’s where custodial accounts come in.

A custodial 529 plan is similar to a regular (individual) 529 plan, but in this case, the student is both the account owner and the beneficiary. However, the account is managed by an adult custodian (parent, grandparent, etc.) until this student reaches the age of majority. Then, the student assumes all control over the 529 plan and can use it as they’d like.

The Role of 529 Custodians

It’s important to note that a custodian does not have the same rights as an account owner. For example, a custodian can’t change the beneficiary. It’s their responsibility to manage the custodial account until the student comes of age. However, they can make withdrawals for qualified expenses (like K-12 tuition, for example) while the beneficiary is under 18. 

Differences Between Custodians and Trustees

Slightly different from custodians are trustees. Trustees generally come into play when grandparents or older family members invest money in 529 plans for their grandchildren or young family members.

These account holders may not want to designate a successor account owner who will have the power to make non-qualified withdrawals and use the money however they’d like. But if the account holder only designated a custodian, that person could not make any changes at all.

Imagine a grandparent was a 529 account owner and wanted the assets to be divided among all their grandchildren as they each go through college. But then another grandchild was born after the grandparent’s death. A custodian would not be able to make any changes at all to the 529 plan.

On the other hand, a trustee would have the legal duty to make sure the plan was carried out as the original account owner intended — even if it meant adding in another grandchild. Establishing and maintaining a trust comes at an expense, with legal and accounting fees. But it might be worth it, depending on the amount invested.  

The Financial Institution’s Role

Once you choose your 529 college savings plan, the role of your chosen financial institution is investment management — investing your funds however you designate. You can create a customized mix of investments based on what’s available through the institution. Or you can choose an age-based investment strategy.

The financial institution you choose will also dictate things like the state income tax break you receive (if you choose your home state’s plan) and the fees you need to pay for account maintenance. Be sure to compare these factors before choosing your plan.

Changing 529 Account Owners

While the account owner can always change the beneficiary of the 529 plan, the rules about changing account owners aren’t as universal. Many plans allow you to change the account owner but may require proof of special circumstances, like death or divorce.

It’s best to check with your plan’s administrator about what’s possible. You might also want to ask a tax professional how the IRS classifies these changes and what the federal income tax or gift tax consequences will be.

Successor Account Owners

Account owners of 529 plans can (and should) designate a trustworthy successor account owner who takes ownership of the account if the original account owner dies. That way, the account will be transferred and will not have to go through probate, which can be time-consuming. 

Other 529 Contributors And Their Rights

As the account owner, you can allow others to make plan contributions, like family and friends — a great idea for holiday and birthday gifts. But no matter how much they give, those contributors won’t have control over the account and its investment options, and they cannot make withdrawals. All control stays with the account owner.

This is especially important for parents and married couples to understand. Since most 529 plans do not allow for joint owners, only one parent or spouse controls the 529 plan — even if they’ve both contributed. In the event of a divorce, the ex-spouse who owns the 529 account can do what they want, including changing the beneficiary or withdrawing funds for non-qualified expenses.

If you’re looking for a tax-free way to invest in a college education for someone you love while retaining control over the funds’ use, a 529 college savings plan is an excellent choice. Find the 529 plan that’s right for you, or learn more about how to maximize your 529 plan here. 

A good place to start:

See the best 529 plans, personalized for you