Should You Choose A 529 Or Custodial IRA?

By / February 24, 2023

529 plans and custodial IRAs are both tax-advantaged investment accounts that can be used to save for a child’s education. However, there are some key differences between the two:

  1. Purpose: 529 plans are specifically designed to save for qualified education expenses, such as tuition, fees, books, and room and board. Custodial IRAs, on the other hand, can be used for any purpose, but they are often used to save for education.
  2. Tax Benefits: Both 529 plans and custodial IRAs offer tax advantages, but the specifics differ. 529 plans are funded with after-tax dollars, but earnings grow tax-free and distributions used for qualified education expenses are also tax-free. Custodial IRAs offer tax-deferred growth, meaning you won’t pay taxes on earnings until you withdraw the funds. However, if you withdraw funds before age 59 1/2, you may have to pay taxes and penalties.
  3. Contribution Limits: 529 plans typically have higher contribution limits than custodial IRAs. In 2022, the annual gift tax exclusion for 529 plans is $16,000 per year per beneficiary, while the contribution limit for a custodial IRA is the lesser of the child’s earned income or $6,000 (for 2022).
  4. Control: Custodial IRAs give the child control of the account when they reach the age of majority (usually 18 or 21, depending on the state). This means the child can use the funds for any purpose, not just education. 529 plans remain under the control of the account owner, who can change the beneficiary or use the funds for their own education expenses.

Overall, both 529 plans and custodial IRAs can be useful tools for saving for a child’s education. The best choice for you will depend on your specific needs and goals. If you are primarily focused on education savings, a 529 plan may be the better choice due to the tax advantages and higher contribution limits. If you want more flexibility and control over the funds, a custodial IRA may be a better fit. It’s always a good idea to consult with a financial advisor to help you make the best decision based on your individual circumstances.

Reach out to Specialty Bookkeepers & Tax for more information and for other investment advice.

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