529 or Custodial Account?

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westcoastinvestor
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Joined: Wed Dec 02, 2009 11:01 pm

529 or Custodial Account?

Post by westcoastinvestor »

My parents recently gifted my two children each a custodial account. We live in CA. One child will be ready for college in 4 years and one child will be ready for college in 7 years. Is there any benefit to retaining the custodial account, or should I convert them to a 529?

Thank you.
CuriousGeorgeTx
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Joined: Mon Dec 14, 2015 4:59 pm

Re: 529 or Custodial Account?

Post by CuriousGeorgeTx »

westcoastinvestor wrote: Tue Jul 09, 2024 10:32 pm My parents recently gifted my two children each a custodial account. We live in CA. One child will be ready for college in 4 years and one child will be ready for college in 7 years. Is there any benefit to retaining the custodial account, or should I convert them to a 529?

Thank you.
It depends on how big the gifts are. If they are large, then funding 529s will probably make sense because the earnings will be tax free. In my experience, 529s generally have higher fees than the low cost index funds that are popular here. If the amount isn’t too big, the earnings could stay below the kiddie tax threshold and also be tax free.
SnowBog
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Re: 529 or Custodial Account?

Post by SnowBog »

FWIW I'm not sure you can convert them to a 529... A 529 account is usually "your money" with a defined "beneficiary" of your child. AFAIK you can't take money out of a "custodial" (aka your kids) account and put it into "your" account - even if for the child.

More likely, you'd be looking at a Custodial 529 account. https://www.fidelity.com/529-plans/faqs-about-accounts

At least that's what we setup to transfer funds from a Custodial Account (funded by appreciated shares gifted from us) to a Custodial 529.

As to your question, there is an implied question as to the usefulness of a 529 account. What if your child(ren) get a full ride scholarship? What if they don't go on to college?

We decided to leave some money in the custodial account to give more flexibility. Maybe they want to travel abroad for a year... Maybe they want to go into a trade and need tools/equipment... Maybe they need/want a vehicle...

Of course, that was also before the recent changes that allow a portion of "unused" 529 funds to be converted to a Roth IRA. https://www.fidelity.com/learning-cente ... er-to-roth

So, I think the other question is how much money is involved. If it's well under the limits (and likely will be at the 15 years required) allowed to convert to Roth, you might give up a little flexibility but gain tax advantages by moving to a Custodial 529. And it doesn't have to be an "all or nothing" decision.
Last edited by SnowBog on Wed Jul 10, 2024 11:09 pm, edited 1 time in total.
TheOscarGuy
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Re: 529 or Custodial Account?

Post by TheOscarGuy »

westcoastinvestor wrote: Tue Jul 09, 2024 10:32 pm My parents recently gifted my two children each a custodial account. We live in CA. One child will be ready for college in 4 years and one child will be ready for college in 7 years. Is there any benefit to retaining the custodial account, or should I convert them to a 529?

Thank you.
My assumption is that custodial means the account is theirs. I am not sure they can be converted to 529, because technically you control the 529, even though they can be named for anyone.
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