What’s the Difference Between Custodial and Individual 529 Plans?

Saving for a child’s future education is one of the most important financial decisions a family can make, and 529 plans are a popular tool for achieving this goal. However, not all 529 plans are the same. Two standard options—custodial 529 plans and individual 529 plans—differ in key ways, including who controls the account, how funds are managed, and their impact on financial aid eligibility.

Understanding these differences is crucial for selecting the plan that aligns with your family’s needs and long-term goals. This article breaks down the key features, benefits, and considerations of each type of 529 plan, helping you make an informed decision for your child’s educational future.

What is a custodial 529 plan?

All 529 college savings plans have an account owner and beneficiary. The account owner controls the account. A 529 plan utilizes tax advantages to save for the beneficiary’s future education costs.

A custodial 529 plan account is similar to an individual 529 plan account, but the student is both the account owner and beneficiary. When the student is a minor, the account must be managed by a custodian (typically a parent or grandparent) until the student reaches the age of majority.

The custodian of a custodial 529 plan account is not the same as the plan’s account owner. It is inaccurate to refer to the owner of an individual 529 plan account as the account’s custodian.

The custodian cannot change the beneficiary or account owner of a custodial 529 plan account. Instead, the custodian must manage the account for the beneficiary’s benefit.

When the beneficiary reaches the age of majority (age 18, 19, or 21, depending on the state), the beneficiary can take over control of the account.

What is an individual 529 plan?

An individual 529 plan account is the more common type of 529 plan account. An adult individual, usually a parent or grandparent, is the account owner, while the student, usually the child or grandchild, is the beneficiary.

The account owner makes investment decisions involving the 529 plan.

The account owner can change the beneficiary to the previous beneficiary’s family member.

When the beneficiary enrolls in college, the account owner can take withdrawals from the 529 plan account to pay for the beneficiary’s qualified education expenses.

Comparison Chart of Differences

This table shows the differences among the two types of 529 plan accounts.

^* – Annual contributions to a 529 plan are subject to the gift tax exclusion limit ($19,000 in 2025) and may incur federal gift taxes if contributions exceed this limit.

Impact of the 529 plan on financial aid eligibility

Most investments are reported as an asset of the account owner on the Free Application for Federal Student Aid (FAFSA).

529 education savings plans are an exception because the owner determines whether and how the plans are reported.

• Suppose the account owner is a dependent student or the dependent student’s parent. In that case, the 529 plan is reported as the parent’s asset on the FAFSA, and distributions are ignored, i.e., not reported as untaxed income to the student.
• If the account owner is an independent student, the 529 plan is reported as the student’s asset on the FAFSA, and distributions are ignored.
• If the account owner is someone else, such as a grandparent, aunt, or uncle, the 529 plan is not reported as an asset on the FAFSA. In the case of divorce or separation, only one parent—the one who provides more financial support to the student—files the FAFSA. If the non-filing parent owns a 529 plan, it will also not be reported as an asset on the FAFSA.

So, it would seem that a custodial 529 plan and an individual 529 plan owned by the student’s parent have the same impact on eligibility for need-based financial aid. The only difference occurs when an individual 529 plan account is owned by someone other than the student or parent.

However, a subtle difference exists in how a custodial 529 plan is treated for financial aid compared to an individual 529 plan. That difference concerns how the plans are reported on a sibling’s FAFSA.

A custodial 529 plan account that the student’s sibling owns is not reported as an asset on the student’s FAFSA since it is an asset of neither the student nor the student’s parent. On the other hand, an individual 529 plan account that the student’s parent owns is reported as an asset on the student’s FAFSA, even if the beneficiary is someone other than the student, such as the student’s sibling.

Similarly, if the parent is going back to college and files their own FAFSA, a parent-owned 529 plan is reported as an asset on the parent’s FAFSA, even if the beneficiary is a child. On the other hand, a custodial 529 plan account is not reported as an asset on the parent’s FAFSA.

Reasons for custodial 529 plan accounts

There are several reasons why a contributor might create a custodial 529 plan account instead of contributing to a parent-owned 529 plan.

• The custodian of a custodial 529 plan account retains control until the beneficiary reaches the age of majority without needing to be the account owner.
• The beneficiary of a custodial 529 plan account cannot be changed.
• A custodial 529 plan account has the same financial aid impact as a parent-owned 529 plan on the beneficiary’s eligibility for need-based financial aid.
• A custodial 529 plan account is not reported as an asset on the beneficiary’s sibling’s FAFSA, providing a way to partially shelter the assets and reduce the impact on financial aid eligibility.
• If the funds came from a custodial bank or brokerage account, the family may be required to create a custodial 529 plan account.
• The contributor can use a custodial 529 plan account to keep the account’s existence a secret until the beneficiary reaches the age of majority.

Converting a custodial account to a 529 plan

UGMA/UTMA accounts are custodial accounts established for a child under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). If parents have opened a UGMA/UTMA account for their child, they may consider converting it to an individual or custodial 529 plan account.

UGMA/UTMA accounts offer greater spending flexibility than 529 plans, but they don’t offer many of the tax benefits of 529 plans. For example, UGMA/UTMA accounts are considered student assets on the FAFSA. Student assets are counted at 20% of the value, as opposed to only 5.64% for the 529 plan, which is considered a parent asset. This can reduce financial aid eligibility.

Consider the pros and cons before deciding whether to convert your custodial account to a 529 plan account.