How Grandparents Can Contribute to 529 Plans

Video Transcript

College costs can feel like a moving target. If you're a grandparent who wants to help, a 529 plan can be a flexible, tax-advantage way to do it. Today, we'll cover ownership choices, FAFSA changes for 2024, 2025 and beyond, gift tax thresholds for 2026, and practical steps to get started.

You can open your own 529 for a grandchild or contribute to an account the parents already own. Owning the account yourself can offer advantages: you control investments and withdrawals, and some states may allow a state income-tax deduction to the account owner. If you give to a parent-owned account, that deduction may not apply to you, depending on state rules.

Money in a 529 can impact a student's eligibility for need-based aid. In some cases, a grandparent-owned 529 may be a better deal for the student than a parent-owned account. Starting with the 2024 to 2025 FAFSA, distributions from grandparent-owned 529s are no longer reported as student income - removing a common aid penalty families used to worry about.

Mind the annual gift tax exclusion when you contribute. For 2026, you can give up to $19,000 per recipient without gift tax; married couples can combine for $38,000. Tuition you pay directly to an educational institution is also excluded from gift tax and doesn't use your annual exclusion. Large or complex gifts generally require filing Form 709 - work with a tax professional.

A special election lets you "superfund" a 529 by contributing up to five times the annual exclusion at once and treating it as if it was made evenly over five years.

You make this election on Form 709; extra gifts to the same beneficiary during that period could tap your lifetime exemption. This can accelerate compounding while keeping contributions within gifting rules.

For some, 529s are a useful tool for estate planning and passing on wealth to the next generation in the family. Contributions may help reduce the size of your estate while you retain control as the account owner - including the ability to change beneficiaries within eligible family members if plans change. Coordinate with your estate planning attorney and tax advisor so 529 giving fits your broader strategy.

Talk with parents about ownership, contribution timing, and how withdrawals will be used. Even with the FAFSA change, distribution timing still matters for budgeting, and some colleges may ask about outside support. Rules differ by state, so align on who owns the account, who claims potential state tax benefits, and when to draw funds.

You can choose any state's plan. Compare fees, investment options, and state tax perks, then apply online. Have owner and beneficiary details ready, link a bank account, choose an age-based or static portfolio, and consider setting up automatic contributions to stay consistent. Western & Southern's resources and calculators can help you evaluate scenarios.

Grandparents can make a meaningful difference with 529s especially now that FAFSA rules are friendlier and gift tax thresholds are clear. Decide who should own the account, coordinate with the family, and follow state and IRS rules as you contribute. For more guidance and tools, visit Western Southern.com.

A 529 college savings plan is a common way to save for a child’s education, and grandparents can contribute to 529 plans, too. If you want to set aside money for your grandchildren, a 529 plan can help support their education. Before contributing, it is important to understand account ownership and tax rules. Here are key factors to consider.

Account Ownership Matters

As a grandparent, you can choose to open your own 529 account for a grandchild or contribute to a plan owned by the child’s parents. Opening your own 529 account may offer added benefits.

For example, as the account owner, you may be able to deduct 529 contributions on your state income taxes. Deduction limits vary by state.¹ If you contribute to a parent-owned account, your contributions may not qualify for a deduction.

If you want to lower your tax bill, consider working with a tax professional in your state. They can help you find a tax-efficient way to support your grandchild’s education with a 529 plan.

Account owners also control how money in the account is used. As the owner, you can decide when distributions are made and have the option to change the beneficiary if needed.

529 Plans Can Impact Financial Aid

Money in a 529 plan can affect a student’s eligibility for need-based aid.² In some cases, a grandparent-owned 529 plan may offer more advantages than a parent-owned account.

When your grandchild fills out the Free Application for Federal Student Aid (FAFSA), money in a parent-owned 529 plan is counted as an asset. This can reduce the student’s eligibility for financial aid. Grandparent-owned 529 accounts are not counted as assets on FAFSA forms and do not reduce eligibility.

In the past, withdrawals from grandparent-owned 529 plans were treated as untaxed income to the student on the FAFSA. This could lower financial aid eligibility. The FAFSA Simplification Act changed this rule. Distributions from these plans are no longer reported as student income.³ This means students do not pay taxes on money from grandparent-owned 529 plans. It may also make these plans more appealing for families saving for college.

Guidelines continue to change, and 529 plan rules vary by state. It can help to work with a qualified tax or financial professional to make an informed decision for your family.

Large Gifts Could Incur Extra Taxes

Before you set aside educational funds for grandchildren, note how much you contribute. This can help you avoid extra taxes. If you contribute more than $19,000 in one year to a 529 plan, the gift may be subject to the gift tax, and you may need to pay it. This follows IRS rules that set a $19,000 limit per beneficiary in 2026.⁴

Final Considerations for 529 Contributions & Estate Planning

For some families, 529 plans can support estate strategies and help pass assets to the next generation. Grandparents may contribute to 529 plans to help reduce the size of their estate and limit potential tax exposure while still keeping control of the funds in the account.

Working with a registered representative can help guide these decisions. They can explain how 529 contributions may align with your estate goals and overall strategy.

Sources

1. State Section 529 Deductions. https://finaid.org/savings/state529deductions/.
2. Will a 529 Plan Affect Financial Aid Eligibility or Amount Awarded? https://smartasset.com/student-loans/will-529-plan-affect-financial-aid.
3. FAFSA Simplification Act Makes Grandparent-Owned 529 Plans More Attractive. https://www.savingforcollege.com/article/fafsa-simplification-act-makes-grandparent-owned-529-plans-more-attractive.
4. Frequently Asked Questions on Gift Taxes. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.

Footnotes

• Before investing, investors should consider whether their state of residency offers similar qualified benefit plans that offer more beneficial state tax advantages or other benefits. If withdrawals are use for purposes other than higher education, the earnings will be subject to a 10% federal tax penalty, in addition to federal and, if applicable, state income tax.