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 2025, 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 2025, 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 popular way to set aside money for a child's education, but these accounts aren't just for the parents of young kids — grandparents can contribute to 529 plans, too.

If you're looking to earmark educational funds for grandchildren, putting money into a 529 plan can be a good option. By doing so, you can rest assured the money will be put toward their education and support their future development.

However, before you contribute to a 529 plan for a grandchild, it's important to understand the dynamics of account ownership and related tax rules. Here are some of the most important considerations to take into account, as well as insights that can help you make the most of your money while supporting your grandkids' education.

Account Ownership Matters

As a grandparent, it's up to you whether you open your own 529 account for a grandchild or you make contributions to a plan owned by the child's parents. But opening your own 529 account could potentially offer extra benefits.

For instance, as the account owner, you may be able to deduct 529 contributions on your state income taxes; the deduction limits vary by state.¹ If you give to a parent-owned account, your contributions may not be deductible.

If you're interested in lowering your tax bill, you can work with a tax professional in your state to determine the most advantageous way to support your grandchild's education with a 529 plan.

Account owners also call the shots on how money in the account is disbursed, and as the owner, you have the flexibility to change the beneficiary on an account if you choose.

529 Plans Can Impact Financial Aid

Money in a 529 plan can impact a student's eligibility for need-based aid.² In some cases, a grandparent-owned 529 plan may be a better deal for the student than a parent-owned account.

When your grandchild fills out the Free Application for Federal Student Aid (FAFSA), the money in a parent-owned 529 is counted as an asset, which can limit the student's eligibility for financial aid. Grandparent-owned 529 accounts, on the other hand, aren't considered assets on FAFSA forms and won't reduce a student's financial aid eligibility.

Previously, withdrawals from grandparent-owned 529 plans were treated as untaxed income to the student on the FAFSA, potentially reducing financial aid eligibility. However, under the FAFSA Simplification Act, this rule has been eliminated: disbursements from these plans are no longer reported as student income.³ That means students wouldn't owe taxes on money from grandparent-owned 529 plans, which could make those plans an especially appealing option for families as they save for college.

The guidelines are evolving, and 529 plan rules vary considerably by state, so consider working with a knowledgeable 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, make note of how much you're contributing. This can help you avoid paying extra taxes. If you contribute more than $19,000 in one year to a 529 plan, your gift will be subject to the gift tax, and you'll have to foot the bill. This is in compliance with IRS rules on gift taxes that specify a limit of $19,000 per beneficiary in 2025.⁴

Final Considerations for 529 Contributions & Estate Planning

For some, 529 plans are a useful tool for estate planning and passing on wealth to the next generation in the family. Grandparents can contribute to 529 plans with the aim of potentially reducing the size of their estate — and their tax bill — while retaining control over the money in the account.

Working with a trusted financial professional can help here. These individuals can help you determine how 529 contributions fit into your estate planning goals and objectives.

   Make the most of a 529 plan and support your grandchild’s future education. Invest Today  

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.