Key Takeaways
- 1Grandparents can open and control 529 accounts for grandchildren
- 2Contributions grow tax-free when used for education
- 3Superfunding allows $90,000 upfront (2024) without gift tax
- 4Grandparent-owned 529s have less financial aid impact since 2024 FAFSA changes
- 5New rule: Up to $35,000 can roll to Roth IRA if unused
- 6State tax deductions available in many states for contributions
- 7You retain control - beneficiary can be changed if needed
Age Considerations
0-5 years old
- Maximum time for growth
- Consider aggressive investment options
- Start with whatever you can - it adds up
6-12 years old
- Still plenty of time to grow
- Moderate investment approach
- Consider superfunding strategy
13-17 years old
- Shift to conservative investments
- Consider timing of contributions for financial aid
- Direct tuition payments may be better alternative
Tax Implications
529 Plan Basics for Grandparents
A 529 plan is a tax-advantaged investment account designed for education savings. Named after Section 529 of the IRS code, these plans offer significant tax benefits.
- Tax-free growth - Investment earnings are never taxed if used for qualified education expenses.
- Qualified expenses - Tuition, fees, books, room and board, computers, and K-12 tuition up to $10,000/year.
- Any school - Use at any accredited college, university, trade school, or graduate program.
- No income limits - Unlike Roth IRAs, anyone can contribute regardless of income.
- High contribution limits - Most states allow $300,000-$500,000+ lifetime contributions.
- State tax benefits - Many states offer deductions for contributions to their state's plan.
Grandparent-Owned 529 Plans
Grandparents can open 529 accounts with themselves as owner and grandchild as beneficiary. This gives you control while providing for their future.
- You stay in control - As account owner, you control investments and withdrawals.
- Change beneficiary - If grandchild doesn't need funds, change to another grandchild or family member.
- Estate planning benefit - Money is removed from your estate, reducing potential estate taxes.
- Retain access - You can withdraw funds (with penalties) if you need them.
- Multiple accounts - You can have separate 529 for each grandchild.
Ownership Decision
Parents can also own 529s for their children. Discuss with your family whether grandparent or parent ownership makes more sense for financial aid and estate planning.
The Superfunding Strategy
Superfunding allows you to contribute up to 5 years of gift tax exclusion amounts at once without triggering gift taxes. For 2024, that's $90,000 per grandchild ($180,000 for married couples).
- 5-year averaging - You elect to spread the gift over 5 years for gift tax purposes.
- No additional gifts - You cannot make additional gifts to that person for 5 years.
- Immediate investment - All $90,000 starts growing immediately.
- Estate benefits - Entire amount immediately leaves your estate.
- Per grandchild - You can superfund accounts for multiple grandchildren.
Death During 5-Year Period
If you die during the 5-year period, a portion of the contribution is included back in your estate. This is usually not a major concern but should be considered.
| Scenario | Single Grandparent | Married Grandparents |
|---|---|---|
| Annual gift exclusion (2024) | $18,000 | $36,000 |
| 5-year superfunding | $90,000 | $180,000 |
| For 3 grandchildren | $270,000 | $540,000 |
Financial Aid Impact
The 2024 FAFSA changes significantly improved how grandparent 529s are treated for financial aid.
- Old rules (before 2024) - Grandparent 529 withdrawals counted as student income, reducing aid significantly.
- New FAFSA rules (2024+) - Grandparent 529s are NOT reported on FAFSA at all.
- Major improvement - Grandparent-owned 529s now have no negative impact on federal financial aid.
- CSS Profile schools - Some private schools still ask about grandparent 529s on CSS Profile.
- Parent-owned - Still counted as parent asset (minimal impact - ~5.64% assessed).
Game-Changer for Grandparents
The new FAFSA rules mean grandparent-owned 529s are now one of the best ways to help with college costs without hurting financial aid eligibility.
Alternatives to 529 Plans
While 529 plans are excellent, there are other ways grandparents can help with education:
- Direct tuition payments - Pay tuition directly to the school. Unlimited, doesn't count as a gift.
- Coverdell ESA - Limited to $2,000/year, more investment options, income limits apply.
- UGMA/UTMA - Custodial accounts with no use restrictions. Counts more heavily against financial aid.
- Roth IRA - Your own Roth can be used for grandchild's education (contributions out tax-free).
- Savings bonds - Series I and EE bonds can be tax-free for education under income limits.
- Simply save separately - Keep funds in your own accounts and gift when needed.
| Option | Tax Benefit | Control | Financial Aid Impact |
|---|---|---|---|
| 529 (grandparent) | Tax-free growth | You control | None (new FAFSA) |
| Direct tuition payment | No gift tax | None after paid | None |
| UGMA/UTMA | Minor's tax rate | Until adult | High (student asset) |
| Coverdell ESA | Tax-free growth | Limited | Moderate |
| Your Roth IRA | Tax-free contributions | You control | None |
Best Strategies for Grandparents
Maximize the impact of your gift with these strategies:
- 1Start early - The power of compound growth means early contributions grow most.
- 2Consider superfunding - Front-loading maximizes growth time and removes assets from estate.
- 3Use age-based portfolios - Automatic shift to conservative investments as college approaches.
- 4Check state benefits - You may get state tax deduction for contributing to your state's plan.
- 5Coordinate with parents - Ensure you're not duplicating and understand the financial aid timeline.
- 6Keep records - Document the 5-year election and track contributions carefully.
- 7Have a backup plan - Know that funds can transfer to other beneficiaries or roll to Roth IRA.
Building Generational Wealth Beyond Education
While 529 plans focus on education, building lasting generational wealth requires diversification. Consider Gold IRAs as part of your legacy planning.
- Physical gold preserves wealth across generations
- No expiration date - use when beneficiaries need it
- Hedge against inflation and market volatility
- Can be held in trusts for grandchildren
- Tangible asset that teaches value of hard money
Frequently Asked Questions
Can I open a 529 for a grandchild in any state?
Yes, you can open a 529 in any state, regardless of where you or your grandchild lives. The grandchild can also use the funds at any accredited school in any state. However, your state may offer tax benefits only for contributions to its own plan.
What happens to the 529 if my grandchild doesn't go to college?
You have several options: change the beneficiary to another family member (including yourself), use it for trade school or continuing education, roll up to $35,000 to a Roth IRA (if account is 15+ years old), or withdraw funds (paying taxes and 10% penalty on earnings only).
Should grandparents or parents own the 529?
With the new 2024 FAFSA rules, grandparent-owned 529s have no negative financial aid impact, making them very attractive. However, parents may want control over the education funds. Some families have both - parents own one 529, grandparents own another.
Can I contribute to a 529 and still claim the grandchild on my taxes?
Contributing to a 529 does not make the grandchild your dependent. The child's parents typically claim them. However, your contribution may give you a state tax deduction in some states.
What if I need the money back?
As account owner, you can withdraw funds at any time. If not used for education, you'll owe income tax plus a 10% penalty on the earnings portion. Contributions (your original money) come out tax and penalty-free. Consider this a last resort.