Save for a grandchild’s education

A 529 plan is a tax-advantaged savings plan designed to help individuals and families, like grandparents, save for college. Earnings are free from federal income tax and, in most cases, state income tax, if used to pay for qualified education expenses. Distributions from a 529 plan can be used to pay for tuition and other education-related expenses such as laptops, room and board, and books at eligible two- and four-year colleges and universities, US vocational-technical schools, and eligible foreign institutions. In some states, up to $10,000 per year can be used for K-12 tuition expenses. Many states offer a state income tax deduction or credit for 529 plan contributions.

A grandparent can give an individual contribution of up to $17,000 a year per beneficiary in 2023. A married couple filing jointly can contribute $34,000 in 2023. They can also choose to make an accelerated gift — five years of contributions at once. In 2023, it’s up to $85,000 for an individual (five times the $17,000 annual gifting limit per beneficiary) or $170,000 for married couples filing jointly. No additional gifts may be made until five years have passed. They can do this for as many children as they want, which can be useful if they need to reduce their taxable estate. For estate planning purposes, the Internal Revenue Service considers assets held in a 529 plan as a completed gift and treats them as the beneficiary’s assets, not the account owner’s.

Yes, a grandparent can open a 529 plan for a grandchild. They can also contribute to an existing one. There are several things to keep in mind when choosing which to do.
 

Control

The account owner chooses the plan, picks the investments, and manages withdrawals. They can change the beneficiary of the account, too, if the child decides not to go to college. If a grandparent contributes to an existing 529 plan they don't own, they don't have control and flexibility over investments, withdrawals, and changing the beneficiary.
 

Taxes

Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit for 529 plan contributions. (Contributions are not federally tax deductible.) In most states that offer tax benefits, anyone who contributes to a 529 plan can get a state income tax deduction. In 10 states, however, only the account owner can claim a tax benefit.

Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit for 529 plan contributions. (Contributions are not federally tax deductible.) In most states that offer tax benefits, anyone who contributes to a 529 plan can get a state income tax deduction. In 10 states, however, only the account owner can claim a tax benefit. 

Opening a 529 plan for each child can make sense:

• All funds for qualified expenses are distributed tax-free for each beneficiary.
• The most appropriate age-based investment allocation can be chosen for each child.
• Grandparents can potentially maximize tax breaks.
• It's easier to track progress for each child.

Assets in a 529 plan owned by anyone other than the parent or student aren’t counted when determining financial aid. Withdrawals from 529 plans, however, currently need to be reported in the student’s FAFSA application as student for the 2022-2023 and the 2023-2024 award year, which can reduce financial aid eligibility by 50%. Starting with the 2024-2025 award year, however, students will not need to report any financial contributions they received on their FAFSA application, including funds from non-parent owned 529 plans.