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Few gestures are more meaningful than a grandparent investing in a grandchild's future. And for many families, that instinct leads to a financial planning question: should I open a 529 college savings plan for a grandchild?
The short answer is: probably yes, if you would like to meaningfully help your grandchildren with large college expenses — and thanks to a major rule change that took effect in 2024, grandparent-owned 529 plans are now more powerful than they've ever been. But there are still nuances worth understanding before you open an account, including some situations where alternative strategies may serve your family better.
Here's everything you need to know.
A 529 plan is a tax-advantaged savings account specifically designed for education expenses. Named after Section 529 of the Internal Revenue Code, these accounts allow your contributions to grow tax-free, and qualified withdrawals — used for tuition, fees, room and board, books, and other eligible expenses — are also completely tax-free at the federal level.
529 plans can be used at accredited colleges and universities nationwide, as well as for K-12 tuition (up to $10,000 per year, check with your specific state), trade schools, and graduate programs. If the original beneficiary doesn't use the funds, you can change the beneficiary to another family member — including another grandchild, a child, or even yourself.
For years, grandparent-owned 529 plans came with a significant drawback that made financial planners like me cautious about recommending them. Under the old FAFSA rules, when a grandparent used a 529 plan or other funds to help pay for a student's education, the contribution counted as untaxed income to the student on the FAFSA. This could reduce need-based aid by as much as 50% of the gift amount.
That meant a well-intentioned $20,000 distribution from a grandparent's 529 could wipe out $10,000 of the student's financial aid — an unintended and often painful financial consequence.
That rule is now gone!
Beginning with the 2024–2025 school year, students are no longer required to report distributions from grandparent-owned 529 accounts on the FAFSA. As a result, those distributions no longer affect the student's aid eligibility. Grandparent-owned 529 plans now have zero impact on FAFSA — the account isn't reported as an asset, and distributions aren't reported as student income.
Important caveat: Many private institutions use the CSS Profile to award financial aid. Grandparent-held 529 plans will still be considered on the CSS Profile. If your grandchild is applying to selective private universities, grandparent-owned 529 assets may still affect their institutional aid eligibility. Research the specific schools on your grandchildren’s list before finalizing your strategy.
1. Tax-Free Growth and Withdrawals
This is the core benefit of any 529 plan. Every dollar you contribute grows completely free of federal income tax, and qualified withdrawals for education expenses are also tax-free. Over a 10 to 15-year savings horizon, the compounding effect of tax-free growth can be substantial.
2. State Tax Deductions in Some States
More than 30 states, plus Washington, D.C., offer either a tax credit or a tax deduction for contributions to their state-sponsored 529 plans. Nine states — Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania — offer residents a tax benefit for contributions to any state's 529 plan. If you live in California, note that California does not currently offer a state income tax deduction for 529 contributions, though the federal tax-free growth and withdrawal benefits still fully apply.
3. Estate Planning Benefits
A grandparent-owned 529 is one of the most tax-efficient wealth transfer tools available. Contributions up to $19,000 per beneficiary in 2026 qualify for the annual gift tax exclusion. This means married grandparents who contribute $38,000 to a grandchild in 2026 remove that amount from their taxable estate entirely.
Unlike most other gifts, you also maintain full control of the account. The money is legally yours until you choose to distribute it for qualified education expenses. If the grandchild receives a scholarship, changes plans, or doesn't attend college, you can redirect the funds to another family member or roll unused funds to a Roth IRA, subject to conditions.
4. Superfunding: Front-Loading Five Years of Gifts
529 plans include a five-year gift election that allows you to front-load contributions. You could contribute up to $95,000 per beneficiary in 2026 and treat it as five years of annual gifts for tax purposes. A married couple could contribute up to $190,000 per beneficiary in a single year. This strategy is most powerful when a grandchild is young, maximizing the number of years the account has to grow tax-free. If you “superfund,” you cannot make additional tax-free gifts to that same beneficiary for the next five years.
5. Flexibility if Plans Change
If your grandchild doesn't use all the funds, you can change the beneficiary to another qualifying family member, or roll over funds to a Roth IRA in the beneficiary's name. Key conditions apply: the 529 account must have been open for more than 15 years, contributions made within the prior five years cannot be rolled over, and annual rollovers are subject to the current IRA contribution limit of $7,000 (2026).
6. No Financial Aid Impact Under the New FAFSA
As discussed above, grandparent-owned 529 assets are not reported on the FAFSA at all, and distributions are no longer counted as student income. This eliminates what was previously one of the biggest drawbacks of grandparent-owned plans — and effectively puts them on equal footing with parent-owned accounts for FAFSA purposes.
1. CSS Profile Schools Are Still a Concern
If your grandchild is targeting private or other universities that use the CSS Profile for institutional aid, grandparent-owned 529 assets may still be factored into their aid calculations. Before opening a grandparent-owned account, research whether the schools on your grandchild's list use the CSS Profile and how they treat third-party 529 accounts for financial aid calculations.
2. Penalties for Non-Qualified Withdrawals
If the funds aren't used for qualified education expenses, you may owe ordinary income taxes on the earnings plus a 10% federal penalty on the earnings portion of the withdrawal. Exceptions exist, including scholarships (the penalty is typically waived up to the scholarship amount) and some instances of disability.
3. Your Grandchild Must Be Named as Beneficiary
A 529 plan requires a named beneficiary from the start. If you're contributing before a grandchild is born, you'd need to name another family member as the initial beneficiary and change it later. This is manageable — just requires an extra step.
4. Investment Risk
529 plans are usually invested in market-based options — typically a mix of stock and bond index funds. While most plans offer age-based options that automatically shift to more conservative allocations as the beneficiary approaches college age, the account value can decline in a down market. There is no guaranteed return.
5. State Maximum Contribution Limits
While there are no annual contribution limits per se, each state sets a maximum account balance — typically between $300,000 and $550,000 — after which no further contributions are allowed. Once the balance reaches the state maximum, the account can continue to grow, but no new contributions are accepted.
A 529 plan isn't the only way to help with college costs. Depending on your goals, your grandchild's situation, and your overall estate plan, one or more of these alternatives may be worth considering alongside — or instead of — a 529 plan.
Direct Tuition Payments
This is one of the most tax-efficient strategies available to grandparents and one that many people don't fully understand. Under federal gift tax law, payments made directly to an educational institution for tuition are excluded from gift taxes — regardless of the amount — and don't count against your annual exclusion or lifetime exemption.
The payment must go directly to the school, not to the student or the parents. A $60,000 annual tuition payment made directly to a university doesn't use a dollar of your gift tax exclusion. Writing your grandchild a check for $60,000 does — the amount above $19,000 would draw down your lifetime exemption and you would typically need to file Form 709.
Important caveat: Direct tuition payments may reduce institutional aid at some schools. Coordinate with the school's financial aid office before making large direct payments if aid is a consideration.
Contribute to a Parent-Owned 529
Rather than opening your own account, you can simply contribute to a 529 plan that the parents already own for their child. The annual gift tax exclusion still applies — you can contribute up to $19,000 per year ($38,000 for a married couple) without gift tax implications. The account remains in the parents' control, which simplifies things for the family. The tradeoff is that you lose the direct control that comes with owning the account yourself.
UTMA/UGMA Custodial Accounts
A custodial account opened in your grandchild's name offers flexibility — funds can be used for anything, not just education. But the tax treatment is less favorable: earnings are taxable each year, and once the grandchild reaches the age of majority (typically 18 or 21 depending on the state), the assets are legally theirs. UTMA/UGMA assets are also counted as student assets on the FAFSA, assessed at a 20% rate — significantly higher than the rate applied to parent-owned 529 plans.
Post-Graduation Loan Repayment
An often-overlooked strategy is to help repay your grandchild's student loans after graduation rather than contributing to savings upfront. Post-graduation support avoids aid reporting entirely and allows the student to claim tax benefits on loan interest. The annual gift tax exclusion applies — up to $19,000 per year without touching your lifetime exemption. This approach also gives you a clearer picture of the actual need before committing funds.
Roth IRA for the Grandchild
If your grandchild has earned income — from a part-time job, for example — you can contribute to a Roth IRA in their name up to the amount of their earned income, subject to the 2026 IRA contribution limit of $7,000 for those under 50. This doesn't directly fund college, but gives your grandchild a tax-free account they can use for a variety of purposes. The longer-term benefit is significant: a Roth IRA started in a grandchild's teens has decades of tax-free compounding ahead of it.
For most grandparents, a combination of approaches works best. Here's a simple framework:
Disclosure: This article is for informational purposes only and does not constitute personalized tax, legal, or investment advice. Tax rules are subject to change. Please consult a qualified financial advisor and CPA for guidance specific to your situation. Arcadia Private Wealth LLC is a Registered Investment Adviser in the state of California. Advisory services are only offered to clients or prospective clients where we are properly registered or exempt from registration.
Grant Webster, CFP®, TPCP®
Founder, Wealth Advisor