What is a 529 college savings plan owned by grandparents? How do they function? What do you need to know about them and what changes do you need to know about? Understanding Grandparent
A grandparent-owned 529 plan is a type of 529 college savings plan where the account owner is a grandparent instead of a parent. The grandchild gets the money.
A custodial 529 plan account is another option. Here, the grandchild owns and benefits from the account, but the grandparent manages it. Grandparents can give money to any type of 529 plan. Grandparents can contribute to 529 plans they own, custodial 529 plans, and 529 plans owned by parents. Understanding Grandparent
Keep in mind that grandparent-owned 529 plans have a different impact on eligibility for need-based financial aid than parent-owned 529 plans. Here’s what you need to know if you’re interested in a grandparent-owned 529 plan.
What To Know If You’re An Account Holder
If you’re a grandparent, there are several reasons why you may or may not want to be the account owner. The most important factors of account ownership include tax implications, financial aid, and estate planning. Understanding Grandparent
- You are in control of the funds: By serving as the account owner, as opposed to contributing to a parent-owned 529 plan, the grandparent retains control over the account. This might be necessary to ensure that the money is spent for the grandchild’s benefit if the parents are spendthrift.
- You can tap into the funds if you need it: You can take back the money from a 529 plan account as a non-qualified distribution, if necessary. Understanding Grandparent
- Tax benefits: You may need to be the account owner to claim a state income tax deduction.
- You don’t need a ton of info to open an account: The grandparent can keep the plan a secret from the parents and grandchildren to surprise the family when they announce they’ve saved for the grandchild’s college education. All you need to know is the grandchild’s date of birth and Social Security Number to open the account. Understanding Grandparent
The Impact On Your Taxes
Two-thirds of states offer an income tax deduction or tax credit based on contributions to the state’s 529 plan. In the following 10 states, the taxpayer must be the account owner (or spouse of the account owner) to claim a state tax deductionhusetts Understanding Grandparent
Find your state in our 529 plan guide and see what tax deductions or credits are available for you >>
529 Plans Provide Significant Estate-Planning Benefits
Contributions to a 529 plan, up to the annual gift tax exclusion, are immediately removed from the contributor’s estate, even if the contributor retains control over the 529 plan as the account owner. Understanding Grandparent
Here are the gift tax rules for 2026:
A five-year gift-tax averaging, also known as superfunding, allows contributors to give a lump-sum contribution up to five times the annual gift-tax exclusion and have it treated as occurring over a five-year period. Understanding Grandparent
For example, you can give up to $95,000 (5 x $19,000) per beneficiary or you and your spouse can give up to $190,000 per beneficiary.
A portion of the gift is removed from your estate each year. Giving a lump sum allows the beneficiary to immediately invest the full amount, instead of just a fifth of the amount each year. Understanding Grandparent
See more on 529 plan contribution limits here.
Earnings Accumulate On A Tax-Deferred Basis
Qualified distributions are entirely tax-free. Qualified distributions include amounts spent on college costs, such as:
Qualified distributions may also be used to pay for up to $10,000 per year in elementary and secondary school tuition. Understanding Grandparent
Qualified distributions can also be made to repay up to $10,000 in the beneficiary’s student loans and $10,000 for each of the beneficiary’s siblings. (With a change in beneficiary, the 529 plan can also be used to repay up to $10,000 in parent loans.) The $10,000 limit is a lifetime limit per borrower, regardless of the number of 529 plans.
The earnings portion of a non-qualified distribution is taxable at the recipient’s rate, plus a 10% tax penalty. The recipient may be the beneficiary or the account owner. Here are some commonly asked expenses that are non-qualified distributions: Understanding Grandparent
The tax penalty is waived if the beneficiary has passed away, is disabled or received:
- A tax-free grant or scholarship, such as the American Opportunity Tax Credit (AOTC), Lifetime Learning Tax Credit (LLTC)
- Attended a U.S. military academy
- Veterans’ educational assistance
- Employer-paid educational assistance up to the amount of the education benefit
Generation-Skipping Transfer Taxes
When a grandparent contributes to a 529 plan for a grandchild, they may be subject to Generation-Skipping Transfer Taxes (GST).
GST occurs when the beneficiary is 37.5 years younger than the donor. However, GST does not apply if the grandchild’s parents are both dead. GST is subject to the same exclusions and exemptions as gift taxes. In particular, the $18,000 annual gift tax exclusion and 5-year gift tax averaging applies. Understanding Grandparent
If you want to give more, you will use up part of your lifetime exemption, which was $13.6 million in 2024 ($27.2 million for a couple).
Most people will not have to pay GST or gift taxes. However, if you give more than $18,000 to a beneficiary in a single year, you will need to file a U.S. Gift (and Generation-Skipping Transfer) Tax Return, IRS Form 709. Understanding Grandparent
Changing Beneficiaries
Changing 529 plan beneficiaries to another member of the family does not trigger any tax liability. This can be especially beneficiary if the grandparent wants to change the plan from one grandchild to another. Understanding Grandparent
For IRS purposes, the beneficiary’s family includes the beneficiary’s spouse and the following other relatives of the beneficiary.
- Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
- Brother, sister, half brother, half sister, stepbrother, or stepsister.
- Father or mother or ancestor of either.
- Stepfather or stepmother.
- Son or daughter of a brother, sister, half brother, or half sister.
- Brother or sister of father or mother.
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
- The spouse of any individual listed above.
- First cousin.
Whether or not you can change ownership of a 529 varies from state to state. In some states, you can change the owner of the 529 account under certain situations. Understanding Grandparent
Impact on Financial Aid
The financial aid impact depends on who owns the account, which affects how the 529 is reported as an asset on the Free Application for Federal Student Aid (FAFSA) and how distributions are reported as income on the FAFSA. See the following table to understand ownership, how it’s reported on the FAFSA, and how qualified distributions are counted. Understanding Grandparent
In all cases, the earnings portion of a non-qualified distribution is included in adjusted gross income (AGI) on the recipient’s federal income tax return. Therefore, it’s reported as income on a subsequent year’s FAFSA.
How 529 Plan & Distributions On FAFSA Affects Student’s Eligibility For Need-Based Financial Aid
Parent assets reduce eligibility for need-based financial aid by as much as 5.64%. Student assets reduce eligibility for need-based financial aid by as much as 3.29% if the student has dependents apart from a spouse. It is reduced by 20% if the student does not have dependents other than a spouse. Understanding Grandparent
Qualified distributions from a grandparent-owned 529 plan no longer have an impact on eligibility for need-based financial aid. The same applies for a 529 plan owned by anyone else.
This means that grandparent-owned 529 plans will not be reported as an asset and qualified distributions will not be reported as income on the FAFSA. (Non-qualified distributions will continue to be included in income.) FAFSA Simplification eliminates the cash support question, which is where untaxed income to the student was previously reported. Understanding Grandparent
Examples
For example, if there is $10,000 in a 529 plan owned by a dependent student or the dependent student’s parent, it will reduce the student’s aid eligibility by up to $564.
An independent student owning the 529 plan can reduce their aid eligibility by up to $2,000.
A grandparent’s ownership of the 529 plan does not affect aid eligibility. Understanding Grandparent