Funding a grandchild’s education is a meaningful way to support their future, and grandparent-owned 529 plans have become even more appealing with recent changes to financial aid rules. Not only do 529 plans provide tax advantages and control over these assets, but they can also preserve financial aid eligibility under the new FAFSA guidelines.

Let’s explore the benefits of grandparent-owned 529 plans, how they work, and why they’re a smart choice for family education planning.

What Is a Grandparent-Owned 529 Plan?

A 529 plan is a tax-advantaged savings account designed for higher education expenses. While parents often open 529 accounts, grandparents can also own these plans, enabling them to directly contribute to a grandchild’s education fund.

Grandparent-owned 529 plans offer several unique benefits:

Tax-Deferred Growth

Earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses.

Estate Planning Opportunities

Contributions to a 529 plan are removed from the contributor’s taxable estate, providing significant estate tax benefits, as long as the gift is completed.

Control Over Assets

Grandparents maintain control of the funds, allowing flexibility if plans or circumstances change.

New FAFSA Rules Make Grandparent 529 Plans Even More Attractive

Under previous FAFSA rules, distributions from grandparent-owned 529 plans were considered untaxed income for the student, potentially reducing financial aid eligibility by as much as 50% of the distributed amount. For example, a $10,000 withdrawal could decrease financial aid by $5,000—a significant penalty.

However, starting with the 2024–2025 academic year, FAFSA no longer includes cash gifts or distributions from grandparent-owned 529 plans as part of the student’s income. This means grandparents can contribute to their grandchild’s education without negatively impacting their financial aid eligibility.

FAFSA Simplification

The new FAFSA uses IRS data to calculate income, eliminating the need to report cash gifts or support from grandparents.

CSS Profile Caveat

While FAFSA no longer considers grandparent-owned 529 plans, some private colleges that use the CSS Profile for financial aid decisions may still include these funds. It’s important to note that some colleges may treat 529 plan distributions as student income, affecting aid eligibility, while others may not.

Additional Benefits of Grandparent-Owned 529 Plans

Tax-Free Rollovers to Roth IRAs

Thanks to the Secure Act 2.0, unused 529 plan funds can be rolled over into a Roth IRA for the beneficiary, offering an excellent opportunity to jumpstart their retirement savings.

Key conditions for this to occur include:

• The 529 plan must be at least 15 years old.
• Contributions made within the last five years are not eligible to be rolled over.
• Rollovers are subject to Roth IRA contribution limits and a lifetime maximum of $35,000.

Flexibility in Use

If your grandchild doesn’t need the funds for college—perhaps they receive a scholarship or choose an alternative path—you have options:

• Change the beneficiary to another family member.
• Use the funds for other qualified higher education expenses. It’s important to note that some states have more restrictive rules regarding which expenses qualify, and not all states conform to the federal definition of qualified expenses.
• Roll over unused funds into a Roth IRA under the Secure Act 2.0 provisions.

Estate Planning Advantages

Grandparent-owned 529 plans allow contributors to reduce the size of their taxable estate while retaining control of the funds.

Contributions up to the annual gift tax exclusion ($19,000 per grandchild in 2025, or $38,000 for a married couple) are excluded from the taxable estate, as long as the gift is completed.

For even greater estate planning benefits, grandparents can “superfund” a 529 plan, contributing five years’ worth of gifts upfront. In 2025, this means up to $95,000 per grandchild ($190,000 for married couples) can be contributed at once, with no gift tax consequences, provided no additional gifts are made to the beneficiary for five years.

Key Considerations for Grandparents

While grandparent-owned 529 plans offer substantial benefits, there are some points to keep in mind:

CSS Profile Rules

Some private colleges still consider grandparent 529 funds when awarding institutional aid.

Medicaid Eligibility

Assets in a 529 plan may count against Medicaid eligibility (this is state specific).

Alternative Gifting Options

Direct tuition payments to colleges are not considered gifts for tax purposes, allowing grandparents to preserve their annual gift tax exclusion for other purposes.

How to Get Started

Opening a 529 plan is simple and can often be done online or through a financial advisor. To maximize benefits:

Research State Plans

Some states offer tax deductions or credits for contributions to their 529 plans. Check whether your state provides additional benefits for using an in-state plan.

Compare Fees and Investment Options

Low fees and a robust selection of investment choices will help your savings grow more effectively.

Conclusion

A grandparent-owned 529 plan is a powerful tool to support your grandchild’s education while also benefiting your estate planning and tax strategy. With recent FAFSA changes removing the financial aid penalty, now is an excellent time to consider this option.

By contributing to a grandchild’s education, you can help set them up for a successful future while leaving a lasting legacy. Start planning today and explore how a 529 plan can make a difference for your family.