529 Plans and Grandchildren: A Holiday Gift That You Control

As a grandparent, you want to help your grandchildren thrive. And with the holidays approaching, you might be trying to decide on a gift that is both thoughtful and practical. Consider a 529 plan: Not only can you easily set one up in time for this season’s gift giving, but you can also help your grandchildren meet the high cost of their future college tuition.

Grandparents and 529 Plans

The 529 plan was once a vehicle used primarily by parents to save for their children’s college education. But times are changing, and more grandparents than ever are setting up accounts.

A 2014 survey by Fidelity Investments found that 53 percent of grandparents are saving or plan to save for their grandchildren’s college costs. The study also found an increase in the number of 529 savings plans owned by grandparents—perhaps not so surprising since 529 plans offer grandparents tax benefits, flexibility, and control.

What Is a 529 Plan?

A 529 plan is an investment vehicle designed to take the sting out of college costs. As long as the funds are used for qualified educational expenses, you can withdraw the money tax-free. What’s more, qualified expenses are a broad category, including tuition, books, fees, computers, and the internet. So you can feel confident that your grandchildren will put your gift to good use.

The plans are offered by states (or their chosen investment advisor), and many states offer a tax deduction to residents who open a plan. For example, Ohio offers a $2,000-per-beneficiary deduction that will increase to $4,000 in 2018. Moreover, to the extent you contribute more than the deduction, you can carry the amount to future years. That means if you contribute $10,000 in 2018, you can deduct $4,000 and carry forward the remaining $6,000. (One important note: Though many states offer tax deductions, the federal government does not.)

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Why Use a 529 Plan?

As with any investment plan, the general rule for a 529 plan is the sooner you can start one, the better. It is with time that your gift has the opportunity to earn the returns needed to pay for your grandchildren’s college costs.

But what if your grandchildren are still in diapers? How can you even know which ones will go to college?

The flexibility of a 529 plan is one of its biggest advantages for grandparents. You open separate accounts for each grandchild and you have the flexibility to change the beneficiary on each account in the future. In essence, you are making a formal gift for federal and state tax purposes that you can rescind. Most financial gifts lack this flexibility.

If your designated beneficiary decides she is not going to college, or if he faces personal issues such as addiction, you control whether they can access the funds.

This control allows you to make a direct impact on your grandchildren’s lives while bypassing more common and potentially ineffective forms of giving. For example, you might have considered giving money to the parents to safeguard for your grandchildren’s future use. But if the parents hit hard times, they may be tempted to dip into the college fund. With a 529 plan, they cannot.

The flexibility extends to your needs as well. Should you need to use the money for medical expenses, for example, you have that option. However, keep in mind that withdrawals for non-educational purposes trigger income taxes and a 10% penalty.

What Is the Impact on Financial Aid?

The fact that you have designated a grandchild as a beneficiary will not affect their federal financial aid eligibility. However, once funds are withdrawn, the money is considered income for your grandchild and will affect any financial aid award that they may receive.

Under the old rules for the Free Application for Federal Student Aid (FAFSA), advisors would recommend that grandparents wait until the final year of college before helping out a grandchild. However, the FAFSA now uses income from two years prior (rather than one year prior) in eligibility calculations. That generally means you can help your grandchild in their junior year without affecting their financial aid eligibility.

And, of course, if they are not eligible for financial aid, then you do not have to take the timing of your gift into account.


More grandparents than ever want to reduce the burden of college costs on their grandchildren. A 529 savings plan can enable you to help your grandkids while providing you with a holiday gift idea plus potential tax breaks and the ability to make sure your gift is spent how you envisioned.

We would love to help you determine the right 529 plan for your situation. Just contact us to get started.