Using a 529 Plan to Help a Grandchild Pay for College
529 plans are powerful college saving tools.
When setting up these accounts, you need to select the following:
An account owner – the person who controls the funds
A beneficiary – typically the child / student
Who owns an account can make a difference when it comes to financial aid eligibility through the FAFSA (Free Application for Federal Student Aid).
Parent-owned 529: Counted as a parental asset; up to 5.64% of its value may be expected to go toward college expenses.
Student-owned assets: Counted more heavily; up to 20% can be factored into the aid formula.
Grandparent-owned assets: Not counted on the FAFSA.
Why don’t more grandparents own 529s?
Until recently, distributions from grandparent-owned 529s had a catch - the amount withdrawn had to be reported as student income on the next year's FAFSA—potentially reducing financial aid by up to 50% of the distribution. A $10,000 distribution could cost the student $5,000 in aid.
That rule has changed.
Distributions from grandparent-owned 529 plans are no longer reported as student income. This removes the biggest disadvantage and opens the door to a powerful planning strategy.
Parents Can Gift Contributions to Grandparents
Not all grandparents are in a position to contribute directly to a grandchild’s 529 plan—and that’s okay. There’s a strategic workaround - parents can gift money to the grandparents, staying within the annual gifting limits. The grandparents then contribute those funds to a 529 plan they own for the grandchild.
This approach can be particularly beneficial when:
The parents live in a state with no state tax deduction for 529 contributions (like California), and
The grandparents live in a state that offers a deduction for 529 contributions.
In this case, the gifted funds:
Don’t count as parental assets on the FAFSA (since they’re no longer in the parents’ name),
Avoid being reported as student income (due to recent FAFSA changes), and
May qualify for a state tax deduction on the grandparent’s return—something the parents couldn’t access themselves.
Consider discussing this strategy with your financial and tax person if you think it may benefit you.
originally posted 3/2014
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.