5 Reasons Grandparents Should Open a 529 Account

January 3, 2023
3 min read

529 plans aren’t just for parents. Between rising college costs and new FAFSA changes, grandparents should be looking at 529s, too, and as early as possible. You can get a lot out your account while helping a grandchild save for college.

Here are 5 reasons grandparents should open a 529:

1. Gift tax exclusion

In 2024, anyone can gift up to $18,000 per beneficiary without having to file a gift tax return. And the amount doubles for married couples filing jointly. That’s great news for doting grandparents since 529 contributions are considered completed gifts.

Even if you exceed the annual gift tax exclusion amount, you most likely won’t pay taxes. The excess can be deducted from your lifetime estate and gift tax exemption – $13.61 million in 2024.

Although there are no federal tax deductions for saving in a 529 plan, there could be other tax savings depending on where you live. Several states offer tax deductions, especially for residents who contribute to their state-owned 529 plan.

2. Superfunding

A special rule in the Internal Revenue Code allows anyone to superfund a 529 account up to five times the annual gift tax exclusion amount. In 2024, it’s $90,000 per beneficiary or $180,000 for married couples filing jointly.

This lump sum is treated as if you’re giving the money evenly over five years, so your lifetime estate and gift tax exemption isn’t reduced. To superfund a 529, you would need to file a federal gift tax return (Form 709).

3. The option to prepay

For grandparents looking to minimize investment risk, a prepaid 529 plan might be the best option. As the name suggests, these 529 plans allow you to save for college by prepaying all or part of tuition and mandatory fees at a predetermined rate, protecting you against tuition inflation. The prepaid dollars are guaranteed by the state or colleges that sponsor the plan.

Currently, nine states offer prepaid, and there is one national plan, called Private College 529, that has a network of nearly 300 colleges and universities.

4. Estate planning tool

Owning a 529 account allows grandparents to move finances out of your estate while still retaining control of the assets. Because 529 contributions are considered completed gifts, they’re no longer part of an estate and therefore excluded from federal estate tax.

5. No impact on the FAFSA – NEW

The FAFSA Simplification Act led to several new updates to the financial aid form used by nearly all college students and rising freshmen. Starting with the 2024-2025 FAFSA, distributions from grandparent-owned 529 plans will no longer count against students. This is a major change since these distributions used to be reported as untaxed student income on the form.

It’s important to note that 529 accounts owned by grandparents and other family will continue to be counted on the CSS Profile, which is an additional financial aid form used by many private colleges and universities.