Grandparents’ Guide to 529 Plans

Key facts

  • Grandparents can open tax-advantaged 529 college savings plans for the benefit of grandchildren.
  • Each beneficiary must have her own account.
  • There’s no limit to the number of accounts opened for each beneficiary.

One of the best ways for grandparents to contribute to their grandchildren’s future is to ease the burden of college expenses. While a variety of investment accounts make acceptable college savings solutions, many grandparents find that a 529 plan offers the greatest overall benefits for themselves and their grandchildren.

How a 529 Plan Works

Though 529 college savings plans are created through IRS tax code, ultimately, they are state-sponsored programs. Each state designs its own version of the plan. According to federal regulations, any U.S. citizen or resident alien at least 18 years can open an account, and anyone can be the beneficiary of an account.

While contributions are taxed as regular income on your federal tax return, earnings grow in the 529 plan tax-free. As long as the beneficiary uses the funds for qualified higher education expenses at an eligible institution, you won’t be assessed additional taxes when funds are withdrawn.

Your state of residence and your grandchild’s state of residence don’t factor into which school she attends. Your grandchild can use funds from the 529 college savings account at public and private schools anywhere in the country as long as the institutions meet certain eligibility criteria.

Contributing to a Grandchild’s 529 College Savings Plan

While you can’t contribute to a 529 plan that another person has opened for your grandchild, you can open a separate 529 account. There’s no limit to the number of accounts each beneficiary may have. Your contributions will be considered a completed gift to the beneficiary for tax purposes, so amounts over the gift exemption limit could be subject to gift taxes.

In 2016, you are permitted to contribute up to $14,000 per beneficiary before incurring gift taxes. If you plan a larger contribution, consider superfunding the account. This rule permits you to make up to five years of contributions at once without incurring gift tax liability. Many grandparents choose to open 529 accounts for their grandchildren as a way of transferring assets from their estate in a tax-efficient manner. Of course, if you choose this option, any additional contributions you make during the five-year period could put you over the gift tax exemption limit.

Accounts owned by a grandparent for the benefit of a grandchild aren’t taken into consideration when calculating initial financial aid awards. However, distributions taken from grandparent-owned 529 accounts to pay for a student’s eligible expenses may be considered as student income for that tax year. If so, financial aid eligibility could be impacted the following year.

The peace of mind that your grandchildren will feel knowing they don’t face a lifetime of student loan debt is priceless. Your contributions will make it easier for them to reach their educational goals, and a 529 plan is a simple way to get started.


Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.

This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.

Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.