By Trisha Good, Executive Director, Ohio Tuition Trust Authority
November 7, 2023
Grandparents place a high value on higher education and want to give their grandchildren the best possible start to a successful life as an adult. To support their grandchildren’s education after high school, a 529 plan is one of the best ways to save.
A 529 plan grows with tax-free earnings so all contributions and earnings are available to pay for a higher education. 529 withdrawals are also tax-free withdrawals to cover qualified education expenses, which are the required costs for attendance. Many states’ 529 programs also offer special state tax credits or deductions. If you’d like to see what other benefits your home state’s 529 program offers, check out the College Savings Plan Network’s (CSPN) search tool. Remember, even if you save in your own home state’s 529 program but your grandchild lives in another state, your 529 plan can pay for college costs nationwide.
A grandparent can choose to make gift contributions to their grandchild’s existing account, or they can open a 529 account themselves for their grandchild. Either choice is a great option.
Grandparent-owned 529 account
With a grandparent-owned 529 account, the grandparent will make all the decisions regarding the use of the account, such as choosing the investment options, deciding how much to contribute, and when the time comes, making the 529 withdrawals to pay for their beneficiary’s qualified higher education expenses, which include the large required costs like tuition, room and board, rent, fees, books, and for computers any required electronic equipment.
As the account owner, a grandparent can choose to change the beneficiary of the account if the original beneficiary receives a full-ride scholarship, enlists in the military, or decides not to continue with their higher education. Additionally, if there are any funds remaining in one grandchild’s 529 plan after they complete their higher education, the grandparent account owner can make a tax-free transfer of the surplus into any other family member’s 529 account, whether that is a sibling or cousin of the original beneficiary, for their pay qualified college expenses. There is also the option of transferring the grandparent-owned 529 account funds into a parent-owned 529 plan.
Be aware that gift tax considerations may come into play depending on the amount of your gift contributions. The current annual gift tax exclusion for 2023 is up to $17,000 ($34,000 for married couples) per beneficiary, per year, but that amount is inclusive of all gifts to a beneficiary, not just gifts to a 529 account. In 2023, you can also superfund the 529 up to $85,000 per beneficiary in a single year ($170,000 for married couples) and take advantage of five years’ worth of tax-free gifts at one time as part of your estate-planning strategy. As this is a complicated area of tax law and strategies vary from person to person, please consult with a tax or financial advisor for information on this option.
It would also be wise to confer with a tax or financial advisor on the timing of withdrawing funds to cover a grandchild’s qualified higher education. Under the FAFSA Simplification Act, starting for the 2024-25 school year, grandparents 529 withdrawal will no longer be considered a student asset and is not figured into the financial aid equation.
Contributing to parent-owned 529 plan
It is also simple to contribute to an existing 529 plan for your grandchildren. Ask your children if they have a preferred method to add to your grandchildren’s 529 accounts. Some 529 programs offer a code to share with family and friends so they can contribute to the 529 account without needing the account number.
Giving the gift of a higher education may not be as exciting as the latest and greatest toy, but once your grandchild starts their higher education and see how you have spared them from taking on student loan debt, they will be grateful for your generosity. To learn more about 529 accounts, visit collegesavings.org or search for your state plan.
About the author:
Trisha Good is the executive director of Ohio Tuition Trust Authority. For more than 34 years, Ohio Tuition Trust Authority has sponsored and administered Ohio’s 529 College Savings Program, CollegeAdvantage. Ohio’s 529 Plan oversees more than 670,000 accounts and over $15 billion in assets as of September 30, 2023. Visit CollegeAdvantage.com or call 1-800-AFFORD-IT (233-6734) for more information.