By Illinois State Treasurer Michael Frerichs
September 13, 2022
The relationship that grandparents have with their grandchildren is special beyond words. The American writer Alex Haley summed it up beautifully when he said, “Nobody can do what grandparents do. Grandparents sort of sprinkle stardust over the lives of little children.” With wisdom, patience, and love, grandparents play critical roles for the youngest among us.
Since Grandparents’ Day is this month, I want to address this message to all the wonderful grandparents and take the opportunity to highlight the role you can play in helping your grandchildren save for college. 529 college savings plans are incredibly flexible and allow families to save in several different ways.
First, grandparents can open their own 529 accounts. 529 plans have very few requirements regarding who can be an account owner or beneficiary. In most states, an account owner is someone at least 18 years of age with a valid Social Security Number (SSN) or Taxpayer Identification Number (TIN) and a permanent US address. Beneficiaries can be of any age with a valid SSN or TIN and permanent residence. Furthermore, the account owner does not need to be related to the beneficiary in any way.
You may be wondering, what if my grandchildren already have a 529 college savings account? Not to worry— there are several other ways grandparents can help save for college.
Grandchildren can have multiple accounts
Your grandchildren can have multiple accounts opened. This means that grandparents can still open 529 accounts for their grandchildren. In fact, grandparents can open multiple accounts for different grandchildren. Better yet, most 529 plans do not require a state residency. For example, if your grandchild lives in Illinois but you live in a different state, you can still open an account for them in the Illinois 529 plans or, if you prefer, you can open an account using your local state’s plan.
Family and friends can contribute
Most states have simple programs that enable account owners to invite family and friends to contribute to a 529 account for special occasions like birthdays and graduations. Ugift® is the most popular of these programs and is used by 35 college savings programs across 23 states and the District of Columbia. This allows grandparents to contribute to 529 college savings accounts without having to be the account owner.
Another great way to contribute is through rewards programs like Upromise®. Accounts are free and easy to open, and you can link them to a grandchild’s 529 account. You earn cash back rewards by shopping online, answering surveys, and trying out new products and services. Those rewards turn into dollars that can be contributed to a single 529 account or multiple accounts. Programs like Upromise® can be a great option for grandparents with excellent money management.
Finally, let’s say that one of your grandchildren has decided not to go to college, even though you already opened an account for them. The solution is simple: funds can be transferred to the beneficiary’s family member, which can be a sibling, spouse, child, parent, aunt, uncle, cousin, niece or nephew.
There are several benefits to opening or contributing to a 529 college savings account. The federal government allows families to save for education in 529 vehicles and offers federal tax benefits. Additionally, contributions of all amounts bring with them great state tax benefits! Over 30 states and the District of Columbia offer state tax benefits. These benefits vary from state to state and, like federal tax benefits, will ultimately depend on each family’s income, filing status, and other factors. Account owners and others, liable to state income taxes, may deduct their contributions on most states’ income taxes—up to $20,000 for a couple filing jointly in Illinois, for instance. For your grandchild, the investment earnings in their account are never taxed, and withdrawals are free from state and federal taxes as long as they are used for qualified education expenses.
When it comes to financial aid, there is one thing worth noting. While the account balance itself does not figure into the student’s assets, withdrawals made from grandparent-owned accounts are counted as student income for the year in which those funds are used and must be reported on the student’s FAFSA application. However, the good news is that effective for the 2024-2025 academic year, the FAFSA application will no longer consider distributions from grandparent-owned 529 accounts as a student’s asset!
I also want to be clear that while the details I outlined are generally true nationwide, different state plans vary in their benefits and investment options. I therefore encourage you to use this search and compare tool in order to make the most informed decision on the plan that is best suited for you and your grandchildren.
Sprinkle some stardust over the lives of your grandchildren. Invest in their education and make their future as bright as possible.
About the Author
Michael Frerichs was first elected Illinois State Treasurer in November 2014 and re-elected in November 2018. He is the Past-Chair of the College Savings Plans Network, which brings together administrators of 529 savings and prepaid plans and their private sector partners to offer convenient tools and objective, unbiased information to help families make informed decisions about saving for college.