Grandparents and 529 College Plans: How to Help Pay for School Without Risking Your Own Retirement

How a 529 Plan Can Help a Grandchild

Many grandparents want to help a grandchild through school, and a 529 college savings plan is designed for that purpose. Before you put money in, though, keep in mind that you may need it later for your own care.

Step One: Decide What You Can Comfortably Give

Start by working out what your own budget can spare. College money should fit alongside your retirement spending, health care, housing, travel and the possibility of needing long-term care.

If you own the plan, you can take money back at any time. If you take out money for anything other than covered school costs, you will generally owe income tax and a 10% penalty, but only on the earnings, meaning the growth on what you put in.

Step Two: Understand What a 529 Plan Is

A 529 plan is a state-run savings account for education, named after a section of the federal tax code. Anyone can open one and name anyone as the student. There are no income limits. You may also use another state's plan instead of your own.

The main advantage is that the earnings grow free of federal tax and come out tax-free when spent on qualifying costs. Money you put in is not deductible on your federal return. The money is invested, so the account can also lose value. According to the IRS, qualifying costs include college tuition, fees, books, room and board, computers and internet service. They also include certain apprenticeship costs and up to $10,000 over a lifetime to repay student loans. For kindergarten through high school, up to $20,000 a year in total can come out tax-free for tuition and related costs, counting every 529 plan the student has.

Step Three: Choose Who Owns the Account

You can open a plan in your own name, open one with a parent named as the owner, or add money to a plan the parents already own. The owner of a 529 plan controls the money until it is withdrawn, including whether to change the student named on it. If a parent owns the account, the parent makes those decisions.

Step Four: Protect the Grandchild's Financial Aid

The FAFSA, or Free Application for Federal Student Aid, is the form families fill out to qualify for federal grants and loans. A 529 owned by a grandparent is not reported on it. Under the old rules, money a grandparent's plan paid out could be counted as the student's income, which could cut aid the next year. That changed with the simplified FAFSA starting in the 2024-25 school year, so withdrawals from a grandparent-owned plan no longer count as the student's income.

Money you add to a parent-owned account counts as the parents' savings on the FAFSA, which could reduce the student's aid somewhat. Some colleges, often private schools, also use a second form called the CSS Profile. It asks how much help the student expects from others, so your help may count differently at those schools.

Step Five: Know the Gift Tax and State Tax Rules

Money put into a 529 counts as a gift. In 2026 you can give up to $19,000 to each grandchild, or $38,000 as a married couple, without using any of your lifetime exemption. That exemption is the total you can give away during life and leave at death before federal gift or estate tax is owed. In 2026 it is $15 million per person. Gifts above the yearly amount often mean filing a gift tax return rather than paying tax.

A 529 plan also allows a large gift all at once, sometimes called superfunding. In 2026 one grandparent can put in $95,000, and a couple $190,000, for one grandchild and have it counted for gift tax as five equal yearly gifts. This generally requires filing IRS Form 709, the gift tax return. Because it uses up five years of your yearly amount for that grandchild, any further gift to that grandchild during those years generally goes over the limit.

For estate tax purposes, money given to a 529 is no longer part of your estate, although Medicaid treats a plan you own differently. The exception is a five-year gift: if you die before the five years end, part of it is counted back in.

Many states offer an income tax deduction or credit for contributing, while others offer nothing. Depending on the state, the break may go only to the account owner or only to people using the state's own plan, so check your state's rules before you choose a plan or add to the parents' account. In most states the deadline to qualify for the current year is December 31, though some allow until April.

Step Six: Plan for Leftover Money

A grandchild may win a scholarship, choose a cheaper school or skip college. You can change the student named on the account to another family member, such as a sibling or another grandchild, with no tax. If the grandchild wins a tax-free scholarship, you can also take out as much as the scholarship is worth without the 10% penalty, though income tax is still due on the earnings.

A newer option lets up to $35,000 over a lifetime move from the 529 into a Roth retirement account for the student. The plan must have been open at least 15 years, and money added in the last five years cannot be moved. Each year's move is held to the yearly Roth limit. The student must also have enough earned income, meaning pay from work, to cover the amount moved that year. Federal guidance has not settled whether changing the named student restarts the 15-year clock, so get current tax advice before counting on this option.

Step Seven: Think About Medicaid

Owning the plan yourself carries a risk if you might someday need Medicaid to help pay for your care. A 529 you own is generally counted as one of your assets when Medicaid decides whether you qualify. If you open the plan but name someone else as the owner, such as a parent, the money likely will not count. Changing the owner later may not help, because a state's Medicaid agency may look back at transfers made during a set period before you apply and count them anyway.

Other Ways to Help

• Paying tuition straight to the school. This does not use up any of the $19,000 a year you can give each grandchild. It also does not reduce aid on the FAFSA. The downside is missing years of tax-free growth.
• Custodial accounts. These are run by an adult for the grandchild and can pay for anything that benefits the grandchild, not only school. The gift cannot be taken back. The grandchild takes control on reaching adulthood under state law, typically at 18 or 21. They also count much more heavily against financial aid than a parent's savings, because the aid formula treats them as the student's own money.
• Coverdell education savings accounts. These allow only $2,000 a year per child from everyone combined, and people above certain incomes cannot put money in.

Get Help and Talk It Over

A tax preparer or CPA, a financial planner and an estate or elder law attorney can each help, especially with gift tax filings and Medicaid planning. IRS Publication 970 on tax benefits for education explains the rules in detail. Before you open a plan or write a check, settle these questions with the parents:

• Do they already have a 529, and would they rather you add to it or open your own?
• Which schools are likely, and might any use the CSS Profile?
• Who should own the account, and who would take it over if you could no longer manage it?
• What should happen to leftover money?
• Will you pay tuition directly later instead of saving now?