What Grandparents Should Know About Gifting to 529 Plans
Grandparents who want to help with college costs often turn to 529 plans — but the way you give can matter as much as the gift itself.
Hello Discerning Parents and Future Graduates,
Today, we delve into another essential chapter in our guide to mastering the financial maze of funding higher education. For all the Jills and Jacks navigating the delicate balance of funding their children's education without jeopardizing their own retirement dreams, this one's for you.
Grandparents often want to help pay for college, and 529 plans are one of the most powerful ways to do it. These accounts let contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education costs.
But generous giving can come with hidden strings. How and when you contribute can affect financial aid, taxes, and even your estate plan. Here’s what to know before you contribute to a 529 plan.
1. Choose How You’ll Contribute
There are two main ways to give: open your own 529 plan for a grandchild or contribute to one owned by the parents. The way the account is owned affects who controls it and how it’s treated for financial aid.
Parent-Owned 529s: These count as parent assets for financial aid, although they have only a small impact on a student’s financial aid eligibility.
Grandparent-Owned 529s: These accounts used to hurt financial aid because withdrawals were treated as the student’s untaxed income. However, under the new FAFSA rules that started with the 2024–25 school year, withdrawals from grandparent-owned 529s no longer count as student income, making them much friendlier than before.
Note that some private colleges use the CSS Profile, a financial aid application that is separate from the federal government’s FAFSA form. Schools using the CSS Profile may ask about 529 accounts owned by relatives and count them when calculating aid.
2. Understand the Gift-Tax Rules
529 gifts are considered gifts for tax purposes, but they have special rules that make them powerful for grandparents. Knowing the limits helps you give generously without triggering tax surprises.
Annual Exclusion Gifts: You can give up to $19,000 per grandchild in 2025 ($38,000 for married couples) without filing a gift-tax return.
Superfunding Strategy: You can front-load five years of gifts at once—up to $95,000 per grandchild ($190,000 per couple)—and spread it over five years on your tax return.
Lifetime Exemption Use: If you give more than the annual exclusion, the extra counts toward your lifetime gift and estate tax exemption, set at $13.99 million for 2025.
Generation-Skipping Considerations: Any time you contribute to a 529 plan with your grandchild as the beneficiary—whether you open the account yourself or add money to a parent-owned account—it’s treated as a gift directly to that grandchild. Large gifts may use part of your generation-skipping transfer tax (GST) exemption, so it’s wise to coordinate with your estate plan.
Direct Tuition Payments: Instead of using a 529, you can pay tuition directly to the school. This doesn’t count as a gift at all under IRS rules, but it applies only to tuition, not room, board, or supplies.
3. Weave Estate Planning Into Your Strategy
529 contributions don’t just help with college—they can also help with your estate plan. You can move assets out of your taxable estate while still keeping control over how they’re used.
Shift Assets Out of Your Estate: Contributions to a 529 are considered completed gifts, so the money and its future growth leave your taxable estate, even though you retain control.
Use Superfunding for Impact: Front-loading five years of gifts accelerates tax-free growth and moves more out of your estate. However, be aware that if you die during that five-year window, the remaining “unused” portion is pulled back into your estate for estate-tax calculation.
Coordinate with GST Planning: Large gifts directly to grandchildren can also use part of your GST exemption, so it’s best to align your 529 strategy with your overall estate plan.
4. Keep State Rules in Mind
Where you live can also affect the benefits and pitfalls of 529 contributions. Nevada and California families face different rules than families in many other states.
California and K–12: Federally, you can use up to $10,000 per year for qualified K–12 expenses ($20,000 in 2026), but California taxes the earnings portion and adds a 2.5% state penalty.
California and Roth Rollovers: A recent federal rule allows unused 529 money to roll into a Roth IRA for the beneficiary (up to $35,000 over time), but California taxes the earnings portion and adds the 2.5% penalty.
If you’re in Nevada, you don’t have these state tax concerns. However, you want to be aware of the following:
Nevada and California Contributions: Families in these states don’t get a state income tax deduction for 529 contributions, so choosing a plan often comes down to investment quality and low fees rather than tax breaks. Residents do not have to select their state-sponsored plan, and they can shop for 529 plans sponsored by other states.
5. Time Your Withdrawals Carefully
How and when you take money out matters. Matching withdrawals to actual qualified expenses keeps the tax benefits intact and avoids problems later.
Same-Year Rule: Always take 529 withdrawals in the same calendar year the qualified expenses are paid. Make sure to save your receipts.
Avoid Double-Dipping with Credits: You can’t use the same dollars of tuition for both a tax-free 529 withdrawal and the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC). To get the most benefit, pay enough tuition out of pocket to qualify for the credit, then use 529 funds for the rest.
6. Plan for After College Too
If your grandchild receives scholarships or finishes school with leftover funds, there are ways to use that money without penalties.
Scholarship Exception: If the student gets scholarships, you can withdraw an equal amount without the 10% federal penalty. The penalty is waived so families aren’t penalized for saving when scholarships reduce their need to use 529 funds. However, you’ll still pay income tax on the earnings portion.
Student Loan Repayment: You can use up to $10,000 per beneficiary (and $10,000 per sibling) from a 529 to repay student loans.
Roth IRA Rollover: If the account has been open at least 15 years, you can roll up to $35,000 total in leftover funds into the beneficiary’s Roth IRA (within annual limits). Note that in California, the earnings portion is taxable and carries the 2.5% penalty.
7. How to Set It Up Right
Getting the details right can help you make the most of your gift while protecting both financial aid and family relationships.
Choose Who Should Own the Account: Decide based on which colleges are likely (FAFSA-only vs. CSS), how much control you want, and your estate goals.
Contribute the Right Way: Use e-gifting or checks to add money to a parent-owned 529 if CSS schools are likely, or open your own account if FAFSA-only schools dominate and you want control.
Keep Your Records: Save receipts, 1098-T forms, and housing contracts for room and board. This proves your withdrawals matched qualified expenses if the IRS ever asks.
Bringing It All Together
A 529 plan can be one of the most powerful ways for grandparents to help with college costs and pass on wealth. But to get the most out of it, you need to balance financial aid rules, tax rules, and estate planning goals.
At GW Financial, Inc., our Reno–Tahoe financial planning firm works with Nevada and California families to build college funding strategies that fit their big-picture financial plan.
If you’d like to see how comprehensive financial planning that includes college funding strategies could work for your family, schedule a free getting-acquainted call.
Yours in planning, always,
Julie Bray
Your Family's College and Retirement Champion
GW Financial, Inc.
This content is developed from sources believed to be providing accurate information and is provided by GW Financial, Inc. It is not intended to be used as investment, tax, or legal advice. The information presented is for general education and informational purposes only and should not be construed as a solicitation or recommendation. Please consult with a qualified professional regarding your specific circumstances.
