Leaving a Legacy With 529 College Savings Plans: A Great Path for Grandparents

Contributing to your grandchild’s education can be a valuable contribution to your family’s future, both by improving your grandchild’s future earning potential and by helping to relieve a key worry for your adult children. T. Rowe Price recommends saving enough as a family to cover at least 50% of the published cost of college, with the rest of the cost covered by grants and scholarships, as well as student loans, student income, and other support. With the cost of higher education continuing to rise, getting an early start on investing can make today’s contributions more valuable when it’s time for your grandchildren to use them.

While there are many ways to save and pay for college, some have more advantages than others. Using common investment vehicles such as taxable savings or brokerage accounts for college savings could cause you to essentially leave money on the table in the form of tax advantages offered by other options. For example, when you invest in a 529 plan, the savings grow tax-deferred. Earnings from a 529 account are also tax-free at the federal level when used toward qualified education expenses. The potential tax savings could be substantial over time, particularly if you are in a higher tax bracket.

Whether you open a new 529 account for your grandchild or contribute to an existing account, you may reap other benefits as well. (See “How 529s Compare With Other Saving and Investment Alternatives.”) For example, many states allow you to deduct some of your 529 contributions from your state income tax bill. Some states also provide incentives to invest in these plans, such as matching grants or programs that fund new 529 plan accounts with an initial contribution.

Starting in the 2024–2025 school year, distributions from a grandparent-owned 529 account will no longer count as income to the student on the Free Application for Federal Student Aid (FAFSA). This change means that, in most cases, funding a grandchild’s education through a 529 account will no longer have any bearing on their eligibility for financial aid that is based on the FAFSA.

While 529 plans allow you to earmark funds for educational purposes, they also provide the flexibility to support your family’s future in a variety of circumstances.

In addition, qualified educational expenses include a wide range of costs beyond college tuition. For example, you can use the funds to support attendance at certified apprenticeship programs and technical or trade schools. If your grandchild chooses not to pursue higher education or earns substantial college scholarships, you can transfer the assets in their 529 account to another family member without penalty. Something else to consider, especially if you and/or your grandchild’s parents are on the path of saving to fund both K–12 and college education: You can use the money saved in your 529 account for tuition expenses of up to $10,000 each year at private, public, and religious elementary or secondary schools.⁴

Starting in 2024, you will be able to roll over funds from a 529 plan that has been open for at least 15 years to a Roth IRA for the beneficiary. This transfer will be subject to various rules, including, but not limited to, the regular annual IRA contribution limit, plus a $35,000 lifetime maximum. This alternative allows you to help your grandchildren get a jump on preparing for retirement if they don’t need help funding their education.

You also have opportunities to use these funds yourself if your grandchildren don’t need them. You can use the funds to further your own education, for example, by taking college courses for fun, even if you don’t pursue a specific certificate or degree. If you remain the account’s owner, you can also pull back some or all of the assets in the 529 plan for personal use during retirement, though taxes and penalties will apply if you do so.

When you contribute funds to a grandchild’s 529 account, those contributions are (with some exceptions) removed from your taxable estate and considered a gift to your grandchild. This tax treatment means 529 plans can be a valuable addition to an estate plan.

The ability to use gift tax averaging means it’s possible to “superfund” a child’s 529 account with a one-time deposit of up to $85,000 per child in 2023 (or $170,000 if you are a married couple filing jointly) without incurring gift taxes, provided that additional gifts are not made to the child during the five-year period following the deposit. Alternatively, each grandparent could take advantage of the $17,000 gift maximum (per recipient, per year) to contribute annually to a grandchild’s 529 account under the gift tax exclusion. Both approaches offer a tax-advantaged opportunity to pass a portion of your estate on to future generations in a meaningful way.

Investing in your grandchildren’s education can be a fulfilling way to provide a substantial legacy for your family. It’s never too soon to consider contributing to a grandchild’s education and giving a gift that will last a lifetime. Whatever decision you make, it’s always wise to consult with a tax and estate planning professional before you invest.

Be sure to review any 529 college savings plan offered by your home state or your beneficiary’s home state, as there may be state tax or other state benefits, such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s plan. Please note that the plan’s disclosure document includes investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.