Yes, grandparents can contribute to parent-owned 529 plans. 529 plans accept third-party contributions, so a grandparent may contribute to a grandchild’s 529 plan account regardless of who owns the account.
Grandparents are often looking for ways to help contribute to a grandchild’s college savings and future education expenses, and making contributions to an existing 529 plan can be a good option.
The grandparent will no longer have access to the funds contributed to a grandchild’s parent-owned 529 plan account since they are not the 529 plan account owner, but for many grandparents, that’s fine.
Almost all 529 plans accept gift contributions by check, and some 529 plans offer gifting platforms that allow friends and family to make secure electronic deposits. Some also accept Gift of College gift cards, which are available to purchase online or at over 3,000 retailers. All 529 plans operate differently, so if you’re grandparent looking to make a gift contribution directly to your grandchild’s 529 account, talk to the account owner to understand how best to proceed.
Gift tax consequences
Understanding the potential gift tax consequences of 529 college savings plan contributions is essential. Whether you contribute to 529 plan accounts owned by you or to accounts owned by the parents or someone else, your contributions are a gift from you to the account beneficiary. Generally, gifts of less than $18,000 are tax-free and not subject to the gift tax. However, a generation-skipping transfer tax may be due if the beneficiary is your grandchild.
For contributions exceeding $18,000 in 2024 (previously, $17,000 in 2023), you may elect on IRS Form 709, the gift-tax return, to treat up to $90,000 of the contribution as made over a 5-year period. This 5-year gift-tax averaging allows you to front-load contributions into a 529 plan without exceeding the $18,000 annual gift exclusion. The annual gift tax exclusion amount is per donor per beneficiary, so couples may contribute up to $36,000 per year to each beneficiary without gift-tax consequences or up to $180,000 with 5-year gift-tax averaging.
For estate planning purposes, if your total gifts (including 529 plan contributions and other gifts) to an individual exceed $18,000 in 2024, the excess amount will count against your $13.61 million lifetime estate tax and gift tax exemption. It must be reported on IRS Form 709 when you file your taxes. You will be subject to estate and gift tax only if your gifts are more than $13.61 million.
State tax benefits
529 plan gift contributions may qualify for a state income tax benefit. Over 30 states provide residents with a state income tax deduction or income tax credit for at least some of their 529 plan contributions. In most states, residents may claim the income tax benefit only when using an in-state 529 plan. However, the following states offer a state income tax benefit for contributions to any 529 plan:
In seven states, only the 529 plan account owner is eligible to claim a state income tax deduction or income tax credit. Two of these states, Utah and Virginia, allow the 529 plan account owner to claim a state income tax benefit for 529 plan contributions made by a third party.
Financial aid implications
Another important consideration with any funds used to pay for college is how they’ll impact the student’s financial aid eligibility, primarily through the Free Application for Federal Student Aid (FAFSA).
Contributions by grandparents themselves do not have a direct impact on FAFSA. However, since the 529 is in the parent’s name, the overall value of the 529 plan generally counts as a parental asset on FAFSA. It may reduce a student’s aid package by up to a maximum of 5.64% of the asset’s value.
Starting on the 2024-25 FAFSA, grandparent-owned 529 college savings plan distributions are no longer reported and will not impact financial aid. With this in mind, grandparents may want to consider opening a 529 account for the benefit of their grandkids rather than contributing to the account of the student’s parent.
