Can a Grandparent Contribute to a Parent-owned 529 Plan?

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March 9, 2023

Yes, 529 plans accept third-party contributions, so a grandparent may contribute to a grandchild’s 529 plan account, regardless of who owns the account.

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 is an entirely acceptable consequence.

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. 529 plan contributions can also be made with Gift of College gift cards, which are available to purchase online or at over 3,000 retailers.

It’s important to understand the potential gift-tax consequences of 529 plan contributions. 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. A generation-skipping transfer tax may be due if the beneficiary is your grandchild.

For large contributions (over $17,000) you may elect on IRS Form 709, the gift-tax return, to treat up to $85,000 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 $17,000 annual gift exclusion. The annual gift tax exclusion amount is per donor per beneficiary, so couples may contribute up to $34,000 per year to each beneficiary without gift-tax consequences, or up to $170,000 with 5-year gift-tax averaging.

If your total gifts (including 529 plan contributions and other gifts) to an individual exceed $17,000 in 2023, the excess amount will count against your $12.92 million lifetime estate tax and gift tax exemption and will have to be reported on IRS Form 709 when you file your taxes. You will be subject to estate and gift tax only if the total amount of your gifts is more than $12.92 million.

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 of these states, residents may claim the income tax benefit only when they use an in-state 529 plan. However, Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio and Pennsylvania offer a state income tax benefit for contributions to any 529 plan.

In 10 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.

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