529 in a Grandparent’s Name: FAFSA, Gift Tax, and Control

A 529 plan in a grandparent’s name is a college savings account that you own and control while naming a grandchild as the beneficiary. The money grows tax-deferred, withdrawals for qualified education costs come out tax-free, and since the 2024–2025 academic year the distributions no longer reduce your grandchild’s federal financial aid. You keep the right to change the beneficiary, pull the money back (with tax and penalty on the earnings), or roll leftover funds into the grandchild’s Roth IRA. The main things to watch are how private colleges treat the account, what counts as a qualified expense, and what happens to the account if you die without naming a successor owner.

How Financial Aid Treats a Grandparent-Owned 529 Now

This used to be the biggest reason to avoid grandparent ownership. Distributions counted as untaxed income to the student on the FAFSA, and student income was assessed at a rate that could cut aid by up to 50 cents on the dollar. That rule is gone.

Starting with the 2024–2025 academic year, the redesigned FAFSA pulls income data directly from IRS tax returns through an automated data exchange. Qualified 529 distributions are not reported as income on federal tax returns, so they no longer show up on the FAFSA regardless of who owns the account.¹ The balance of a grandparent-owned 529 was never a reportable FAFSA asset either, so now neither the account nor the withdrawals affect the Student Aid Index.

A parent-owned 529, by contrast, has to be reported as a parent investment asset on the FAFSA.² Parent assets reduce aid at a modest rate; grandparent-owned accounts avoid even that. For federal aid purposes, grandparent ownership is now slightly more favorable than parent ownership.

Private Colleges and the CSS Profile

The federal change does not reach every school. Many private colleges use the CSS Profile, administered by the College Board, to award their own institutional aid, and the CSS Profile asks families to list all 529 accounts naming the student as beneficiary, including those owned by grandparents.³ Each school decides how to weight that information. If your grandchild is targeting private colleges, call those financial aid offices before deciding how to structure the account.

Gift Tax and the Five-Year Election

Every contribution to a grandchild’s 529 is a gift for federal tax purposes. You can give up to the annual gift tax exclusion per beneficiary without owing tax or using any of your lifetime exemption. For 2026, the exclusion is $19,000 per beneficiary, and a married couple can combine their exclusions to give $38,000 per grandchild per year.⁴

Anything above the annual exclusion goes on IRS Form 709, the gift tax return. Filing does not mean paying. The excess just reduces your lifetime gift and estate tax exemption, which is $15,000,000 per person for 2026.⁵ Most grandparents never approach that ceiling.

529 plans also carry a front-loading option that no other gifting vehicle has. You can contribute up to five years of annual exclusions at once and treat the gift as spread evenly across those five years.⁶ For 2026, that is up to $95,000 from one grandparent or $190,000 from a couple, with no gift tax, as long as neither spouse makes additional gifts to the same grandchild during the five-year window. You file Form 709 the year you contribute and in each of the next four years.

One caveat for larger estates: if you die before the five years are up, the portion of the gift allocated to the remaining years comes back into your taxable estate. A $95,000 contribution with death in year three would pull $38,000 back in. The 2026 exemption is high enough that this rarely creates an actual tax bill, but it matters if your estate is already near the limit.

State Income Tax Deductions

More than 30 states and the District of Columbia offer a state income tax deduction or credit for 529 contributions, and the benefit generally goes to the account owner. As the grandparent-owner, you claim it on your own state return. Deduction sizes vary widely by state. Some states restrict the deduction to contributions made to their own in-state plan, so a grandparent in one of those states who picks an out-of-state plan loses the benefit. Check your state’s specific rules before choosing a plan.

What You Can Spend the Money On Tax-Free

Withdrawals keep their tax-free status only if the money goes to a qualified education expense. Qualified uses include:

Tuition, fees, books, supplies, room and board, and computer equipment during enrollment at an eligible college.⁷
Up to $10,000 per year for K–12 tuition at a public, private, or religious school.⁷
Up to $10,000 over the beneficiary’s lifetime to pay down qualified student loans. The same $10,000 limit applies separately to each sibling of the beneficiary.⁶
Fees, textbooks, supplies, and required equipment for apprenticeships registered with the U.S. Department of Labor.

Pulling money for anything that doesn’t qualify triggers income tax on the earnings plus a 10% federal penalty on the earnings. Your original contributions come back tax-free because they went in with after-tax dollars. Some states also recapture any deduction they gave you on the way in.⁶ The 10% penalty does not apply in a few situations, including the beneficiary’s death or disability, a tax-free scholarship up to the scholarship amount, or attendance at a U.S. military academy.

What Happens to Money the Grandchild Doesn’t Use

You have three main options for leftover funds.

The first is a Roth IRA rollover for the grandchild, created by SECURE 2.0 and available starting in 2024. You can move unused 529 money directly into a Roth IRA in the beneficiary’s name, tax-free and penalty-free, subject to limits:

The 529 must have been open more than 15 years.
Contributions made in the last five years, along with their earnings, are not eligible.
Each year’s rollover cannot exceed that year’s Roth IRA contribution limit, which is $7,500 for 2026.⁸
Lifetime rollovers for any single beneficiary are capped at $35,000.

Normal Roth IRA income limits do not apply to these rollovers, which helps beneficiaries who earn too much to contribute to a Roth on their own.⁹ The 15-year clock is the practical hurdle. A 529 opened at birth will clear it easily; one opened when the grandchild is already a teenager may not.

The second option is to change the beneficiary. You can switch to another eligible family member tax-free, as long as the new beneficiary is in the same generation as the old one or an older one.⁶ The IRS definition of family is broad and includes siblings, step-siblings, first cousins, nieces, nephews, and their spouses. Switching to a younger generation, such as a great-grandchild, can trigger generation-skipping transfer tax.

The third option is simply to take the money back. You pay ordinary income tax on the earnings at your rate plus the 10% penalty on the earnings. Your contributions come out untaxed.

Keeping Control, and Not Losing It

You own the account. You decide how it is invested, when distributions happen, and who the beneficiary is. The grandchild has no authority over the account and cannot withdraw funds. For grandparents who want to make sure the money goes to education and not something else, this control is the single biggest reason to hold the account yourself rather than hand it to the parent.

The risk sits on the back end. If you die without naming a successor owner, the account may pass through your will or, with no will, through state intestacy rules. Either path can mean probate, which delays access and, in a worst case, can lead to the account being liquidated. A liquidation triggers income tax on the earnings plus the 10% penalty on any portion not used for qualified expenses. The fix is a one-page successor owner form from the plan administrator, usually naming the grandchild’s parent. Fill it out when you open the account.

When to Transfer the Account to the Parent

Before the FAFSA overhaul, moving the 529 from grandparent to parent ownership was a common move to avoid the student income penalty. That reason is largely gone. One scenario still favors a transfer: if the grandchild is applying to private colleges that use the CSS Profile, converting to parent ownership means the account appears as a standard parent asset rather than a grandparent-held account the school might treat differently. The transfer runs through the plan administrator and carries no federal tax consequence.

The cost is control. Once the parent owns the account, they make every decision about investments, distributions, and beneficiary changes. For most grandparents, keeping ownership and coordinating with the parents is the better path. Transfer only when a specific school’s aid policy makes it worth giving up that control, and confirm with the financial aid office first that the change would actually improve the award.

1
Vanguard. Understanding the 529 Plan Grandparent Loophole
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Federal Student Aid. How Do I Answer the Current Net Worth of Investments, Including Real Estate Question
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MEFA. What Do I Include on the CSS Profile
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Internal Revenue Service. Frequently Asked Questions on Gift Taxes
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Internal Revenue Service. What’s New – Estate and Gift Tax
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Office of the Law Revision Counsel. 26 USC 529 – Qualified Tuition Programs
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Internal Revenue Service. 529 Plans – Questions and Answers
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Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
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Smart529. Roll Over Unused 529 Funds to Roth IRA Accounts