Broker Check
What Should Grandparents Know About 529 Savings Accounts?

What Should Grandparents Know About 529 Savings Accounts?

July 18, 2023

What Should Grandparents Know About 529 Savings Accounts?

Grandparents can often find themselves in a better financial position to save for their grandchildren's education than their own children are. The parents of prospective students may still be contending with competing priorities like their own student loans, high-interest credit card debt, or a hefty mortgage.

One way to help save for a grandchild's college education is by contributing money to a 529 savings account, an account where funds can be saved or invested and later withdrawn to be used exclusively for college-related expenses.1 What else should grandparents know about 529 college savings accounts? Continue reading to learn why this could be a sensible financial strategy.

Grandparent-Held 529 Accounts Won't Increase the Expected Family Contribution

Every family who fills out the Free Application for Federal Student Aid (FAFSA) receives an "expected family contribution" (EFC) calculation. The EFC is designed to measure how much the family can afford to pay per year for the child's college education; the lower the EFC, the more need-based aid may be available.

While parent-held 529 college savings accounts will count as an asset for EFC purposes, grandparent-held 529 accounts don't; this may allow the child to be eligible for more financial aid than they would be if the account were held by a parent.

Additionally, beginning with the 2024-25 award year, the EFC is being modified and renamed to the "Student Aid Index," or SAI. Under the SAI, funds withdrawn from a non-parent-owned 529 account will no longer be included in the "income test" portion of the expected family contribution. This means that students will no longer have 50 percent of their grandparent-owned 529 distributions counted as income.2

Under the current rules, if a grandparent withdrew $20,000 from a 529, the student's aid award would be decreased by up to $10,000. After December 31, 2023, students will no longer experience any decrease in their aid awards, no matter how much they're receiving in grandparent-owned 529 benefits. Some schools may still have their own rules for grandparent-owned 529 assets, but under the FAFSA, these accounts (and distributions from them) are neither considered assets nor income.

An Income Tax Deduction May Be Available

More than 30 states and the District of Columbia offer a state income tax deduction or credit for contributions to a 529 account (even one owned by someone else, such as the child's parent).3

This means that if a grandparent contributes $5,000 to their grandchild's 529 in a given tax year, they can receive a tax credit of anywhere from a few hundred dollars to $1,000 or more, depending on the state's tax treatment. For those looking to reduce their tax rate while helping the next generation, contributing to a 529 can be a good means to do so.

Generally, the taxpayer is required to contribute to their own state's 529 plan to qualify for favorable tax treatment; however, nine states (Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania) offer tax benefits for contributions to any state's 529 plan.

529 Plans are Flexible

One relative disadvantage of 529 plans is that they can only be used for educational expenses—similar to how a Health Savings Account can only be used for healthcare expenses. But even if a 529 beneficiary opts out of college, that doesn't mean these funds are wasted. Grandparents can easily designate an additional (or substitute) beneficiary and use these funds to pay for that person's educational expenses instead.

The same principle holds if the first beneficiary doesn't use all the funds in their 529. Any leftover funds can be directed to other family members simply by adding them as a

beneficiary. Grandparents may opt to simply contribute funds to one general 529, adding grandchildren as beneficiaries shortly before they begin college.


1 “How do grandparent-owned 529 college plans affect financial aid eligibility?” Fastweb,

2 “As FAFSA rules change, more grandparents may save in 529 plans,” Putnam,

3 “How much is your state’s 529 plan tax deduction really worth?” Saving for College,´╗┐

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any 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 qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

LPL Tracking #1-05373225