Ask Liz Weston

Get smart with your money

529 accounts

Q&A: Grandparent’s generosity could affect financial aid

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Dear Liz: You wrote in a recent column that grandparents could pay tuition directly to a school, and it would not trigger a gift tax return. That’s true, but my daughters have told me — and two private, expensive, and not excessively generous universities have verified — that my paying $20,000 in tuition would decrease my grandchildren’s financial aid package by $10,000 to $20,000. I would appreciate your comments.

Answer: How about, “No good deed goes unpunished — at least at private, expensive and not excessively generous universities?”

The vast majority of colleges use the Free Application for Federal Student Aid or FAFSA to determine financial need. The FAFSA was revised a few years ago so that it no longer counts cash gifts from grandparents or other non-custodial relatives. The same is true for withdrawals from 529 college savings plans owned by non-custodial relatives. Before the change, such gifts and withdrawals would be counted as untaxed student income, which had a huge negative effect on financial aid. Now, the money has no impact at all — except at schools that haven’t adopted these changes.

About 200 private colleges and universities use an additional tool, the College Scholarship Service (CSS) Profile, which can still factor in help from grandparents and other relatives. Typically, though, the maximum reduction would be 50%, not dollar for dollar.

Q&A: What can be done with unused 529 funds?

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Dear Liz: My parents set up 529 college savings accounts for my niece and nephew. The accounts are now quite substantial. My nephew chose to go to community college for his freshman year, and seems to be leaning toward not continuing in college. If he chooses to go to a trade school instead of college, can the 529 funds be used for that? Or, if he decides not to pursue either college or trade school, what becomes of those funds in his 529 account? Can they be transferred to his sister (who may not need it due to the large amount in her own account)? Is there any ability for my parents to recoup the money? What are the available options?

Answer: College savings accounts can be used at any eligible post-secondary institution, including most trade and vocational schools. In addition, up to $35,000 of unused 529 funds can be rolled tax- and penalty-free into a Roth IRA for your nephew, subject to various rules. If your nephew had student loans, up to $10,000 could be used to pay those, as well.

Your parents have many other options for unused funds. They can change the beneficiary to your niece, or any other eligible family member (which can include the original beneficiary’s spouse, children, siblings, nieces, nephews, cousins, in-laws, or parents). In addition to college expenses, 529 withdrawals can pay for up to $10,000 in annual expenses for tuition at elementary and secondary schools.

Account owners can even change the beneficiary to themselves, although they would need to incur expenses at an eligible institution to get tax-free withdrawals.

Finally, your parents could simply withdraw the money and owe income tax on the earnings plus a 10% federal penalty.

That should probably be a last resort, though. Since there’s no deadline to use the money, it can be left alone to grow for the future. Your nephew may want more education later, or your niece’s education could be more expensive than expected. Even if they don’t use the money, either or both of them may someday have kids who could use the money for their schooling.

Q&A: “Superfunding” a 529 account requires filing gift tax returns

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Dear Liz: You wrote that people could contribute up to five times the annual gift tax exclusion to a 529 college savings plan without having to file a gift tax return. People can contribute that much without the gift reducing their lifetime gift and estate tax exemption amounts, but they must file annual gift tax returns to report the gift.

Answer: To recap, few people will ever have to pay gift taxes, but gifts over the annual exclusion amount (which is $19,000 in 2026) usually require filing a gift tax return. Gift taxes aren’t owed until the amounts in excess of the annual exclusion total more than the giver’s lifetime gift and estate tax exemption amount (which in 2026 is $15 million).

Generous givers can “superfund” a 529 college savings plan by contributing up to five years’ worth of annual exemption amounts at once. In 2026, that would be $95,000. To keep the gift from counting against your lifetime limit, however, you must file gift tax returns annually to indicate the gift is to be spread over multiple years.

It’s also important to know that any other gifts you make to the same beneficiary during the five-year period will reduce the allowance for 529 gifting. And if the giver dies during the five-year period, some of the gift will be added back into their estate.

There are other rules that apply to superfunding a 529, so anyone considering this option should discuss their situation with a tax pro and likely will want to consult an estate planning attorney as well.

Q&A: How do you set up a savings account for a grandchild who lives overseas?

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Dear Liz: My son lives overseas. He just became a father. He plans to apply for U.S. citizenship for his dependent as an American born abroad. We would like to help save for our new granddaughter’s future. There are 529 accounts here.

Can he set up an account like that if he gets a Social Security number? Are there other options besides a 529 account for children born abroad?

Answer: If your son is a U.S. citizen and the child has a Social Security number or Individual Taxpayer Identification Number (ITIN), then he can open and contribute to a 529 plan benefiting the child.

So can you, and it may be even more beneficial for you to do so. Grandparent-owned 529 accounts, and distributions from those accounts, aren’t counted in federal financial aid calculations.

There are other options for saving for college, including regular savings or investment accounts, but 529s allow money to grow tax-deferred, and withdrawals are tax-free when used for qualifying educational expenses. That’s a significant advantage.

The money can be used at any school eligible to participate in a student aid program administered by the U.S. Department of Education, which includes the vast majority of U.S. colleges and many abroad. In addition, up to $10,000 annually can be used to pay tuition at elementary or secondary public, private or religious schools. Any unused money can be transferred to another family member. Plus, starting in 2024, up to $35,000 can be used to fund a Roth IRA.

Q&A: Using 529 accounts on groceries

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Dear Liz: You said 529 accounts could not be used for groceries. I searched on the internet and found that students can use 529 money to purchase meals off campus and buy groceries. Which is correct?

Answer: The original letter writer’s child lived on campus, so the amount the family can withdraw tax free from the 529 account is limited to what they spent on a campus meal plan. Grocery runs and restaurant meals aren’t covered.

Once the child moves off campus, the family can use the college’s official “cost of attendance” figures to determine the maximum they can withdraw tax free to pay for food. The child should keep all receipts as proof to back up the withdrawal.

Please be careful about assuming that the results of any internet search are reliable, especially if artificial intelligence is involved in creating — or inventing — the answer. Tax law can be particularly tricky to interpret, which is why I rely on tax experts such as Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, who helped with the original answer.