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529 plans

Q&A: Should grandparents open their own 529 plans?

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Dear Liz: My two grandchildren are in middle school and are expected to attend college. I’d like to contribute to 529 plans for them, possibly making five years’ worth of contributions at once. Should I contribute to the plans their parents have established, or open separate 529s so I can maintain control? I’m 86 and live in California; my grandchildren live in Oregon. What would you suggest?

Answer: As you know, 529 college savings plans allow you to contribute up to five times the annual gift tax exclusion limit in one year and treat the contribution as if it were made over five years. Since the annual limit in 2026 is $19,000, you could contribute up to $95,000 per child this year without reducing your lifetime gift-and-estate tax exemption. This “superfunding” is allowed whether you set up the accounts yourself or contribute directly to the already-established ones.

To be clear, the five-year rule doesn’t offer a direct tax break to you. But if you’re concerned about estate taxes, the five-year election can get a chunk of money out of your estate. Keep in mind that most people don’t have to worry about estate taxes, as the current lifetime limit is $15 million per person.

You’ll need to file IRS Form 709 to make this election. If you make other financial gifts to the grandkids during the five-year period, you must file gift tax returns to report those amounts to the IRS. And if you die before the end of the five-year period, the portion of the 529 contributions attributable to the years after your death will be added back to your estate. Your estate planning attorney can offer further advice.

If you’re not worried about estate taxes but you’re certain you won’t need the money yourself, you might still make a large contribution now to get the money growing tax-free for your grandchildren’s educations. Or you can simply make annual contributions and either keep them under the annual gift tax exclusion limit or be ready to file gift tax returns if you go over the limit. You won’t owe any gift taxes until your gifts over the annual exclusion exceed that massive lifetime limit.

Now, on to the question of whether to open your own accounts or contribute to the existing ones. Opening your own accounts for the grandkids means you’ll get to maintain control over the funds until they’re needed, plus the money isn’t considered in federal financial aid calculations. Only 529s owned by parents or students have to be reported in the Free Application for Federal Student Aid (FAFSA), although some colleges may use other formulas when awarding their own aid.

Contributing the money directly to the plans already established means the parents will control the funds. On the plus side, that relieves you of the burden of administering the accounts.

Oregon does offer an income-based tax credit for contributions that maxes out at $190 for single filers and $380 for married people filing jointly. Only Oregon taxpayers making the contribution to Oregon educational plans can get the credit, however. If you give the money to the parents rather than directly to the 529 plan, you’ll need to keep gift tax rules in mind since any gift over $19,000 per recipient would need to be reported.

Q&A: Can I open a Roth IRA for my minor grandchildren?

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Dear Liz: Where can I open a Roth IRA for my minor grandchildren?

Answer: Fidelity, Charles Schwab and Vanguard are among the large brokerages that offer custodial IRAs with no account minimums or fees.

Getting your grandkids started with saving for retirement is a great idea, but they’ll need to be earning their own money before you can contribute to an IRA or a Roth IRA for them. You can match whatever taxable income they receive from a job or self-employment up to the annual contribution limit, which is $7,500 in 2026. You’ll want to keep copies of the tax returns showing their income in case you’re ever audited.

If the minor doesn’t have taxable income, you could consider contributing to a Trump account. That requires filling out IRS Form 4547, but only certain people in a certain order are allowed to fill out the form. For example, if the children have a legal guardian, that person fills out the form. If there’s no legal guardian but the child has a parent, the parent fills out the form. If there is no parent, an adult sibling can fill out the form. Only if there is no legal guardian, parent, or adult sibling is a grandparent allowed to fill out the form. Once the account is established, up to $5,000 per year per child can be contributed.

That’s only the start of the many complicated requirements surrounding these accounts, so seek a tax pro’s advice before proceeding.

Keep in mind that with Trump accounts, the money is turned over to the child at 18, while custodial accounts must be turned over by the age of majority (typically either age 18 or 21, depending on the state). If you want to maintain control of the money for longer, consider funding a 529 college savings account. The contribution limits are much higher, the money is tax-free when used for qualified education expenses, and up to $35,000 can eventually be rolled over to a Roth IRA.

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: How to help grandchildren pay for college

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Dear Liz: What is the best way for us to contribute to our grandchild’s college expenses? I believe federal financial aid formulas no longer count grandparents’ cash or 529 contributions. Would direct cash to the student (who is responsible) or a 529 be the most beneficial to the student or us?

Answer: If the grandchild is already in college, then cash contributions may make the most sense. The tax benefits of a 529 plan at this point would be minimal, and you’d face some restrictions in what expenses qualify.

Keep in mind, though, that you may need to file a gift tax return if you give more than the annual exclusion amount, which in 2026 is $19,000 per recipient. You won’t actually have to pay gift taxes until the amounts you give away over that annual exclusion total more than your lifetime gift and estate tax exclusion amount, which in 2026 is $15 million per person.

Any amount you pay directly to the college for tuition expenses isn’t counted toward the gift tax exclusion. (The same is true for any medical expenses you pay on behalf of someone else, as long as the payments are made directly to the medical provider.) In other words, there’s no limit on how much tuition you can pay, as long as you pay the college directly.

If college is still many years away, then 529 college savings plans are often the best option.

These plans, administered by the states, allow contributions to be invested and grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses, including tuition, room and board, books and supplies, computers and related equipment and repayment of student loans.

Qualified education expenses do not include transportation costs, insurance payments or room and board above what school housing and meal plans would cost.

There’s no federal tax deduction for contributions to 529 college savings plans, although many states offer tax breaks (California and Oregon are among the states that don’t offer such incentives).

The tax breaks typically apply only if you contribute to that state’s plan, but you’re allowed to contribute to any state’s plan and use the money at nearly all accredited two-year, four-year, and graduate schools in the U.S. and many schools abroad.

Morningstar rates each plan annually.

For the wealthy, 529 plans have another benefit: up to five years’ worth of annual exclusion amounts can be contributed at once, without having to file a gift tax return. In 2026, that means you could contribute up to $95,000 per recipient.

In the past, 529 plan assets had only a small impact on financial aid, but distributions were another story. Money distributed from a grandparent-owned account was treated as untaxed income to the student, which could reduce financial aid by up to 50%.

Today’s Free Application for Federal Student Aid (FAFSA) no longer counts such distributions or any cash contributions from people other than the child’s parents. The formula also doesn’t count 529 plans owned by people other than the parents.

Such plans are still counted by the CSS Profile, which is used by about 200 private colleges, and some of the schools also count distributions. If your grandchild attends one of these schools and receives financial aid, check with the school’s financial aid office about how your generosity could affect their aid package.

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.

Is it time to switch your college savings plan?

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College savings plans are a great way to save for education. But not all college savings plans are great.

Most state-sponsored 529 college savings plans, which allow you to invest in a tax-advantaged account for future education costs, have improved significantly in recent years, says Madeline Hume, analyst for multi-asset and alternative strategies at investment research firm Morningstar. Plans have lowered fees, improved investment options and smoothed investment “glide paths” to reduce risk.

But not every plan is keeping up. In my latest for the Associated Press, which plans have been downgraded and new ones to consider.