Broker Check

529 Plans Owned by Grandparents

August 16, 2023

The 529 college savings plan has been an attractive savings vehicle for higher education expenses since its inception in 1996. However, as with most investment accounts, there are pros and cons to using these accounts. Fortunately, there have been several changes recently that address some of the shortcomings of 529 plans, making them even more attractive savings vehicles. This includes a recent change to how 529 plan ownership may impact student financial aid.

One of these changes impacts 529 plans owned by grandparents. 529 plans can be very useful gifting tools for grandparents for many reasons including: saving for a specific goal for the grandchild, tax-free benefits for qualified educational expenses, and exclusion from the taxable estate in the future.

In the past, qualified distributions from 529 plans that are owned by the student’s grandparent (and other relatives besides the parents) used to negatively affect The Free Application for Federal Student Aid (FAFSA) eligibility for the grandchild, requiring advanced planning and timing of distributions from the plan based on the student’s financial aid needs.  This sometimes complicated the planning when trying to coordinate 529 distributions from both the parents and grandparents or other relatives.

Fortunately, effective for the school year 2024-2025, qualified distributions from 529 plans owned by relatives other than the parents will no longer negatively affect financial aid eligibility, therefore making it easier for other family members to establish and fund 529 plans as gifts for the student.