Planning to open a 529 for a grandchild? Here’s what you need to know

529_Article_Grandchild_1a_mm.jpgAs college costs increase, many grandparents are stepping in to help. Saving for a grandchild’s education is a meaningful gift that can make a lasting impact, but there are considerations to be mindful of.

If you’re planning to invest in a grandchild’s 529 plan, there are 2 ways to contribute. You can:

  • Add money to an existing account. Often the child’s parents open the account and give others the option of adding to it.
  • Open a new account and stay in control as the account owner.

Which option is right for you? There are important issues to consider:

  1. Control over the account.
  2. Tax benefits.

1. Protect your future needs and control the assets

529 accounts give the account owner control over the assets. That means:

  • You can make sure the money will be used for education.
  • You can change the beneficiary. If one grandchild decides not to pursue his or her education, you can transfer the money to another grandchild.
  • You can take the money back. If your circumstances change and you need the money for other purposes, you can take it out of the account. Keep in mind you’d have to pay any income taxes owed. You’d also have to pay a 10% penalty on the earnings (but not the contributions).

The bottom line: If flexibility and control are important to you, it may be worth opening an account as the owner.

Note: If there’s a chance you’ll need to apply for Medicaid in the future, it might be better if you’re not the account owner. The money in the 529 account could be considered an asset for Medicaid eligibility purposes. That means your state could require you to spend it before qualifying for Medicaid. If this is a concern for you, you may want to consult a financial advisor.

2. Take advantage of tax breaks

The biggest tax benefit of 529 plans goes to the student. Earnings on 529 investments are free from federal and state taxes as long as they’re used for qualified education expenses.*

Contributors can get some tax breaks as well:

State income tax deductions: In many states, if you’re the account owner, you can deduct contributions from your state income taxes. In some cases, this applies to any contributor to an account. Check with your state to find out if a tax deduction applies.

Gift tax exclusions. Whether or not you’re the account owner, a contribution is considered a gift to the beneficiary. As a gift, it qualifies for the 2025 $19,000 ($38,00 if married filling jointly) annual gift tax exclusion. If you want to contribute even more in one year, 529 plans allow you to “front-load” your gifts. That means if you make a contribution of up to $90,000, you can choose to treat the contribution as if it were made over a 5 calendar-year period for gift tax purposes. Note that if you do this, you won’t qualify for the exclusion again until the 5 years is up.**

State tax benefits for 529 plans

Give a lasting gift

Contributing to a 529 plan can give you a way to take an active role in your grandchild’s education. And you can feel confident you’re making a meaningful difference in your grandchild’s life.

 

*Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements. Please consult your tax advisor about your particular situation.

**Contributions of up to $10,000 are deductible annually from New York State taxable income for married couples filing jointly; single taxpayers can deduct up to $5,000 annually. New York State tax deductions may be subject to recapture in certain circumstances such as rollovers to another state's 529 plan, nonqualified withdrawals, withdrawals used to pay elementary or secondary school tuition as described in the Disclosure Booklet and Tuition Savings Agreement. State tax benefits for non-resident New York taxpayers may vary. Please consult your tax advisor about your particular situation.