529 plans and more: Smart strategies to help pay for your grandchild’s college education

Grandparents may feel it’s important to leave a legacy of shared values, hopes, and wisdom for future generations. One way you can achieve these goals is to support your grandchildren’s educational aspirations. This support can offer benefits that are both practical (the cost of higher education is substantial) and emotional (you can contribute to your family’s future success). Grandparents gain satisfaction from seeing their hard work benefit future generations, while parents and the students themselves get some relief from the burden of paying for college.

One option that may offer particular advantages for grandparents is a 529 college savings plan. These accounts are typically invested in a diversified portfolio with potential tax‑advantaged growth. Recent legislative changes have made 529s an even better tool for many grandparents. If you have the means to support a grandchild’s education, these accounts are well worth considering.

It’s important to integrate college savings plans into your broader financial plans, including your estate planning needs.

When it comes to saving for college, you have several options available to you. These options include funding a 529 college savings plan, putting money into a custodial UGMA/UTMA account,¹ or opening a taxable savings or brokerage account earmarked for funding education, among others. To determine which college savings strategy could best fit your goals, consider how each is structured. For instance, you might think about factors including:

After considering your preferences, think about how you’ll fund this goal. Your options include:

The right choice for you likely depends on your financial situation. Be sure to make decisions about saving for a grandchild’s education in the context of your other financial goals.

Grandparents have many vehicles available to save for college, including:

Accounts specifically for the benefit of the children:

Additional ways to fund education:

Both 529 plans and UGMA/UTMA accounts offer some degree of control for grandparents. Here’s how these accounts differ in several important ways:

529 college savings plans

529 plans are flexible savings vehicles that are typically invested in diversified portfolios, often based on the beneficiary’s projected college attendance date. They have the potential for significant tax advantages and may provide greater growth potential than regular savings accounts.² Some 529 plans also offer cash incentive programs that can help boost your savings on behalf of your grandchild.

With a 529 plan, grandparents have the option of opening their own accounts or contributing to an account that the parents have already established. When you are the account owner, you maintain control of the assets for the life of the account and can ensure that the money will be used for its intended education‑related purpose.

Assets in a 529 account, including any growth over time, can be withdrawn tax‑free for a range of education-related expenses, including tuition and room and board, among others, at eligible schools across the U.S. and internationally. These funds can also be used for trade school or apprenticeships. You can even take distributions of up to $10,000 per beneficiary each year for K–12 tuition at private, public, and religious schools.³

Additionally, as of the 2024–2025 school year, distributions from a grandparent‑owned 529 account no longer count as income to the student on the Free Application for Federal Student Aid (FAFSA^®). The value of parent-owned 529 accounts must be reported on the FAFSA. However, those assets are treated as parental assets instead of less favorable student assets, and grandparent-owned accounts are not reported.

If something changes, you can access the money; however, there may be taxes and penalties.⁴

UGMA/UTMA accounts

These custodial accounts allow you to give money to a grandchild and maintain control over how those assets are invested and spent until the child reaches the age of majority—typically 18 or 21, depending on the state where your grandchild lives. Gifts to an UGMA/UTMA account are irrevocable, and the funds in the account must be spent to benefit the child.

When the custodianship terminates, the assets must be turned over to the named beneficiary, who can then use the funds as they see fit. Withdrawals, along with investment income and capital gains, from an UGMA/UTMA account above a certain level are taxed at either the child’s or the parent’s rate. In addition, student assets in an UGMA/UTMA account are likely to reduce eligibility for need‑based financial aid.

After deciding to support your grandchild’s college education, you’ll want to be sure to make the most of your money. The following strategies may help:

1. Start early. Setting money aside when your grandchildren are young provides time for those assets to benefit from tax‑advantaged potential growth. Using an investment account, such as a 529 account, rather than a savings account may provide more growth potential over the long run—an important factor, given that T. Rowe Price recommends saving enough to cover 50% of the published cost of college.

2. Be tax savvy. Any growth in a 529 account is tax‑free for qualified withdrawals. Unlike a Roth IRA, 529 accounts do not have income restrictions. In addition, many states let you deduct some of your 529 contributions when calculating your state tax bill.

3. Stay flexible. If your original beneficiary decides not to pursue higher education or receives substantial college scholarships, you can easily transfer the assets in their 529 account to another family member without penalty. What’s more, if your own retirement plans need shoring up, you can pull back some or all of the 529 assets as long as you remain the account’s owner. Note that taxes and penalties will apply.

You are now also able to roll over funds from a 529 plan that has been open for at least 15 years to a Roth IRA for the beneficiary. This transfer will be subject to various rules, including, but not limited to, the regular annual IRA contribution limit, plus a $35,000 lifetime maximum. This alternative allows you to help your grandchildren get a jump on preparing for retirement if they don’t need help funding their education.

Be sure to review any 529 college savings plan offered by your home state or your beneficiary’s home state, as there may be 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 plan. Please note that the plan’s disclosure document includes investment objectives, risks, fees, charges and expenses, and other information that you should read and consider carefully before investing.