529 Plans for Grandparents: Education Gifts and Current Rules
A grandparent-owned 529 can support education while the owner retains control of the account. Federal financial-aid changes and California tax differences deserve a careful review.
October 12, 2026
A grandparent who wants to help with education has several decisions to make: how much to contribute, who should own the account, and how the gift fits the rest of the family's plans.
A 529 account allows the owner to direct withdrawals and generally change the beneficiary within applicable rules. Its tax benefits depend on how the funds are used. California does not follow every federal expansion, so the state treatment needs its own review.
Understand the Current Financial-Aid Treatment
Beginning with the 2024-25 FAFSA, distributions from a grandparent-owned 529 are no longer reported as student untaxed income. The grandparent-owned account is also outside the parent and student asset categories on that form.
This addresses an earlier concern about using a grandparent's account while a student is applying for federal aid. It does not guarantee eligibility or an award.
Some colleges use additional applications, including the CSS Profile, for institutional assistance. Ask the school's financial-aid office how it treats outside education support before assuming the FAFSA result applies to every award.
Match Withdrawals to Eligible Expenses
Federal rules allow 529 funds to cover qualifying education costs, including eligible higher-education expenses. Other uses include qualifying registered apprenticeships and certain student-loan payments, with specific limits and conditions.
Federal K-12 rules have also expanded. For 2026, the annual federal limit for qualifying K-12 expenses is $20,000 per beneficiary across applicable accounts.
Keep records of expenses and withdrawals. Coordinate with parents and the student so the same expense is not used for incompatible tax benefits. Confirm both federal and California treatment before using the account for a new type of expense.
Review Unused Funds Before Taking Cash Out
Changing the beneficiary to an eligible family member may preserve education uses, although some changes can have gift or generation-skipping tax consequences.
Federal rules also permit certain direct 529-to-Roth IRA transfers for the beneficiary. Requirements include an account open for at least 15 years, a $35,000 lifetime limit, annual IRA limits and compensation requirements, and restrictions on recent contributions and earnings. Existing IRA contributions affect the available annual amount.
This is not an unrestricted transfer of the balance. Ask the plan and the IRA custodian to confirm eligibility and procedures.
For California taxpayers, current ScholarShare guidance states that a 529-to-Roth transfer is treated as a nonqualified withdrawal: the earnings portion is subject to state income tax and an additional 2.5% California tax. A federal tax benefit does not remove that state cost.
Consider How the Gift Affects Your Own Finances
Decide what you can contribute while retaining resources for retirement and unexpected expenses. You can make smaller contributions over time rather than committing a large amount immediately.
A special federal election can spread an eligible contribution over five years for gift-tax purposes. It requires appropriate reporting and affects other gifts during the period. If the donor dies during that period, estate inclusion rules may apply to a portion.
Have your tax advisor explain the election before making a large gift. Account ownership, beneficiary changes, and future withdrawals also deserve consideration in the estate plan.
Compare Plans and State Treatment
California offers no state income-tax deduction for 529 contributions. Compare fees, investment choices, and administration when selecting an account.
California generally provides favorable treatment for qualified higher-education withdrawals, but K-12 uses and Roth transfers receive different state treatment. Check current guidance for the intended withdrawal.
Nonqualified withdrawals generally create tax on earnings and may involve additional taxes, subject to exceptions. Keep the distinction between contributions and earnings clear when discussing the cost of taking money back.
What This Means For You
- Ask colleges about institutional aid as well as FAFSA.
- Confirm expenses and keep withdrawal records.
- Review California treatment before relying on a federal expansion.
- Discuss large contributions and unused balances with your tax advisor.
Thiesen Dueker's education-planning services can help you compare how an education gift fits your family's financial needs. Your advisor can also coordinate with your tax professional when contribution or withdrawal rules affect the choice.
Bring your intended gift and the student's likely education plans to that discussion.
To speak with Thiesen Dueker, visit thiesendueker.com or call (559) 448-8190.
Frequently Asked Questions
How does a grandparent-owned account affect FAFSA?
Current FAFSA treatment excludes a grandparent-owned 529 from parent and student assets and no longer reports its distributions as student untaxed income. Separate institutional-aid applications may use different rules.
Can unused money go to a Roth IRA?
An eligible direct transfer to the beneficiary's Roth IRA may qualify federally, subject to account-age, contribution, compensation, and other requirements. California currently taxes the earnings portion and imposes an additional state tax.
Does California provide a deduction for contributions?
California offers no state income-tax deduction for 529 contributions. Compare investment options, fees, and account features when choosing a plan.
Sources
Important Disclosures
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any 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 qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This material was prepared for Thiesen Dueker's use.
Saving for education and helping children and grandchildren prepare for the years ahead.
Explore More Topics
Talk With an Advisor
To discuss how this applies to you, call (559) 448-8190.