Should 529 Plans Be Owned By Parents or Grandparents?

by Sarah Mouser, CFP®, CTS™, CES™

NOTE: This piece was written prior to the passage of the SECURE Act (December 20, 2019), which expanded the use of 529 plans. These changes could impact the strategies and suggestions below. We will provide updated content in the coming weeks. In the meantime, please contact your advisor if you have questions about 529 plan ownership.

With the price of higher education increasing nearly eight times faster than wages, saving and paying for college is a common concern for many families. While there are multiple ways to begin saving for educational expenses, 529 plans are the most common. These plans are tax-advantaged investment accounts specifically designed to encourage saving for future education costs. 529 plans offer an array of advantages, including possible tax deductions for contributions, tax-free growth if used for qualified education expenses, and flexibility to change the beneficiary of the account.

But when it comes to ownership of 529 plans, whose name should the 529 plan be in? Does it matter if the owner is a grandparent versus a parent?

Questions like these about 529 account ownership are extremely common. We recently received a question from a client regarding a 529 plan that they have for their grandchild. Director of Financial Planning Sarah Mouser, Cassaday & Company, Inc.’s expert on education planning, responded by addressing:

  • the difference in parent vs. Grandparent-owned plans,
  • when to maintain or transfer ownership,
  • tax implications associated with 529 plan ownership, and
  • the importance of succession planning for a 529 plan.

Question: I read an article in the Washington Post about grandparent-owned 529 plans and it sparked questions about the plans we own for our grandchildren. The article discussed how distributions from these plans may have a negative impact on financial aid eligibility. Can you clarify this for me? Is there a tax impact for changing the owner of these plans to parents? The article also talked about the importance of succession. What happens to these plans when I am no longer around?

Answer: Grandparent-owned 529 plans are treated differently than parent-owned 529 plans when completing the FAFSA (Free Application for Student Aid). Distributions made from a grandparent-owned 529 plan are considered income to the student. Parent-owned 529 plans, however, are not considered income to the student, but rather assets set aside for education. Because of this distinction, grandparent-owned 529 plans can reduce the amount of financial aid that a student is able to receive.

Before you consider transferring ownership of 529 plans from grandparents to parents, there are a few factors to consider:

#1 ) As grandparents, are you still making contributions to the 529 plan?

If the answer to this question is yes, we would not recommend transferring the entire account just yet. Contributions to 529 plans are tax deductible in 34 states. In order to claim the state deduction for the contribution, you must be the owner of the 529 plan.

If you live in a state that does not offer a tax benefit for 529 contributions, you may want to consider transferring the 529 plan to the parents so that when the time comes for the grandchild to apply for financial aid, you aren’t rushing to transfer ownership.

#2)  Do you plan on making distributions from the 529 plan to pay college expenses?

If the answer to this question is yes, then these plans should be transferred to parents prior to completing the FAFSA.

Distributions from grandparent-owned 529 plans will be considered income to the student and would therefore have a negative impact on their eligibility for aid. Even if distributions are made after the FAFSA is submitted, those distributions would have a negative impact when a student files for aid in subsequent years (students must annually re-apply for aid – it is not a one-time application).

If changing the ownership of 529 plans from grandparents to parents is recommended, there should not be any adverse tax consequences. The IRS allows one tax-free rollover per 12-month period for 529 plans with the same beneficiary. While no income taxes would be due, you may need to file a gift tax return depending on your situation. We would recommend consulting your tax advisors to determine if this is necessary.

Succession planning is also an important aspect of managing your 529 plans. When opening a 529 plan, most states require you to designate a contingent owner. If something were to happen to you, this person would step in to own and manage the 529 plan. If something happens to both the owner and contingent owner simultaneously, your estate plan would dictate next steps.

Education Planning is important to your holistic wealth management. Cassaday & Company, Inc. has developed a few resources that clients have found helpful when it comes to education planning:

If you have questions or would like more information, you can always contact your advisor or myself directly at We are always happy to talk to you about maximizing your opportunities for paying for college.



Important Disclosures: Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional. Non-qualifying distribution earnings are taxable and subject to a 10% tax penalty.


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