For most grandparents, the best savings account for a grandchild's education is a 529 plan that you own yourself. A UTMA or UGMA custodial account suits gifts with no strings attached, a custodial Roth IRA suits a grandchild with a job, and a Trump account, open to family contributions since July 4, 2026, suits long-term savings of up to $5,000 a year (2026 and 2027) from everyone combined.
Each account has its own rules about who controls the money, how it can be spent and what tax is due. A wrong pick can cost thousands of dollars in tax, or hand an 18-year-old a check you meant for tuition. Many families start with birthday money sitting in a bank account that pays almost nothing. Under Internal Revenue Code Section 529, a qualified tuition program lets that same money grow free of federal income tax when it pays for education.
The Five Paths to Save: Understanding Your Federal Options
Five accounts have been around for years.
A 529 plan is a state-sponsored education account. You name your grandchild as beneficiary and keep control as the owner. Growth is free of federal income tax when it pays for qualified education costs.
A Coverdell Education Savings Account (ESA) works the same way on a smaller scale, with a low yearly cap that counts every contributor together. The Internal Revenue Service (IRS) explains how it caps contributions in its Topic 310 page. The balance must be paid out within 30 days after the beneficiary turns 30, unless the beneficiary has special needs.
UGMA and UTMA custodial accounts follow state law. Money you put in is an irrevocable gift, so you cannot take it back. A custodian manages it until the state's termination age, which is commonly 18 or 21 and can be as late as 25 in a few states.
A custodial Roth individual retirement account (IRA) holds retirement savings for a grandchild who earns money from a job.
A high-yield savings account in your own name is the simplest path. You keep full control. Rates vary by bank and change often, and the interest is taxable to you, the account owner, every year. Add your grandchild as a payable-on-death beneficiary so the money skips probate.
Two newer options sit beside these five: the Trump account for children under 18, and the ABLE account for a grandchild with a disability. Each has its own section below.
Section 529 Plans: The Powerhouse for Education Savings
You own a 529 and decide when money comes out. Federal law sets no annual contribution limit. In 2027, each plan's total balance limit per beneficiary runs from about $235,000 to over $600,000, so check your plan.
Growth is free of federal income tax. Say you put in $10,000 in 2027 and it earns an assumed 7% a year for 20 years. It grows to about $38,700, and the gain is never taxed if it pays for qualified expenses.
Gift tax rules for 529 contributions (2027)
The 2027 annual gift exclusion is $20,000 per donor per grandchild, up from $19,000 in 2026. A married couple who split gifts can give twice as much. The IRS lists these amounts in its 2027 inflation adjustments. A larger gift means filing Form 709. No gift tax is due until lifetime gifts use up the basic exclusion, which is $15,480,000 for 2027.
A five-year election, often called superfunding, lets you give five years of gifts at once. For 2027 that is $100,000 per donor, or $200,000 per couple. You make the election on Form 709.
What a 529 can pay for
Under IRS Publication 970, withdrawals are tax-free for these costs under the 2027 rules:
- College tuition, fees, books, room and board, computers and internet access
- K-12 tuition and other K-12 costs, up to $20,000 per year per student since 2026
- Registered apprenticeships and recognized postsecondary credential or licensing programs
- Student loan repayment, up to $10,000 over the beneficiary's lifetime (2027 rule)
Since July 4, 2025, K-12 costs also include curriculum, books, online materials, tutoring, standardized-test fees and educational therapies for students with disabilities. Some states do not follow the K-12 rules and may tax the withdrawal.
Unused money can move to the beneficiary's Roth IRA. For 2027 the lifetime cap is $35,000, and each year's rollover is capped at the $7,500 Roth limit. The 529 must be open at least 15 years, and contributions and earnings from the last five years cannot be rolled.
State tax deductions
More than 30 states give a deduction or credit for contributions. For 2027, New York allows $5,000 per person, or double that for a married couple filing jointly. Pennsylvania allows up to the federal annual exclusion per beneficiary. Your saving equals the deduction times your state tax rate.
When money comes out for something else
Contributions always come out tax-free. Only the earnings share of a non-qualified withdrawal is taxed, and in 2027 that share also faces a 10% additional federal tax.
Say a 2027 account holds $65,000, made up of $50,000 of contributions and $15,000 of earnings. You take out $13,000 for a car. About 23% of the account is earnings, so about $3,000 is taxable, and the 10% additional tax is about $300. The earnings are taxed to whoever receives the money, either you or your grandchild.
| Situation | What happens (federal rules, 2027) |
|---|---|
| Grandchild uses money for college tuition, room and books | No federal tax and no additional tax. Growth is never taxed. |
| Grandchild gets a $20,000 scholarship and you withdraw $15,000 | Earnings share is taxed, but the 10% additional tax is waived. Contributions come out free. |
| Grandchild withdraws $10,000 for a car down payment | Earnings share faces income tax plus the 10% additional tax. Contributions come out free. |
| Grandchild becomes disabled before college | 10% additional tax is waived. Earnings are still taxed. |
| Grandchild attends a U.S. military academy | 10% additional tax is waived on earnings, up to the cost of attendance. |
In every row, taxable earnings are taxed to the person who receives the distribution.
On the current Free Application for Federal Student Aid (FAFSA), including the 2027-28 form, a grandparent-owned 529 is not reported as an asset. Its distributions are not reported as student income either. The CSS Profile, used by a few hundred mostly private colleges, may ask about it, so check with each school on your grandchild's list.
Coverdell ESAs: A Smaller Tool with Strict Age Rules
A Coverdell ESA suits modest savings. The 2027 limit is $2,000 a year per child, counting every account and every contributor. If you and the parents together put in more, a 6% excise tax applies to the excess each year until it is fixed.
Your income matters too. For single filers, the right to contribute phases out between $95,000 and $110,000 of modified adjusted gross income (MAGI). For joint filers the range is $190,000 to $220,000. These limits are fixed by law and do not rise with inflation, so they are the same for 2026 and 2027. Corporations and trusts can contribute at any income level.
Two age rules apply. Contributions must stop when the beneficiary turns 18. The balance must be paid out within 30 days after the beneficiary turns 30. Both rules are waived for a special-needs beneficiary. Before the deadline, the balance can roll to a family member under 30. Otherwise the earnings are taxed and face the same additional tax as a non-qualified 529 withdrawal.
The tax breaks match a 529. Growth is tax-free, and withdrawals for K-12 or college costs are not taxed. A Coverdell has no dollar cap on K-12 spending beyond its own contribution limit. Contributions are not deductible. Fewer providers offer Coverdells today, so you may need to shop around. For most grandparents it works only as a small add-on to a 529.
UGMA and UTMA Custodial Accounts: Trading Control for Flexibility
Money in a custodial account belongs to your grandchild from the moment you deposit it, and you cannot change your mind. You name yourself or another adult as custodian to manage it.
The termination age depends on your state and on whether the account is UGMA or UTMA. It is commonly 18 or 21. A few states, such as California, allow up to 25 if the transfer document says so.
At that age the account is your grandchild's to spend on anything, whether college or a motorcycle. Some grandparents accept that trade because they want the money to be a surprise for a first car or a house down payment. A UTMA invested in a low-cost index fund fits that goal better than cash left in a bank for 20 years.
There is no annual contribution limit. Gifts above the 2027 annual exclusion need Form 709, and UTMA gifts cannot use the five-year election that 529 plans allow.
How the kiddie tax hits custodial accounts (2027)
Investment income is taxed to the child each year. Under the kiddie tax rules, the first $1,400 of unearned income in 2027 is tax-free. The next $1,400 is taxed at the child's rate. Anything above $2,800 is taxed at the parent's rate, not the grandparent's. For 2026 the amounts were $1,350 and $2,700. The tax covers children under 19, or under 24 if a full-time student, unless an 18-to-23-year-old's earned income pays more than half of their own support.
Here is a 2027 example. A $50,000 UTMA earns 6%, or $3,000 of ordinary income. The first $1,400 is tax-free. The next $1,400, taxed at the child's lowest-bracket rate, costs $140. The last $200 is taxed at the parent's 24% rate, or $48. The total is $188.
How custodial accounts affect financial aid
The FAFSA treats a custodial account as the student's asset. On the 2027-28 form, student assets are assessed at 20%, while parent assets are assessed at up to 5.64%.
| Factor | UGMA/UTMA account | Parent- or grandparent-owned 529 (2027 rules) |
|---|---|---|
| Owner of the money | The child, from day one. | The parent or grandparent. The child is the beneficiary. |
| Control | You lose control at the state termination age (18-21, up to 25 in a few states). | The owner always controls the account. |
| Spending limits | None. The child can use it for anything as an adult. | Non-education use triggers tax on earnings. |
| Financial aid impact | Assessed at 20% as a student asset. | Parent-owned: up to 5.64%. Grandparent-owned: not reported on the FAFSA. |
| Tax on earnings | Unearned income above $2,800 (2027) taxed at the parent's rate. | None if used for education. |
| If the child skips college | Full flexibility. | Limited. Non-qualified withdrawals face 10% additional tax on earnings. |
Custodial Roth IRAs: Building Retirement, Not Just Education
A custodial Roth IRA is a retirement account for a minor with earned income. That means W-2 wages from a job, or self-employment income from babysitting or lawn mowing. Allowance, gifts and investment income do not count.
The 2027 contribution limit is $7,500 or the grandchild's earned income, whichever is less. It is unchanged from 2026, as the IRS states in its 2027 retirement limits release. If your 14-year-old earns $3,500 babysitting in 2027, that is the most that can go in. You may gift the cash, and some grandparents match every dollar a working teen earns.
The Roth income limits apply to your grandchild, not you. For 2027, direct contributions phase out between $158,000 and $173,000 of income for a single filer, which a teenager almost never reaches.
A single $3,500 contribution made in 2027 at age 14, growing at an assumed 8% a year, reaches about $207,000 by age 67. That figure is not adjusted for inflation, and the return is not guaranteed.
Contributions can come out at any time with no tax or penalty. A first-time home purchase lets a limited lifetime amount of earnings avoid the early-withdrawal penalty. Those earnings are fully tax-free only after the account meets the five-year rule.
Keep records of your grandchild's earned income, such as a W-2 or a log of jobs. For 2027, a child with net self-employment earnings of $400 or more must file Schedule SE.
Trump Accounts: A New Tax-Deferred Account Grandparents Can Fund
A Trump account is a tax-deferred account for a child under 18, created by Internal Revenue Code Section 530A. Family contributions have been allowed since July 4, 2026. One annual cap per child covers all contributors combined. It is the same for 2026 and 2027 and is indexed for inflation only after 2027.
Here is how the account works, based on the IRS Form 4547 instructions:
- A parent or guardian opens the account by filing Form 4547 or using trumpaccounts.gov.
- Employer contributions of up to $2,500 (2027) count toward the annual cap.
- Pilot program, qualified general and rollover contributions do not count toward the cap.
- U.S.-citizen children born from 2025 through 2028 can receive a $1,000 federal pilot deposit.
- No withdrawals are allowed before January 1 of the year the child turns 18.
After that date, traditional IRA rules apply. Earnings are taxable when withdrawn, and an early-withdrawal penalty applies before age 59½ unless an exception fits. Contributions are not deductible.
For gift tax, IRS guidance treats a contribution as a gift that can use the annual exclusion. Ask a tax professional before you combine it with a five-year 529 election in the same year.
A 529 gives tax-free withdrawals for school, and a Trump account does not. A custodial Roth IRA needs earned income, and a Trump account does not. Our rundown of the kids savings account details in the 2025 law covers the fine print.
ABLE Accounts for a Grandchild with a Disability
An ABLE account is a tax-favored savings account owned by a person with a disability. Since 2026, a grandchild qualifies if the disability began before age 46. For 2027, total contributions from everyone are capped at the annual gift exclusion amount.
Growth is tax-free when it pays for qualified disability expenses, such as housing, transportation, education and health care. In 2027, the Social Security Administration ignores the first $100,000 in the account when it checks eligibility for Supplemental Security Income (SSI). A 529 can also roll into the grandchild's ABLE account, within the same annual limit.
When Each Account Works Best: Three Real Scenarios
Every growth figure below uses 2027 limits and a stated assumed return. None is a guarantee.
Scenario 1: The Newborn Grandchild—Maximum Growth Time (18 Years Until College)
Your grandchild was just born. You want to fund college, keep control of the money and protect financial aid.
| Decision point | What happens (2027 figures) |
|---|---|
| Open a 529 plan in your name | You own the account and keep full control. Growth is tax-free for 18 years if used for education. |
| Contribute $20,000 in year one | Equals the 2027 annual exclusion, so no Form 709. At an assumed 6% for 18 years, it grows to about $57,000. |
| In year two, add $2,000 to a Coverdell ESA | Allowed in full only if your MAGI is under $95,000 (single) or $190,000 (joint). Adds a second tax-free account. |
| Claim your state deduction each year | Illinois deducts up to $10,000 ($20,000 joint) at its 4.95% rate. That saves about $495 a year per $10,000. |
| At age 18, withdrawals begin | Tuition, fees, room, board and books are paid tax-free. The grandparent-owned 529 is not reported on the FAFSA. |
Outcome (2027 figures): Your gift grows to about $57,000, and the roughly $37,000 of growth is tax-free for qualified expenses. An Illinois grandparent who claims the single-filer maximum each year saves about $4,950 in state tax over 10 years.
Scenario 2: The Teenager with Earned Income—Dual Path (Roth + Education Savings)
Your grandchild is 15 and earns $4,500 from a job in 2027. You want to help with both retirement and college on limited funds.
| Decision point | What happens (2027 figures) |
|---|---|
| Open a custodial Roth IRA and fund it with $4,500 | The 2027 limit is capped at earned income, so $4,500 is allowed. You gift the cash. |
| Leave the Roth invested until age 67 | At an assumed 8% for 52 years, $4,500 grows to about $246,000, tax-free in retirement. |
| Open a 529 in your name and contribute $5,000 | Education money sits apart from retirement money. Two goals, two accounts. |
| Grandchild keeps working through high school | Each year's Roth contribution is capped at that year's earned income. Contributions can come out in an emergency. |
| At college age, the 529 pays tuition | $5,000 at an assumed 6% for 3 years is about $6,000. Giving $5,000 a year for 3 years reaches about $17,000. |
Outcome (2027 figures): One Roth contribution could reach about $246,000 by age 67. Your single education gift grows to about $6,000 in three years, or about $17,000 if you repeat it each year.
Scenario 3: The Middle-School Child—Complex Family Situation (Shared Custody, Modest Funds)
You have $5,000 to start in 2027, and your grandchild splits time between two homes. You want no limits on how the money is used once the child is grown.
| Decision point | What happens (2027 figures) |
|---|---|
| Open a UTMA account in your state | The $5,000 is an irrevocable gift. The child owns it, and a custodian you name manages it for the child's benefit. |
| Invest in a conservative mix | Your grandchild is 12. With six years to go, you favor stability over growth. |
| Pay tax on the earnings | At 4%, interest is $200 a year. That is under the 2027 $1,400 tax-free amount, so the tax is $0. |
| Grandchild takes control | At the state termination age (18 or 21; up to 25 in a few states). Any use is allowed, with no penalty. |
| Compare a 529 instead | $5,000 at 4% for 6 years is about $6,300. Only the $1,300 of earnings faces tax plus 10% if not used for education. |
Outcome (2027 figures): The UTMA grows to about $6,300 at an assumed 4%. The yearly interest creates no tax, and no return is needed for that income alone. At the termination age the money is your grandchild's for any purpose.
Do's and Don'ts: Actions That Matter
Do:
- Start a 529 as soon as you decide to save. More years invested means more tax-free growth.
- Contribute enough to claim your state deduction. The saving equals the deduction times your state rate, not your federal bracket.
- Use the five-year election for a large lump sum. It lets you give five years of annual-exclusion gifts at once, double that for a couple, and is made on Form 709.
- Keep a separate 529 for each grandchild. Pooled money is hard to split later.
- Change the beneficiary if plans change. The new beneficiary must be a family member of the old one, such as a sibling or cousin.
Don't:
- Use a UGMA or UTMA if you want a say in how the money is spent. At the termination age it is legally your grandchild's.
- Assume you get a state deduction for a 529 you do not own. Illinois and Pennsylvania let any contributor deduct. New York allows only the account owner.
- Treat the cost of a non-qualified withdrawal as small. Under 2027 rules, income tax plus the additional tax can take 30% or more of the earnings.
- Pick your state's plan without comparing fees and investments. An out-of-state plan may cost less.
- Let you and the parents together put more than the yearly Coverdell cap into Coverdells for one child. The excise tax applies each year until it is fixed.
- Leave long-term money in a low-rate bank account. Savings that will sit for 10 or 20 years usually belong in an invested account.
Common Mistakes and Exact Consequences
Mistake 1: Funding a UTMA when you meant to fund a 529
You put $15,000 in a UTMA in 2027 and expect it to pay for college. At the termination age, your grandchild leaves school and spends it on a vehicle. You cannot make them repay it. Along the way, unearned income above the kiddie-tax threshold was taxed at the parent's rate.
Mistake 2: Not claiming your state 529 deduction
You live in Pennsylvania and contribute the full 2027 annual exclusion amount to a 529. Pennsylvania lets you deduct all of it, but you never claim it. At the state's 3.07% rate for 2027, you lose about $614. You can usually fix this by amending the state return within the state's time limit, often three years.
Mistake 3: Withdrawing 529 funds without running the numbers
The 529 holds $30,000, and one-third of it is earnings. You withdraw half of the balance for a car in 2027, so one-third of the withdrawal is taxable. At a 24% federal rate, that is $1,200 of income tax plus a $500 additional tax. The $1,700 total is about 11% of what you took out, before any state tax.
Mistake 4: Putting the 529 in the parent's name out of fear of FAFSA damage
You worry that a grandparent-owned 529 will hurt financial aid, so you fund an account the parent owns. You give up control over withdrawals and beneficiary changes. Where only the owner can deduct contributions, you also lose your own state deduction.
Mistake 5: Contributing more than the rules allow
In 2027 you put $1,500 more into your grandchild's custodial Roth IRA than the grandchild earned that year. The extra amount is an excess contribution. An excise tax of $90 applies for each year the excess stays in the account. The same excise tax hits a Coverdell when the family together gives more than the annual cap.
Mistake 6: Opening a 529 in a state where you don't live
You live in New York but open a 529 in Florida's plan, where your child lives. Florida has no income tax and no deduction, so you deduct nothing. A New York plan would have given you the state's per-person deduction, which saves about $275 to $300 at New York's 2027 middle tax rates. When your state offers a deduction, its plan usually wins unless another plan's fees are much lower.
Grandparent Ownership Versus Parent Ownership: The Control Question
You can own the 529 yourself or contribute to one the parent owns. On the 2027-28 FAFSA, a grandparent-owned 529 is not reported. A parent-owned 529 is a parent asset, assessed at up to 5.64%.
If you own the 529
You decide when money comes out, what it pays for and whether to change the beneficiary. Depending on your state, you may claim a state deduction. You can move a large sum out of your taxable estate by electing five-year averaging on Form 709 for a lump-sum gift. The account stays outside the parents' finances if they divorce. On the downside, a 529 you own usually counts as your asset for Medicaid, and someone must manage it if you die.
If the parent owns the 529
The parent controls withdrawals and could use the money in ways you did not intend. In a divorce, the account may become part of the dispute. Where only the owner can deduct, the parent gets the state deduction.
Changing the owner later
Plans differ on ownership transfers, so read your plan's rules before you count on a switch.
Which choice fits most grandparents
For most grandparents, the better choice is to keep ownership yourself. Aid rules do not favor parent ownership, and you keep control if family circumstances change. Fund your own retirement first, so your grandchild never has to support you.
The Age of Majority and What Happens to Custodial Accounts
A custodial account ends at the termination age set by state law, and that age can differ for UGMA and UTMA accounts. Under the UTMA, 21 is the default in many states. Some states use 18. A few, such as California, allow up to 25 if the account is titled that way from the start. Check your state's statute or ask the brokerage before you open the account.
At termination, the custodian must turn the property over to your grandchild, using the brokerage's transfer paperwork. If you want control past that age, a trust for grandchildren can set its own payout ages.
If the custodian dies first
A successor custodian takes over. That is the person you named, or one chosen under state law. The money still belongs to the child and does not pass to the child's estate.
If you are both the donor and the custodian and you die before termination, the account is included in your taxable estate. Naming someone else as custodian, such as the child's parent, avoids that result.
If a 529 owner dies first
The successor owner is named on the plan's own form, not mainly through a will. Fill in that form when you open the account, and update it after a death or divorce in the family.
Comparison Table: Which Account Fits Your Goal?
| Your goal | Best account | Why (2027 figures) | Second-best option |
|---|---|---|---|
| Maximize tax-free growth for college | 529 plan | No annual limit, tax-free growth, state deductions in many states. | Coverdell ESA (if savings are modest) |
| Save for private K-12 tuition and college | 529 plan | Covers K-12 up to $20,000/year (from 2026), college, apprenticeships, credentials; rollover to Roth IRA. | Coverdell ESA ($2,000/year cap) |
| Child controls money as a young adult | UTMA/UGMA | Child owns it from day one; you cannot stop them spending it. | Custodial Roth IRA (if child has earned income) |
| Lowest financial aid impact | Grandparent-owned 529 | Not reported on the FAFSA. | Parent-owned 529 (assessed at up to 5.64%) |
| Retirement savings, not education | Custodial Roth IRA | Tax-free growth for life; contributions can come out anytime. | Trump account (no earned income needed) |
| Maximum control | Grandparent-owned 529 | You own it, decide all withdrawals and can change the beneficiary. | Savings account in your name (little tax benefit) |
| Simplicity and flexibility | High-yield savings in your name | No complex rules, no withdrawal penalties, full access. | UTMA (less control after termination age) |
| Modest goal (under $2,000/year) | Coverdell ESA | $2,000 annual limit fits small savings. | 529 plan |
| Child builds retirement wealth | Custodial Roth IRA | $7,500/year limit in 2027, capped at earned income. | Combine with a 529 for two goals |
| Long-term savings for a child under 18 with no earned income | Trump account | Up to $5,000 a year from all contributors combined; locked until the year the child turns 18. | UTMA |
| Grandchild with a disability | ABLE account | Up to $20,000 in 2027; first $100,000 ignored for SSI. | 529 plan (can roll to ABLE) |
Key 2026 and 2027 Limits at a Glance
| Limit | 2026 | 2027 |
|---|---|---|
| Annual gift exclusion (per donor, per grandchild) | $19,000 | $20,000 |
| Five-year 529 election (per donor) | $95,000 | $100,000 |
| Basic exclusion amount (estate and gift) | $15,000,000 | $15,480,000 |
| IRA contribution limit (capped at earned income) | $7,500 | $7,500 |
| Kiddie tax: tax-free amount / parent-rate threshold | $1,350 / $2,700 | $1,400 / $2,800 |
| Coverdell ESA contribution cap (per child) | $2,000 | $2,000 |
| Coverdell MAGI phase-out, single filers | $95,000-$110,000 | $95,000-$110,000 |
| Coverdell MAGI phase-out, joint filers | $190,000-$220,000 | $190,000-$220,000 |
| 529 K-12 withdrawals (per student, per year) | $20,000 | $20,000 |
| Trump account contributions (per child, all contributors) | $5,000 | $5,000 |
| 529-to-Roth IRA rollover (lifetime cap) | $35,000 | $35,000 |
The indexed figures come from the IRS inflation adjustments for 2027 and from Notice 2026-66 on retirement limits.
Pros and Cons Summary
529 plans
Pros:
- Tax-free growth and withdrawals for qualified education costs
- State deductions or credits in more than 30 states
- Owner keeps control and can change the beneficiary
Cons:
- Fees and investment menus vary widely by plan
- If the beneficiary dies, withdrawals avoid the additional tax, but earnings are still taxed
- Annual-exclusion gifts are generally exempt from generation-skipping transfer tax; larger gifts use that exemption, $15,480,000 for 2027
UGMA/UTMA custodial accounts
Pros:
- No contribution limit, and any use that benefits the child is allowed
- Out of your estate unless you are also the custodian
Cons:
- Unearned income above the kiddie-tax threshold is taxed at the parent's rate
- Counted as a student asset for financial aid
Coverdell ESA
Pros:
- Tax-free growth for K-12 and college costs
- Can roll to a family member under 30
Cons:
- Donor income limit: higher-income grandparents cannot give the full amount.
- No new contributions after the child turns 18
Custodial Roth IRA
Pros:
- Decades of tax-free growth
- A teen's income is almost always under the Roth phase-out
Cons:
- Requires earned income, and the yearly limit is capped at earnings.
- Earnings withdrawn early can face tax and a penalty
High-yield savings account in your name
Pros:
- Full control and full access
- Federal deposit insurance up to $250,000 per depositor, per bank (2027)
Cons:
- No education tax break
- Passes through probate unless you name a payable-on-death beneficiary
What to do next
- Write down the goal for each grandchild: education, retirement, or a gift with no strings.
- Look up your state's 529 deduction and whether a non-owner can claim it.
- Fill in the successor owner or successor custodian line on the provider's form.
- File Form 709 if a 2027 gift tops the annual exclusion, and make the five-year election there for a lump-sum 529 gift.
- Ask the parents whether a Trump account is open, and total everyone's gifts so they stay within the yearly cap.
FAQs
Can I open a 529 plan for a grandchild who is already 17 years old?
Yes. A 529 has no age limit. Growth time is short, but you can still give up to $100,000 per donor in 2027 ($200,000 per couple) with the five-year election. A state deduction in the year you contribute can make it worth it even with a short time horizon.
What happens to my 529 if my grandchild gets a full scholarship?
You can withdraw up to the scholarship amount without the additional tax, though earnings are taxed. Or change the beneficiary, or keep it for graduate school. A Roth IRA rollover needs a 15-year-old account and a beneficiary with earned income. It excludes the last five years' contributions and is capped yearly at the Roth contribution limit.
If I put money in a UTMA account, can I take it back if I change my mind?
No. A UTMA contribution is an irrevocable gift that belongs to your grandchild. The custodian can spend it only for the child's benefit, such as education or medical costs. The custodian cannot use it for things a parent must provide by law, like basic food and shelter.
Does a grandparent-owned 529 still hurt financial aid after the FAFSA changes?
No. Under the current FAFSA, including the 2027-28 form, a grandparent-owned 529 is not reported as an asset, and its distributions are not student income. A few hundred, mostly private, colleges that use the CSS Profile may count it, so ask each school.
Can I contribute to both a 529 and an ESA for the same grandchild in the same year?
Yes. The $2,000 Coverdell cap is per beneficiary from all contributors combined. Your MAGI must be under $110,000 ($220,000 joint), and the phase-out starts at $95,000 ($190,000 joint). The 529 has no annual federal limit, only the plan's total balance limit.
At what age does my grandchild take control of a 529 plan I own?
Never, unless you transfer ownership. Your grandchild is the beneficiary, and you are the owner. You can change beneficiaries, approve withdrawals or refuse them. Name a successor owner on the plan form so someone you trust takes over if you die.
If I die, what happens to the 529 or custodial account I set up?
For a 529, the successor owner named on the plan form takes over. Without one, plan rules or your estate decide. The account stays out of your taxable estate, except five-year-election amounts for years after death. For a UTMA, a successor custodian steps in. If you were donor and custodian, its value joins your estate.
Can I transfer money from a UTMA account into a 529 plan?
Yes. The UTMA assets are sold first, and gains are taxed to the child. The kiddie tax may apply above $2,800 in 2027. The new custodial 529 still belongs to the child, cannot change beneficiary, and counts as a parent asset on the FAFSA for a dependent student. The child takes over at the termination age.
Are there any states where I get tax benefits for opening a 529 in another state's plan?
Yes. Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania allow a deduction for contributions to any state's plan. Arkansas sets a smaller cap for out-of-state plans. Most other states require their own plan. Confirm with your state's plan or revenue department before you open an account.
Can I withdraw money from a 529 for my grandchild's trade school or apprenticeship?
Yes. Apprenticeships must be registered with the U.S. Department of Labor. Trade schools qualify if they are eligible for federal student aid. Since July 4, 2025, recognized postsecondary credential and licensing programs qualify too, including testing and required continuing-education fees. Up to $10,000 can also repay student loans over a lifetime.
Related reading
- Can Grandparents Deduct 529 Contributions? + FAQs
- How to Buy Savings Bonds for Grandchildren? (w/Examples) + FAQs
- How to Set Up an Education Fund for a Grandchild? (w/Examples) + FAQs
- What Type of Trust Is Best for Grandchildren? (w/Examples) + FAQs
- What Investment Account Should I Open for My Child? (w/Examples) + FAQs
- How Safe Are High Yield Savings Accounts? (w/Examples) + FAQs