Many grandparents want to support their grandchildren’s education, and a 529 plan remains one of the most effective ways to do that. Recent changes to rules and regulations have given 529s more flexibility, improved tax treatment, and fewer unintended consequences when it comes to financial aid.
One of the most significant updates involves the FAFSA (Free Application for Federal Student Aid). In the past, grandparents had to be cautious when using their own 529 plans to help with college costs. The FAFSA used to treat distributions from grandparent-owned 529 plan assets as untaxed income to the student. That “income” could reduce need-based aid by up to 50% of the amount distributed.
That’s no longer the case.
Starting with the 2024–2025 academic year, the updated FAFSA no longer asks students to report cash support from family members. As a result, when grandparents use 529 funds to pay for college, those distributions no longer affect a student’s financial aid eligibility. Grandparents can now fund 529 plans in their own name and help pay for college without inadvertently reducing aid.
In addition to the changes to financial aid rules, Congress passed the SECURE Act 2.0 in 2022, which expanded the flexibility of 529 plans in meaningful ways. One of the most notable updates allows beneficiaries to roll over unused 529 plan funds into a Roth IRA. This creates a valuable fallback strategy if a child receives scholarships, doesn’t attend college, or simply doesn’t use the full account balance.
Here are the key stipulations:
- The 529 plan must be at least 15 years old.
- Rollovers count toward the beneficiary’s annual Roth IRA contribution limit (e.g., $7,000 in 2025).
- The lifetime rollover limit is $35,000 per beneficiary.
- Contributions made in the last five years are ineligible for rollovers.
By transferring unused funds to a Roth IRA, you can shift savings from education to retirement. This allows the funds to continue growing tax-free.
Families can also use 529 funds for a broader range of educational expenses beyond college. Current rules allow for up to $10,000 per year in tuition at K–12 private or religious schools. Additionally, qualified costs for registered apprenticeship programs, such as books and required tools, are now eligible expenses. These expanded uses provide greater flexibility, especially for students who pursue educational paths outside of traditional four-year colleges.
From a tax perspective, 529 plans remain one of the most attractive savings vehicles. Account owners benefit from tax-deferred investment growth, and withdrawals used for qualified education expenses are tax-free. More than 30 states offer additional tax incentives, such as deductions or credits for contributions, although many of these benefits apply only when using an in-state plan.
529 plans also serve as a useful estate planning strategy. In 2025, grandparents can contribute up to $19,000 per beneficiary, or $38,000 for a married couple, without triggering federal gift tax. For those who want to make a larger impact, the IRS allows “super funding,” which lets donors front-load five years’ worth of gifts into a single contribution. This allows individuals to contribute up to $95,000, or $190,000 for couples, per beneficiary without using their lifetime gift and estate exemption. These contributions remove assets from the taxable estate while allowing the account owner to retain control over how and when the funds are used.
In addition to these tax benefits, 529 plans offer a unique opportunity to build an educational legacy across generations. If the original beneficiary does not use the funds, the account owner can change the beneficiary to another family member, such as a sibling, cousin, or even a future grandchild. Beneficiary changes are not treated as a distribution when the new beneficiary is a member of the current beneficiary’s family. This flexibility allows families to preserve the value of the account and continue using it to support educational goals for decades.
When changing beneficiaries, there are some potential tax implications to keep in mind. Changing a 529 plan beneficiary may result in generation-skipping transfer tax (GST) when the new beneficiary is two or more generations below the current beneficiary. However, GST typically applies only to large estates exceeding the $13.99 million exemption.
529 plans offer many benefits if you're looking for a way to support your grandchild’s education while also managing your own tax and estate planning goals. As always, it’s important to view 529 plans in the context of your broader financial picture. Reach out to your Carnegie financial advisor if you’d like to discuss how to incorporate these plans into your financial plan.
If you would like to create a picture of your financial future, contact us to schedule a complimentary consultation and discuss how it works. Our planning professionals take the time to understand your unique circumstances and goals, asking thoughtful questions to uncover what matters most to you. We will develop a personal plan and test it against different market scenarios to help you make informed decisions about your finances.
For informational and educational purposes only. The information is not intended to provide specific advice or recommendations and the information has been obtained from sources believed to be reliable. Please consult with tax, legal, and financial advisors as laws and interpretations are subject to change, and your circumstances may be unique. Opinions are subject to change.
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