How to Set Up a 529 Plan for Grandchildren

A 529 plan is a tax-advantaged savings vehicle designed to help individuals save for future education expenses. Established under Section 529 of the federal tax code, contributions grow free from federal taxes, and qualified withdrawals are untaxed. This makes them an appealing option for funding higher education and certain K-12 expenses at eligible educational institutions, including colleges, vocational schools, and some international programs.

Key Decisions Before Opening a Plan

Before opening a 529 plan, several decisions require careful consideration. The grandparent saving for a grandchild’s education typically establishes themselves as the account owner. This ownership grants control over the account, including investment decisions and the ability to name a successor owner, which is important for ensuring continuity.

The grandchild is designated as the beneficiary, ensuring funds are directed towards their future educational needs. When selecting a plan, individuals can choose between “direct-sold” plans, purchased directly from a state’s program, and “advisor-sold” plans, accessed through a financial advisor. Direct-sold plans often feature lower fees, while advisor-sold plans may offer professional guidance.

Account owners can select almost any state’s plan, not just their home state’s. While some states offer income tax benefits for contributions to their own plans, evaluate factors like investment options, fees, and past performance across different state plans. Investment choices typically include age-based portfolios, which adjust asset allocation as the beneficiary approaches college age, and static portfolios, which maintain a fixed asset mix.

Information Required for Account Setup

Gathering necessary information streamlines opening a 529 plan. For the account owner (typically the grandparent), essential details include full legal name, current address, date of birth, and Social Security Number (SSN) or Taxpayer Identification Number (TIN). Contact information, such as a phone number and email address, is also required.

Similarly, specific personal details for the grandchild beneficiary are needed, including their full legal name, current address, date of birth, and SSN or TIN. Having this information readily available helps avoid delays during the application.

It is advisable to designate a successor owner for the account, often a parent of the beneficiary, to ensure continuity in unforeseen circumstances. Information for this individual, such as their name and relationship, will be requested. For the initial contribution, bank account and routing numbers are necessary for electronic funds transfers, or details for mailing a check will be provided. Identity verification may require documents like a driver’s license for the account owner or a birth certificate for the beneficiary.

Opening and Initial Funding

Opening and initially funding a 529 plan typically involves navigating to the chosen state’s 529 plan website and locating the “Open an Account” or “Enroll Now” section. Many plans offer an online application that guides the user through various sections.

The application starts with entering the account owner’s details, followed by the beneficiary’s information, and any designated successor owner. During this process, chosen investment options, such as age-based or static portfolios, are selected. After completing all fields, applicants review all entered information for accuracy before submitting.

The initial contribution can be made electronically during the online application process by providing bank account and routing numbers for an Automated Clearing House (ACH) transfer. Alternatively, instructions for mailing a check may be provided. After submission, a confirmation email or notification is sent, providing an account number and outlining the processing time before the account becomes active.

Ongoing Management and Contributions

After a 529 plan is established and funded, ongoing management ensures it continues to meet educational savings goals. Subsequent contributions can be made through automated regular transfers, one-time online deposits, or gift contributions from other family members or friends.

Contributions to a 529 plan are considered gifts for tax purposes. In 2024, individuals can contribute up to $18,000 per beneficiary without federal gift tax implications, increasing to $19,000 in 2025. Married couples can contribute double this amount. Larger contributions, up to five times the annual exclusion, can be made at once using a “superfunding” election, averaging the gift over five years.

Periodically reviewing and adjusting the plan’s investments is important. Account owners can change investment allocations for existing funds twice per calendar year. Changes to how future contributions are invested can be made at any time. This flexibility allows for adjustments based on market conditions or the beneficiary’s proximity to college.

Withdrawals from a 529 plan are tax-free at the federal level if used for qualified education expenses. These include tuition, fees, books, supplies, equipment, and room and board for students enrolled at least half-time. Up to $10,000 per year in K-12 tuition expenses per beneficiary can be covered, and certain apprenticeship program costs and student loan repayments (up to a lifetime limit of $10,000) also qualify. Requesting distributions involves submitting a request to the plan administrator, specifying the amount and purpose.

The account owner can change the beneficiary to another eligible family member, such as another grandchild or sibling, without tax consequences. This provides flexibility if the original beneficiary does not pursue higher education. Ownership of the account can also be transferred if needed. Maintaining records of all contributions and distributions is important for tax reporting.