How to save for your grandchild’s college fund

The greatest gift you can give is a future full of possibilities. Give the child you love a head start on education savings.

Why start an education savings account for your grandchild?

Investing in a grandchild's or loved one's education is a great way to support their future. Rather than letting cash sit in a personal savings account, where it may not keep up with inflation, investing it can help grow the funds over time.

The money you set aside for education could help pay for:

• Tuition and fees for K–12 or higher education, like trade school or college. 
• Housing and meals.
• Books and supplies.
• Transportation and other expenses.

But before you send a check somewhere, talk with the child’s mom or dad about their ideas on the best way to save.

For example, if they already have a college savings account set up, like a 529 plan, you could simply give them money to put in it. Or you could open your own separate account if you want more of the benefits and control. See Pros and cons of college savings plans below for more details. 

How to help your grandchild with their education

Here are some account types you can use to save for a loved one's education expenses:

529 plans

529 plans are tax-advantaged accounts made specifically for education savings, including for K–12, college, grad school, trade school, and eligible apprenticeship programs.

Here's how they work: Anyone can open a 529 plan and start saving for a loved one or for their own education. The earnings in a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses, such as tuition, fees, books, and room and board.¹ Many states offer tax deductions or credits for contributions, allowing account owners to save even more.

In addition to the federal and state tax benefits, 529 plans offer a great deal of flexibility. You can transfer unused 529 funds to another qualified family member or roll over up to $35,000 to a Roth IRA for the beneficiary when certain conditions are met.² 

You may be wondering, can a grandparent open a 529 account? Yes, grandparents can open a 529 for grandchildren. Remember, if you live in a state that offers a tax credit or deduction for 529 contributions, you have until December 31 to make a contribution for the current tax year (with certain states extending the contribution deadline).³ Here are some education savings tips to help you maximize your year-end impact. 

UGMA/UTMA Accounts

Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts aren't designed specifically for education but can be used for any purpose, including education expenses. They don't have the same state and federal tax benefits as 529 savings plans and could impact financial aid.

Here's how UGMA/UTMA accounts work:

• A custodian manages the account, but the assets belong to the beneficiary. The custodian can invest and withdraw funds to use for anything for the beneficiary. Once the beneficiary reaches adulthood, they take control of the account and can use the money however they choose.⁴
• There may be potential tax advantages, as a portion of the earnings may be tax-free or taxed at the child's lower rate. However, the assets become the property of the child, which may affect financial aid eligibility.

Learn more to see which account may be right for your education savings goals

Pros and cons of college savings plans

Here are some pros and cons of 529 college savings plans to help you make informed decisions about how to best support your grandchild's education.

Pros of 529 plans

• Tax advantages. State tax deductions for contributions are generally only available to account owners. Any contribution growth is tax-deferred, and withdrawals are tax-free when used for qualified education expenses.¹
• Flexibility. Funds can be used for a wide range of education expenses, including tuition, fees, books, and room and board. Here are 10 things that may surprise you about 529 plans and their flexibility.  
• Control. The account owner retains control over the funds and can change the beneficiary to another eligible family member if needed.
• Gifting benefits. 529 plans are especially popular with grandparents who want to save for a grandchild's future and reap estate planning benefits at the same time. You can contribute up to $18,000 for 2024 ($36,000 if married filing jointly) and $19,000 for 2025 ($38,000 if married filing jointly) to a single beneficiary without triggering a federal gift tax. And if you want to gift a larger amount, you can contribute up to $90,000 for 2024 ($180,000 if married filing jointly) and $95,000 for 2025 ($190,000 if married filing jointly) per beneficiary and then treat it as though you contributed that amount over a 5-year period.⁵ (However, you can't make additional gifts to the beneficiary during that time without triggering a gift tax.)
• Impact on financial aid. Starting in the 2024–2025 academic year, the simplified FAFSA no longer requires contributions or distributions from a grandparent-owned 529 to be reported. With this update, you can help your loved ones pay for their education without affecting their eligibility for financial aid.

Cons of 529 plans

• Penalties for nonqualified withdrawals. Withdrawals for nonqualified expenses may incur taxes and a 10% penalty.
• Investment risk. The value of the investments can fluctuate, and there is a risk of loss.

What if I don't want to set up a 529 account?

Good news: You don't have to open a 529 account to contribute to one. Parents or other account owners can use Ugift® to invite others to celebrate a child's milestones with the gift of education savings. You can easily contribute $50 or more online, and the gifts are deposited directly into The Vanguard 529 Plan account.

Choosing a college savings account

Still not sure how to set up a college fund for a grandchild? We get it. Saving for education can feel like a big decision.  But don't worry—it's easy to find a college savings account that has everything your family needs.

Find out which college savings plan is right for you

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