Funding a Grandchild's Future: 529s, UTMAs, and the Options In Between

There's a moment most grandparents recognize: watching a grandchild head off to school and wondering how to help with what comes next. It's a generous impulse, and acting on it well takes a bit more thought than just writing a check.

The account you choose matters as much as the amount you give. A 529, UTMA, direct tuition payment, and a simple earmarked brokerage account all put money toward a grandchild's future, but they differ in who controls the money, how it's taxed, how it affects financial aid, and what happens if plans change. Here's how to think through the options.

What is a 529 plan, and why is it usually the starting point?

A 529 is a state-sponsored investment account designed for education. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses, which include college costs and, within limits, K-12 tuition and student loan repayment. Some states also offer a state income tax benefit for contributions.

For most grandparents, the 529 is the starting point for three reasons:

1. You keep control as the account owner, including the ability to change the beneficiary to another grandchild if circumstances change.
2. Contribution capacity is high.
3. The tax treatment is hard to beat for money that will actually be spent on education.

Did the financial aid rules change for grandparent-owned 529s?

Yes, and this is the update many grandparents haven't heard about. Under the old FAFSA rules, distributions from a grandparent-owned 529 counted as student income, which could reduce aid eligibility significantly. That created awkward workarounds, like waiting until the final years of school to use grandparents' money.

The simplified FAFSA changed that. Distributions from grandparent-owned 529s are no longer reported on the FAFSA at all, which means grandparent 529 money generally no longer hurts federal aid eligibility.

One caveat: some colleges, mostly private ones, use an additional form called the CSS Profile to award their own institutional aid. The CSS Profile is administered by the College Board and digs deeper into a family's finances than the FAFSA does, and some schools that use it still ask about money coming from grandparents. If your grandchild is aiming for one of those schools, it's worth factoring into the plan.

What if my grandchild doesn't use the money for school?

This is the concern that keeps many grandparents from funding a 529, and it has better answers than it used to. First, the beneficiary can be changed to another family member, including a sibling, cousin, or even a parent going back to school. Second, under rules that took effect in 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary, up to a lifetime limit of $35,000. The account must have been open at least 15 years, annual rollovers are capped at the yearly IRA contribution limit, and the beneficiary needs earned income, so it's a gradual release valve rather than a lump-sum escape hatch. But it means a 529 opened for a five-year-old is no longer an all-or-nothing bet on college.

Where do UTMAs fit?

UTMA accounts, short for Uniform Transfers to Minors Act, are custodial accounts that hold money or investments in a child's name. Their main advantage is flexibility: the money can be used for anything that benefits the child, not just education. A grandchild who starts a business, buys a first home, or takes a nontraditional path can still use every dollar.

That flexibility comes with tradeoffs. The gift is irrevocable, so unlike a 529, you can't redirect it to another grandchild. Investment earnings above a modest threshold are taxed each year under the kiddie tax rules, often at the parents' rate. The child gains full control at the age of majority, which in most states is 18 or 21, regardless of their readiness. And because the account is the child's asset, it's weighted more heavily against financial aid than a parent-owned account.

UTMAs aren't wrong. They're simply a different tool, better suited to "I want to give this child a flexible head start" than "I want to fund education efficiently."

What are the options in between?

Paying tuition directly. Payments made directly to a school for tuition are excluded from gift tax entirely, with no dollar limit, and they don't count against your annual exclusion or lifetime exemption. The payment must go straight to the institution and covers tuition only, not room and board or books. For grandparents with grandchildren already in school, this is one of the most efficient gifting tools available.

A Roth IRA for a working grandchild. If a teenage grandchild has earned income from a job, you can fund a Roth IRA on their behalf up to the amount they earned, subject to annual limits. Decades of tax-free growth starting at 16 is a remarkable gift, and it doubles as a financial education opportunity.

An earmarked brokerage account. Some grandparents simply invest in their own taxable account and mentally earmark it for a grandchild. There's no tax benefit, but you retain complete control and flexibility, and assets in your name generally don't affect the grandchild's aid eligibility at all. For grandparents who value optionality above efficiency, it's an excellent choice.

How much can I give without gift tax implications?

For 2026, the annual gift tax exclusion is $19,000 per recipient, or $38,000 for a married couple giving together. Gifts within that amount require no gift tax return and don't touch your lifetime exemption. Even above that amount, filing a gift tax return is typically just informational; no tax is owed until lifetime gifts exceed the exemption. 

529s offer one more feature worth knowing: superfunding. You can contribute five years of annual exclusions at once, up to $95,000 per grandchild ($190,000 for a couple), and elect to spread it over five years for gift tax purposes. For grandparents who want to move a meaningful amount early and let compounding do the work, it's a powerful option, though it requires filing a gift tax return to make the election and has a few coordination details worth reviewing first.

One conversation before the first check

The most common mistake we see isn't choosing the wrong account. It's grandparents and parents funding plans separately, without comparing notes. That can mean duplicated 529s, missed state tax benefits, gifts that complicate a financial aid strategy, or a well-meaning UTMA that hands an 18-year-old more money than anyone intended.

For our clients, grandchild gifting is part of the broader planning conversation, alongside your own retirement income, estate plan, and tax picture. If helping a grandchild is on your mind this Fall, bring it up as a topic to cover during your next review and we'll walk through the options together. If you've been meaning to start but got stuck on which account, whose name, or how much, those are good questions that likely have clear answers once we can see the whole picture.