Chapter Twelve · For Grandparents
A grandparent's guide to saving for grandchildren
Updated 27 April 2026
Grandparents have several options for saving for grandchildren, each with different tax implications, financial aid impact, and control mechanisms. The best choice depends on the goal (education, general savings, estate planning), the amount, and whether the family expects to apply for need-based aid. This is the consolidated 2026 guide.
The vehicles
Six ways grandparents save
| Account type | Control | FAFSA | Tax | Best for |
|---|---|---|---|---|
| 529 (parent-owned, GP contributes) | Parent controls | 5.64% | Tax-free for education | College savings, simplicity |
| 529 (grandparent-owned) | Grandparent controls | 0% (since 2024-25) | Tax-free for education | GP wants control, estate planning |
| Custodial UTMA / UGMA | GP as custodian | 20% (student asset) | Kiddie tax applies | Genuine gifts, flexible use |
| Joint savings (contribute to parent's) | Parent controls | 5.64% | Parent's return | Small gifts, simplicity |
| Custodial Roth IRA | Parent as custodian | 0% (retirement) | Tax-free growth | Grandchild has earned income |
| Series I Savings Bonds | Bond owner | Varies | Tax-deferred until redemption | Inflation protection, small gifts |
The numbers
Gift tax rules for 2026
Annual exclusion
$19,000
Per grandchild, per grandparent, per year. A married couple can give $38,000 per grandchild without any gift tax reporting. Contributions to custodial accounts and 529 plans count toward this limit.
529 superfunding
$95,000
Single grandparent (5 × $19,000). $190,000 for a married couple. Front-load five years of gifts into a 529 in one year. No additional gifts to that grandchild for 5 years. Powerful for estate reduction.
A 2024 game-changer
Grandparent 529s no longer count on FAFSA
Major change since 2024-2025 FAFSA: grandparent-owned 529 plans are no longer counted. Previously, distributions from grandparent 529s were reported as untaxed student income, reducing aid by up to 50% of the distribution. The penalty made many families avoid grandparent 529 contributions entirely.
Old rule (before 2024-25)
Grandparent 529 distributions counted as student income. A $10,000 distribution could reduce aid by up to $5,000.
New rule (2024-25 onward)
Grandparent 529 distributions are not reported on FAFSA. Zero impact on financial aid eligibility.
If you choose custodial
Four things grandparents need to know
Grandparents can open a UTMA / UGMA account and serve as custodian. The money is an irrevocable gift to the grandchild. Key considerations:
Irrevocable gift
Once contributed, the money belongs to the grandchild. The grandparent cannot take it back or redirect to another grandchild.
Age of majority
The grandchild gains full unrestricted control at 18 or 21 depending on state. There are no restrictions on spending.
FAFSA impact
Custodial accounts count as student assets and are assessed at 20% per year. For families expecting need-based aid, a 529 is better.
Flexible use
Unlike a 529, custodial funds can be used for any purpose that benefits the child. More flexibility, less control.
A simpler alternative
Series I savings bonds
Series I Savings Bonds are inflation-protected bonds issued by the U.S. Treasury. They make excellent gifts because they are safe, tax-advantaged, and tangible.
Purchase limit
$10,000 per Social Security number per year (electronic).
Tax
Tax-deferred until redemption. May be tax-free if used for qualified education expenses.
Holding period
Must be held at least one year. Three-month interest penalty if redeemed before five years.
How to buy
TreasuryDirect.gov. Can be registered with grandchild as primary owner and grandparent as second owner.
For larger estates
Annual gifts as estate reduction
Annual gifts to grandchildren reduce the grandparent's taxable estate. The 2026 federal estate tax exemption is approximately $15 million per person, scheduled to drop significantly after 2025 if current legislation is not extended. Grandparents with larger estates may want to accelerate gifting.
529 superfunding is particularly powerful: a married couple can move $190,000 per grandchild out of their taxable estate in a single year while providing for the grandchild's education. If the grandparent passes away during the 5-year superfunding period, a prorated portion returns to the estate.
If you want simplicity
Contribute to the parent's 529
For grandparents who want simplicity: contribute to the parent's existing 529 plan. No new account needed. No FAFSA impact (parent-owned 529 is a parent asset at 5.64%). Tax-free growth. The parent controls distributions. The contribution counts toward the grandparent's annual gift tax exclusion of $19,000 per grandchild. Most 529 plans accept third-party contributions online or by check. For deep 529 analysis, see 529plancalculator.com.
Postbag
Grandparent questions readers ask most
How much can a grandparent give to a grandchild without gift tax?
For 2026, each grandparent can give up to $19,000 per grandchild per year without triggering gift tax reporting. A married couple can give up to $38,000 per grandchild per year. 529 plan contributions can be 'superfunded' with up to $95,000 (single) or $190,000 (married) in one year, spread over 5 years of the annual exclusion.
Does a grandparent-owned 529 affect financial aid?
No, not since the 2024-2025 FAFSA cycle. Under the FAFSA Simplification Act, distributions from grandparent-owned 529 plans are no longer reported as untaxed income to the student. This was a major positive change that removed the biggest drawback of grandparent 529 contributions.
Can a grandparent open a custodial account for a grandchild?
Yes. Any adult can open a UTMA / UGMA custodial account and serve as custodian for any minor. The grandparent manages the account until the child reaches the age of majority (18 or 21 depending on state). The contribution is an irrevocable gift to the grandchild.
What is the simplest way for grandparents to save for grandchildren?
Contribute to the parent's existing 529 plan. No new account needed. No FAFSA impact (parent-owned 529 is a parent asset at 5.64%). Tax-free growth. The parent controls distributions. The contribution counts toward the grandparent's annual gift tax exclusion.
Can grandparents buy savings bonds for grandchildren?
Yes. Series I Bonds can be purchased through TreasuryDirect.gov. The purchase limit is $10,000 per Social Security number per year. Bonds can be registered in the grandchild's name with the grandparent as second owner. Interest is tax-deferred until redemption.
How does 529 superfunding work?
Under the 529 superfunding rule, a grandparent can contribute up to 5 years' worth of the annual gift tax exclusion in a single year. For 2026 that is $95,000 per grandchild (single) or $190,000 per grandchild (married). The contribution is treated as if made over 5 years for gift tax purposes.