What is the best way to save for college for my grandchildren? By Kimberly Lankford, Contributing Editor July 27, 2006 What is the best way to save for college for my grandchildren?Go with a 529 college-savings plan. "It's one of the most tax-favored, elderly-friendly vehicles I know," says Bob Baldwin, a CPA and personal financial specialist in Charleston, S.C. "You can give it away but keep it. You can shelter it and not pay taxes on it." The 529 money can be used tax-free for college costs, and your contributions are tax deductible in about half the states (see our 529 map for details about each state's rules, and to find the best plan for you). As a grandparent, it's also a great way to get a lot of money out of your estate without worrying about gift taxes. Generally, you can only give each person $12,000 per year without being subject to gift taxes. But you're allowed to contribute five years' worth of gifts to a 529 in one year without gift taxes –- totaling $60,000 per person in 2006. You may want to spread out your contributions, however, if your state limits the amount you can deduct each year. Surprisingly, even though you can get the money out of your estate, you can still maintain control over it. If one grandchild doesn't go to college, you can switch beneficiaries to another relative. Or you can take the money back entirely, if you pay a 10% penalty and taxes on the gains. Advertisement The contribution limits are high -- generally about $250,000 per account -- so you don't need to worry about coordinating with other relatives. And money in a grandparent-owned 529 generally isn't included as an asset on financial aid forms, says Joe Hurley of Savingforcollege.com, which is a great place to search for 529 information. "Grandparents and 529s are made for each other," he says. After your grandkids start college, you can move some more money out of your estate by paying part of their tuition bill. As long as you pay the school directly, that money isn't subject to any gift-tax limits. Got a question? Ask Kim at firstname.lastname@example.org.