Tax Breaks for Generous Grandparents with 529 Plans

I want to contribute to a 529 account for my 4-month-old granddaughter. Can I get a tax deduction, or is that just for the parents?

What Grandparents Should Know About Opening 529 Accounts

Yes, grandparents can claim the deduction for contributing to a 529 if they live in one of the 34 states that offer a state income tax deduction for 529 college-savings plan contributions. The only question is whether you must own the account or whether you can contribute to one set up by, say, the child's parents.

About two-thirds of the states that offer a state income tax deduction for 529 college-savings plan contributions let anyone who is a resident of that state take a deduction, even if you don't own the account -- whether you're a parent, relative or friend. The remaining states let you deduct contributions only if you're the account owner. In that case, you might want to open an account for your granddaughter so that you can qualify for the deduction, even if her parents already have an account for her. There’s no limit to the number of 529 accounts that can be opened for one beneficiary. (To check up on your state’s rules, see Savingforcollege.com.)

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In Utah and Virginia, the owner of a 529 account can also deduct the contributions other people make to the account. For example, in Virginia, account owners can deduct up to $4,000 in contributions per account each year, with unlimited carryover of excess contributions, no matter who makes the contributions. And if you’re 70 or older, you can deduct the entire amount contributed to the Virginia 529 you own in one year.

Most of the 34 states that offer the tax break let you take a deduction only if you contribute to your own state’s 529. However, five states -- Arizona, Kansas, Maine, Missouri and Pennsylvania -- give you the break for contributing to any state’s account.

Be careful with withdrawals from a 529 for your granddaughter when she is in college, because they are counted as income in the financial aid calculations. See Limit the Impact of Grandparent-Owned 529 Plans on Financial Aid for details.

For more information, see 529 Plan FAQs.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.