3 Tax Efficient Ways to Fund Your Grandchild’s College

Discover the perks of 529 plans and outright gifting.Ethan Copeland

As a grandparent, you can help your grandchildren and your bottom line with these tax-efficient ways to fund college.

529 Plan

These state-sponsored savings plans (plans differ by state) let you contribute to beneficiaries generally without paying federal taxes on the earnings as long as the earnings are used for the qualified expenses of the designated beneficiary. Several plans also exempt the beneficiary from paying state taxes on the earnings, as well. “This is usually the plan that I suggest in most cases due to the tax-efficiency of it,” says Ethan P. Copeland, Vice President and Financial Advisor at Regions Investment Solutions in Birmingham, Ala. Note that contributions are not deductible.

There are two types of 529 plans:

  • Pre-paid tuition plan: Locks in tuition prices at eligible public and private colleges and universities.
  • College savings plan: Doesn’t put a lock on college costs but covers all qualified higher education expenses, including tuition, room and board, mandatory fees, books, and computers. There is no age limit for beneficiaries, who can receive up to $14,000 annually without paying a gift tax.

Coverdell Education Savings Account

A Coverdell Education Savings Account is a trust or custodial account created for the purpose of paying the qualified education expenses of the designated beneficiary. Distributions of funds are tax-exempt when used for qualified education expenses. Keep in mind these rules:

  • A maximum of $2,000 can be contributed to the ESA annually.
  • Beneficiaries must be under the age of 18 or have special needs.
  • Funds must be distributed within 30 days after the beneficiary turns 30.

Outright Gifting

The federal gifting limit that is exempt from the gift tax is currently $14,000 per year. Copeland points out that you can advance that for up to five years. For example, you can contribute up to $70,000 into your grandchild’s account for college expenses all at one time.

Outright gifting can save your estate taxes over time. “This option can be a success for everyone — saving you tax dollars and providing financial assistance to your grandchildren for college,” Copeland says.

Learn about passing on your financial values to your grandchildren.


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This information is general in nature and is provided for educational purposes only. Regions makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented. Information provided and statements made by employees of Regions should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Regions encourages you to consult a professional for advice applicable to your specific situation.