Grandparents funding a grandchild’s education used to come with a real financial-aid tradeoff. A 2024 change to the federal financial aid formula, plus a newer rollover option connecting 529 plans to Roth IRAs, changed both halves of that calculation.
The Grandparent Loophole on Financial Aid
Under the simplified FAFSA formula that took effect for the 2024–2025 academic year, cash support and distributions from a grandparent-owned 529 plan no longer have to be reported as untaxed income on the student’s aid application. That closes what used to be a real penalty: a grandparent-funded 529 can now cover tuition without reducing the grandchild’s eligibility for need-based aid the way it once did.
How Much Can Go In Without Gift Tax
A grandparent can contribute up to five years’ worth of the annual gift tax exclusion in a single year — currently $95,000 per grandchild — without triggering federal gift tax, using an election that spreads the gift over five years for tax purposes. The contribution also moves that money out of the grandparent’s taxable estate, which is a secondary but real estate-planning benefit alongside the education savings.
The 529-to-Roth IRA Rollover, and Its Real Restrictions
If a grandchild doesn’t use all the money in the account, up to $35,000 (a lifetime maximum, not annual) can roll over tax-free into a Roth IRA in the beneficiary’s name. The restrictions are specific and easy to miss: the 529 account must have been open for at least 15 years before any rollover, the beneficiary of the 529 must be the same person who owns the Roth IRA, and contributions made within the five years before the rollover aren’t eligible to move.
Why the 15-Year Rule Changes the Planning Timeline
Because the account has to exist for 15 years before a rollover is possible, this only works as a plan made early — a 529 opened when a grandchild starts high school won’t reach the 15-year mark until well into their 20s. Grandparents who want to use the Roth rollover as a fallback for unused education savings need to open the account while the grandchild is still young, not decide on the strategy after the education years are already underway.
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