Grandparents saving for a new grandchild need to weigh more than tax breaks and potential investment growth. When the child can access the money—and whether the assets could affect future financial aid—also matters. Financial planner Caleb Moyer and Sean Mullaney, president of Mullaney Financial & Tax, point to 529 plans, UTMA accounts, trusts, Trump Accounts and taxable brokerage accounts as options with different trade-offs. Deciding what the money is for is often a better starting point than focusing on tax benefits alone.
529 plans: Tax advantages for education, with limits on use
A 529 plan may suit families saving primarily for education. Contributions generally are not deductible on federal tax returns, although some states offer tax benefits to contributors. Investment gains grow tax-deferred, and withdrawals are generally tax-free when used for eligible education expenses. The account owner typically controls when money is withdrawn and can change the beneficiary, allowing grandparents to save for a grandchild while retaining some oversight.
Grandparent-owned 529 withdrawals are not counted as student income on the federal FAFSA. But more than 200 private colleges use the CSS Profile, which may take grandparent-owned 529 accounts into consideration. Most Ivy League schools are among them, so families weighing financial aid should look beyond FAFSA rules alone.
Under current rules, eligible long-held 529 funds can be rolled into the beneficiary’s Roth IRA if the beneficiary does not use all the education savings. The lifetime rollover limit is $35,000 per beneficiary. A bipartisan Senate bill would remove that cap, but its prospects are uncertain. Mullaney notes that 529 money is relatively restricted: if the child does not need the funds for education, the account owner may have to find an eligible use to avoid penalties.
Because it is hard to know whether a newborn will attend college, grandparents could start with smaller contributions and consider a larger lump-sum contribution later, when the child’s education plans are clearer. They may contribute up to five years’ worth of the annual gift-tax exclusion at once. Grandparents can also pay tuition directly to a school.
UTMA accounts: Flexible spending, but the assets belong to the child
Custodial accounts established under the Uniform Transfers to Minors Act (UTMA) let an adult manage investments on a minor’s behalf. Unlike a 529, a UTMA account can be used more broadly, but a completed gift is irrevocable. Once the child reaches the age set by the state, control transfers to them and they can use the money as they choose.
UTMA accounts do not offer tax-deferred growth, Moyer says. Dividends, interest and capital gains must be reported. If a child’s unearned income reaches the relevant threshold, the “kiddie tax” may apply, with some income taxed at the parents’ rate. The assets are also in the child’s name and must be reported on the FAFSA, potentially affecting financial aid eligibility.
Trusts: Conditions on distributions, with added costs and tax complexity
A trust can be used when grandparents want the money to serve purposes beyond college, such as a first home, medical expenses or other needs. Its terms can specify when and why funds are distributed, or set an age at which the beneficiary receives the full amount.
That flexibility comes with more complex administration. Trusts typically require an estate-planning attorney and a trustee, Moyer says, and may involve separate tax returns and other filings. Trust assets may also be treated as the beneficiary’s assets for financial aid, even if the beneficiary cannot yet use them for education.
Tax treatment is another consideration: the top federal marginal rate on income retained in a trust is 37%, and it can apply once income is only slightly above $15,000. That potential tax burden needs to be factored into the plan.
Trump Accounts: New in 2026, with questions still open
Trump Accounts launched in mid-2026. Funds are invested in low-cost index funds and grow tax-deferred; beneficiaries generally cannot withdraw money before age 18. At that point, the beneficiary takes control and the account effectively becomes a traditional individual retirement account.
Mullaney says the accounts have too little operating history to assess their long-term management and results. Unlike 529 plans, which have been in use for decades, their practical record is still developing. Contributions are not tax-deductible, and the effect on financial aid eligibility remains unclear.
Eligible children born from 2025 through 2028 may receive a $1,000 seed contribution. Mullaney considers opening an account generally appealing for those children. Total annual contributions from all sources are capped at $5,000 per child, excluding the $1,000 seed contribution. Grandparents can contribute to an existing account set up by the parents.
Once the account holder turns 18, a transfer to a Roth IRA may also be considered, but the conversion has tax consequences and requires advance planning. Mullaney says there is no need to rush into contributions simply because the accounts are new; families should first understand the tax treatment of withdrawals and conversions.
Taxable brokerage accounts: More control and a wider range of uses
A regular taxable brokerage account does not provide the tax deferral available with a 529 plan or Trump Account. But grandparents can decide when to gift assets, or use the account to pay a grandchild’s tuition, medical costs or other expenses. Keeping assets in the grandparent’s name can preserve control and avoid placing them directly on the child’s balance sheet for FAFSA purposes, Moyer says.
Mullaney notes that for some affluent families, taxable investments inherited by a grandchild after a grandparent’s death generally receive a cost-basis adjustment to their fair market value on the date of death. The beneficiary would then owe capital-gains tax only on appreciation after that date. One drawback is that grandparents do not see the grandchild use the inheritance during their lifetime. A middle ground is to withdraw some funds as needed to help the grandchild while allowing the rest to grow and pass on later.
Match the account to the goal
Moyer recommends that grandparents first decide whether they are saving for college, a home purchase, medical expenses or broader long-term needs. Each goal brings different requirements for control, access and taxes. A 529 is focused on education; a UTMA account offers wider use but gives the child control at adulthood; a trust can impose conditions but adds administrative and tax costs; Trump Account rules are still developing; and a taxable brokerage account offers more flexibility but requires investors to pay tax on investment income.
The choice may be one account or a combination. Grandparents should also check state tax rules, how financial aid applications assess each account, and the withdrawal conditions that apply.