Instead of opening my own 529 accounts, can I just make contributions to the 529 accounts my children have already established for my grandchildren?
If the 529 plan used by your children accepts “third-party” contributions, then you may simply make your contributions to their accounts and not have to worry about opening and maintaining your own accounts. Of course, you will no longer have access to these funds since you will not be the account owner, but for many grandparents that is an entirely acceptable consequence.
To make contributions to an account owned by someone else you will need to know the account number and indicate that number on your check. For most 529 plans you should also use the contribution form that is either pre-printed than sent to the account owner or perhaps can be downloaded from the 529 plan’s web site. It would be a good idea to call the plan’s toll-free number and make sure you are following the appropriate procedures in making your contribution.
A very small number of 529 plans may not accept third-party contributions. If the parents have their own accounts in these particular 529 plans, your options are to open your own accounts or give the parents cash with the request that they place your gifts into the 529 accounts for your grandchildren.
You should be sure to understand the gift-tax consequences of your contributions to the 529 plan. Whether you contribute to accounts owned by you, or to accounts owned by the parents or someone else, your contributions are a gift from you to the account beneficiary (and a generation-skipping transfer if the beneficiary is your grandchild). For large contributions (over $14,000) you may elect on a gift-tax form to treat up to $65,000 of the contribution as made over a five-year period. This election allows you to front load more contributions into a 529 plan without exceeding the $14,000 annual gift exclusion.
Caution: The IRS has not yet indicated whether a contribution you make to a 529 account owned by someone else will be treated as two gifts, the first from you to the account owner, and the second from the account owner to the beneficiary. Most tax practitioners believe there is only a single gift—from you to the account beneficiary—but the answer remains a bit uncertain.
Whether or not your contributions are State tax deductible is another issue you should understand. Many states provide their residents with a deduction for at least some of their contributions to the in-state 529 plan, but in several of these states you must also be the account owner in order to claim the deduction. And just because you cannot claim the deduction, as a “third-party” contributor, it does not mean that the account owner can claim the deduction.
Always consult with your tax professional.