If you’re a grandparent who wants to provide financial help to your grandkids for their education, there are some efficient ways to structure that support.

You can establish an account for your grandchild under the Uniform Gift to Minors Act. That account, sometimes referred to as an UTMA account, will be in the name of the grandchild. One of the grandparents is included as a custodian. These accounts technically belong to the child, but they can’t access the money on their own until they are age 21. The account custodian can use the money for the child before they turn 21, including education. Once the child has access to the account at age 21, there are no restrictions on what he or she can use the money for. If the grandparent’s desire is to restrict the use of the money for education, that might not happen.

A 529 account is designed to save money for education. Each state has a 529 plan, and an account can be set up in any state’s plan. The proceeds can be used for expenses at federally approved higher education institutions. Contributions to the Colorado plan, College Invest, from a Colorado resident are eligible for a tax deduction for Colorado income tax. These accounts have the child as the technical owner and the person who establishes the account, such as a grandparent, as a custodian.

These accounts are controlled by the custodian without an age limitation. Besides the Colorado tax deduction for the contributions to the Colorado 529 accounts, the growth in the account isn’t taxable if distributions are used for approved educational expenses. Some of these expenses are tuition, room and board, fees from the university, textbooks, and computers and peripherals.

UTMA accounts and 529

‘A 529 account is designed to save money for education. Each state has a 529 plan, and an account can be set up in any state’s plan.’

accounts each have some pros and cons.

Both are easy to establish. There is control over an UTMA account until the young person turns 21, but they can use the money for any purpose after that. 529 accounts have some tax benefits and allow the custodian to control the account indefinitely.

With a 529 account, if the child doesn’t go to college, the account can be transferred to specified family members of the child, such as a sibling, parent or cousin. The custodian can, at any point, cash in the account and pay tax and penalties.

Another way to contribute to education is to pay costs directly when your grandchild goes to college. For any funding method you choose, be aware of IRS gifting guidelines. For 2023, the gifting limit is $17,000 per person without triggering a gift tax.

Because UTMA and 529 accounts are from one person to the recipient, the annual limit applies, although the 529 has some ways to contribute multiple years at once.

Check with your tax professional before using this multiyear strategy. With direct payment of expenses, each grandparent could utilize the annual gift limit.