<p>Granny, your understanding isn’t quite right. I’m a big fan of 529 accounts, but let’s be clear on how they can and can’t be used. To clarify:</p>
<p>529s owned by grandparents for the benefit of the child are not reportable on FAFSA but they are reportable on the Profile.</p>
<p>In many states, no contributions are deductible from state income taxes. Some states are very generous with deductions; many do not have deductions allowed. </p>
<p>There are no federal contribution limits to 529s, but states might have their own lifetime limits. Contributions to 529 plans are considered gifts under the federal gift tax rules. The annual gift exclusion for federal taxes is $13,000 in 2009. There’s a 5-year carry-forward option so that someone could contribute $65,000 in one year with no tax consequences to the giver. </p>
<p>Withdrawals from 529s are tax-free to the extent that the funds are used for qualified higher education expenses.</p>
<p>Edited to add:</p>
<p>Withdrawals from a 529 owned by the parent or student are not reportable on FAFSA as untaxed income. Withdrawals from a 529 owned by a third party may be reported as untaxed income on FAFSA. The Dept of Education needs to provide clarification on this. In the meantime, if those withdrawals of 3rd-party 529s can be made during the student’s last year of college, the issue can be avoided.</p>