<p>529 accounts are reported as parent assets in FAFSA whether owned by the parent or the student. This is a good thing as in FAFSA parent assets are assessed to the EFC at a maximum of 5.6% (may be less after parent asset protection allowances) while student assets are assessed at 20% (dependent students have no asset protection in FAFSA).</p>
<p>Currently grandparent owned 529 accounts are not reported. That may change of course.</p>
<p>Withdrawals from 529 accounts are not taxable as long as they are used to pay qualified education expenses. If withdrawals are used for non education expenses they are taxable plus incur a 10% tax penalty. There are some exceptions - for instance if the money withdrawn is not used for qualified education expenses because the student has received scholarships then the withdrawal is taxable but does not incur the penalty. </p>
<p>IRS publication 970 has all the rules and regs and specifies what is considered a qualified education expense. Make sure you read the correct section - some expenses are considered qualified expenses for certain tax benefits and not for others (for instance room and board is for 529 account withdrawals but not for the Hope tax credit).</p>