September 15, 2020
Becoming a grandparent is a joyful experience, and the luckiest grandparents are arguably those who live close to their grandchildren. As grandparents, you play an important role in a multigenerational experience, giving your grandkids your presence, wisdom, and sometimes, financial support.
Helping grandchildren with college expenses is a great way to invest in their future while easing the burden on their parents. That said, it’s not an option for some grandparents who themselves are struggling on fixed incomes.
Many grandparents opt to wait until after they retire to ensure they have enough, and that’s perfectly fine. Here are some practical considerations as you consider how, how much, and when to save or contribute to your grandkids’ education.
Assess your financial situation
To be of service to others, you must first take care of yourself. If supplementing education costs is a top priority for you, it’s best to start these conversations as early as possible. That way, you and your financial team can arrange your investments in a way that supports your goal. Depending on your situation, that might mean adjusting current lifestyle habits, redirecting funds, and creating a more robust investment plan.
Be realistic about whether you can afford to participate in college costs. The average college education is typically tens of thousands of dollars per year more than you likely paid for your own kids’ education.
Assess your current financial situation, ideally with a financial team and tax advisor, to review your options.
- Are your short-term and long-term needs planned for?
- Will your current lifestyle take a hit?
- Do you have enough saved for your healthcare and medical needs?
- How much ‘extra’ might exist in your portfolio and/or other assets to comfortably give away?
Whereas all grandparents want to help their family financially, it’s critical to ensure that your bases are covered first.
Know where to save
If you opt to earmark money for your grandkids’ education, your financial team can help you forecast an appropriate amount of money to have saved by the time the child turns eighteen.
Your contributions can supplement their tuition bills or help pay for books, supplies, transportation to and from home at the holidays, or other expenses that inevitably arise.
Account types include (among others) a traditional savings account, a tax-deferred 529 plan, or a brokerage account in your name that you cash out when the time is right. If you opt for a traditional savings account, ask your tax advisor to educate you about the gift tax ($15,000 per year or double for married couples) and its annual tax-free limits. For those with significant cash savings, you can gift amounts over the $15,000 annual gift tax exclusion tax-free if it is made directly to an educational institution for tuition.
It’s never too late to put money into the stock market or other investment vehicles that will deliver higher interest rates than a savings account. Even if you’re in your seventies now and your grandchild is 10 years old, the compounding interest over eight years can be significant! For example, if you invested $5,000 to start, and added $200/month to the account, over eight years at 6% interest (not guaranteed, just estimated), you’d have over $31,000 in today’s dollars.
Another option that has gained popularity over the years is to deposit money into an existing 529 plan or other investment account designated for the grandkids’ education. 529 plans are tax-advantaged investment accounts designed to help families save for educational expenses.
Although contributions are not income tax-deductible, depending on your state of residence you may be able to claim a state deduction (sorry Delawareans, this does not include you). Even though you contribute with after-tax dollars, all growth is tax-deferred, and qualified education expenses are tax-free.
What is a qualified education expense? Upon its inception, 529 funds could only be used for tuition, fees, supplies, and room and board at the University/College level. But due to the SECURE Act legislation passed in late 2019, it’s since expanded to include K-12 education and even student loan repayment ($10,000-lifetime limit).
529 plans have higher contribution limits (dependent on your state plan) than other savings vehicles and don’t have income limits on contributions. These accounts have another unique feature: front-loading contributions.
With a 529, you can front-load 5 years’ worth of annual gifts in one year, up to $75,000 in 2020. Be sure you work with your team to implement tax planning strategies if you decide to go down this path.
Going the 529 route? Here are some questions to ask your finance team:
- What’s the best way to choose a 529 plan, and what are there fees?
- Should I set up a separate 529 plan for each child?
- If my grandchild doesn’t end up going to college, can I have the money back?
- Can I withdraw money from a 529 plan for unplanned emergencies?
- What are the tax consequences to my estate of a 529 plan?
- Does my state offer a state tax credit along with the federal tax credit?
- Does a 529 plan count against the child’s eligibility for financial aid?
- Can I withdraw money from a 529 plan for unplanned emergencies?
Think outside the box
If all these considerations feel overwhelming or too complicated, remember: not all college support comes in the form of a strategically planned-out education savings account.
Don’t underestimate the value of demonstrating your support and love through visits, phone calls, and care packages. Any gift, whether it be time, money, or talent, during important life milestones are all but guaranteed to make your grandkids appreciate you even more than they already do!
Contributing to your grandchild’s education is a significant goal. If you need help wading through the pros and cons of a 529 vs. other investment options, reach out today. We’re here to help.