How to Help Your Grandchildren Pay for College
How to Help Your Grandchildren Pay for College – Taking the time to design a retirement blueprint, which takes into account all personal priorities and resources, can help you answer three big questions that are on the minds of many dedicated savers approaching their retirement transition:
- “Do you have enough built up in your retirement savings to stop working if you choose to?”
- “How much money can you afford to spend without running out?”
- “How do you manage your retirement savings to make it last?”
Another overlooked benefit is the ability to determine how much you can afford to help your children and grandchildren without jeopardizing your long-term financial security.
This can be a real eye-opener as most folks don’t know how much they can afford to help, so they hold back. After designing a retirement blueprint and discovering how much you can afford to help, your next question can flip to “how” should you help?
There are several factors to consider when selecting your approach, such as the child’s age, proximity to college, the family’s financial aid strategy, and the amount of money you want to invest.
However, in many cases, our recommendation is pretty straightforward: 529 College Savings Plans.
For the purposes of this discussion, let’s assume that your children will be saving for their kids’ education costs and not planning to receive financial aid.
The government’s priorities change all the time, so counting on financial aid is not a sound long-term strategy.
How 529 Plans Work
Let’s review the benefits of 529 plans:
- 529 plans are set up with you (or your child/grandchildren’s parent) as the custodian and the grandchild as the beneficiary. You may request to have all investment statements and correspondence sent to you exclusively or to your grandchild as well.
- You control how you invest money in the plan. Most plans offer a large selection of investment options and “age-based portfolios” where the company automatically adjusts the allocation of the investments to coincide with your grandchild’s age and years remaining before he or she needs the money for college.
- All money deposited into the plan grows tax-deferred just like your IRA. This is the first big long-term benefit. You will not receive a yearly 1099 to report gains on your tax return.
- As long as the student uses the money for education expenses, such as room, board, tuition, books, etc., he or she withdraws all money from the plan tax-free, similar to a Roth IRA. This is the most significant benefit. Imagine the tax bill for 18 to 22 years of growth under normal circumstances!
- If your grandchild does not go to college, you have three choices:
- You may transfer the balances in the plan to another grandchild with no penalties or tax consequences.
- You may open a Roth IRA in your grandchild’s name and transfer $35,000 ($7,000 per year over five years) to the Roth IRA with no penalties or tax consequences. The funds continue to grow tax-free for the remainder of your grandchild’s life.
- For balances over and above that limit that are not used for education expenses or transferred to a Roth IRA, your grandchild will pay taxes and a 10% penalty on the gains generated in the plan over the years when he or she withdraws the money.
- Plans have become very flexible, so your grandchild may use the money to pay for virtually any college. Most plans don’t have a limited “approved” list, such as only for in-state schools.
- You can use 529 plan balances for private high school expenses (with certain limitations).
- The last big benefit is that 529s are an estate planning tool for you. The government considers funds deposited into a 529 plan a gift and removes them from your taxable estate. For this reason, it’s a helpful estate-planning tool.
The last factor to consider is which 529 college savings plan to invest in. There are several good ones available. Take your time to evaluate the quality of investment options offered and the fees they charge to run the program.
Even with all the tax benefits, the quality of the underlying investment options is what drives the real value of these plans, like all other investments.
If you need help selecting a plan, let us know.
Once you have the plan set up, step back and feel great about helping your grandchildren get off to a better start than you likely did.
Imagine how your grandchild may feel someday when he or she finds out that the reason they’re able to go to the school of their choice is because you helped pay for it by investing for them!
That will make it all worth it.
Financial Advisor Evaluation Checklist
Our Financial Advisor Evaluation Checklist outlines the questions you should ask any advisor or firm you’re considering hiring. Using the Checklist, you can make side-by-side comparisons of potential firms designed to help you feel confident in taking the next step.
This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique situation.
Jack Phelps
Managing Partner / Financial Advisor