Invest in your grandchildren’s futures
This time of year marks National Grandparent’s Day. While not as well known as Mother’s Day or Father’s Day, Grandparents Day is, nonetheless a reminder to us of the importance of grandparents in the lives of their grandchildren. If you’re a grandparent yourself, you might want to use this day as a starting point to consider how you can best help your own grandchildren on their journey through life.
Of course, one of the most generous things you can do is to help your grandchildren pay for college. A person with a bachelor’s degree will earn, on average, almost twice as much over a lifetime as workers with a high school diploma, according to the U.S. Census Bureau. And over the past several years, college costs have risen significantly.
To help meet these costs, you might want to consider opening a Section 529 savings plan. Your contributions may be deductible on your state taxes, and all earnings and withdrawals are tax-free, as long as the money is used for qualified higher education expenses. Withdrawals for other types of expenses may be subject to federal and state taxes plus a 10 percent penalty. And since you can open a Section 529 plan in your name, you’ll maintain control over the funds, so if the grandchild who is the plan’s beneficiary decides against going to college, you can switch the beneficiary designation to another grandchild.
While saving for college may be more of a near-term goal for your grandchildren, they’ll also have other objectives, such as saving for retirement — and you can help them out in that area, too. For instance, you may want to help them fund a Roth IRA. Since your grandchildren are young, they have many decades ahead of them to take advantage of this retirement vehicle, which offers tax-free earnings, provided your grandchildren don’t make withdrawals until they’re 59-1/2.
To qualify for a Roth IRA, your grandchildren just need to be old enough to earn some money. They would have to establish the Roth IRA in their names, but you could contribute to it. The contribution limit is the lesser of $5,000 per year or the amount of annual earned income.
Helping your grandchildren pay for college or save for retirement will bring you great satisfaction during your lifetime. But once you’re gone, you can still provide valuable financial resources that may help your grandchildren achieve other goals, such as furthering their education or making a down payment on a home.
Specifically, you might want to pass on some of your assets to your grandchildren through a living trust, which can avoid probate and gives you great control over how — and when — you want your wealth distributed. And if you name your grandchildren beneficiaries of a life insurance policy owned by a trust, the proceeds will not typically be subject to estate or income taxes. (Keep in mind, though, that you will need to consult with a qualified legal advisor before establishing a living trust, which can be a complex arrangement. Edward Jones does