Helping grandkids save for college
With education costs continuing to soar, many grandparents may be wondering what they can do to help their grandchildren financially in the pursuit of a college degree. If you are a grandparent who has the means to lend support, there are a variety of ways you can do so. The best solution for you will depend in part on the timing of when your grandchildren will need the money.
Saving in advance
If your grandchildren are years away from needing tuition funds, you can set money aside in a variety of vehicles. One attractive option may be a 529 College Savings Plan, which allows you to deposit up to $75,000 ($150,000 for a couple) in 2018 into the plan for each grandchild without incurring gift taxes. That money can be deposited in one lump sum or over a period of time.
Earnings can grow on a taxdeferred basis and be withdrawn tax-free to meet qualified education costs for each grandchild. Opening an account in your name allows you to retain control over the assets, using them for your grandchildren’s qualified education expenses as you see fit.
Keep in mind that funds withdrawn from a grandparent-owned account for a grandchild will be counted as student income on the FAFSA, which is used to determine eligibility for financial aid.
It’s worth noting that the recent tax reform legislation expands the tax advantages of 529 plans to expenses for tuition at an elementary or secondary public, private or religious school. Starting in 2018, you may withdraw up to $10,000 annually that is federal income tax-free for elementary or secondary school tuition incurred by your grandchildren during the tax year.
Other college savings options include:
• Custodial accounts. Placing cash or other types of assets into a Uniform Gift to Minors Act or Uniform Transfer to Minors Act account will, at a specified age, give the grandchild full rights to the money. That means there is no guarantee the money will be used to pay for education needs.
• Education trust. Putting money in a trust that specifies it must be used for education purposes is another option. This approach can come with high legal and administrative costs, but ensures that the money would be spent according to your wishes.
• Coverdell Education Savings
Account. These accounts provide a way to grow savings on a potentially taxfree basis, but annual contributions are limited to $2,000 per year per grandchild and are subject to income limits.
Paying as they go
If your grandchild is ready to begin college, you can provide help today
in several different ways:
• Gift funds to the grandchild. Annual gifts of up to $15,000 for an individual or $30,000 for a couple can be made to the grandchild without incurring gift taxes. A monetary gift will give the grandchild control over the money, which means he or she could put it to use for something besides education.
• Tuition payments directly to an institution. Any amount of tuition
you pay directly to a school for the benefit of a grandchild is not subject to gift tax. This does not apply to room and board or books and supplies.
• Lending money. You can provide an interestfree loan to a grandchild of up to $10,000, and lend any amount over that if you apply an interest rate set by the IRS.
Paying after they finish school
If the grandchild has
finished college but is carrying debt from student loans, you can offer to help repay them. Any amount paid in a given year is subject to the annual gift tax exclusion limitation of $15,000 per person per year.
Have a family conversation
Before any decisions are made on the best ways to provide financial assistance for higher education needs, discuss
your wishes with your children and grandchildren, as appropriate. Talk about your desires to see the grandchildren obtain a good education to help them succeed in life, and be specific about your expectations if you provide support. Then talk to your financial and tax advisor to determine the best course of action given your circumstances and goals.
Bronwyn L. Martin is a Financial Advisor Chartered Financial Consultant with Martin’s Financial Consulting Group, a financial advisory practice of Ameriprise Financial Services Inc. in Kennett Square and Havre de Grace, Md. She specializes in fee-based financial planning and asset management strategies and has been in practice for 18 years. To contact her visit www. ameripriseadvisors. com/bronwyn.x.martin.