As a grandparent, you may want to help pay your grandkids’ college expenses. There are a number of ways for you to contribute to grandkids’ college funds, including some with tax and estate benefits for you and/or your grandkids.
529 Plan
One of the best ways to contribute to a grandchild’s college funds is to set up a 529 college savings plan in your name with the child as the beneficiary. Contributions to the account may be tax deductible in your state (if it is an in-state plan), funds in the account grow tax-free, and they are also tax-free when withdrawn if they are used for qualified education expenses. For you, as a grandparent, there are other significant advantages to 529 plans.
First is flexibility in contributions. You can contribute as much or as little to a 529 college savings plan as you want in any year, and there is no minimum contribution requirement. Therefore, if you are uncertain about your income and expenses in future years, a 529 plan allows you the flexibility to adjust contributions as necessary based on your financial situation. Contributions to 529 plans are considered gifts for tax purposes, so very large contributions could have gift tax consequences. However, favorable gift tax rules apply to some 529 plan contributions, so check with your accountant if you plan to make a large upfront deposit to the plan.
Second is flexibility in the use of funds. If the grandchild for whom the 529 plan was set up decides not to go to college, you can change the beneficiary on the account to another grandchild or other relation who can use the funds for educational purposes. Also, the funds can be used for qualified education expenses at any college or university.
If you decide to contribute to your grandkids’ college funds through a 529 plan, here are some suggestions to make the process easy and productive.
First, start as soon as possible, since funds in a 529 account opened when a grandchild is born or is very young have much longer to grow.
Second, realize that even small contributions can make a big difference. While making large contributions when your grandchild is young may result in a larger balance when she is ready for college, don’t be discouraged if you can’t afford to take that approach. Even if you deposit only a small amount regularly, the funds will add up nicely over time. For example, $10 deposited each month for 18 years starting when a grandchild is born will grow to more than $3,500 at an annual interest rate (compounded monthly) of 5%.
Third, don’t overlook your own financial well being to help your grandchild. Contributing to your grandkids’ college funds should be just one part of your long-term financial plan, with your own financial security before and after retirement at its center.
Fourth, talk to your grandkids’ parents about your plans to help out with college expenses. Coordinating with them can be important, since the funds you provide could affect your grandkids’ eligibility for financial aid.
Other Options
Other options for grandparents who want to help pay their grandkids’ education expenses include outright gifts or direct payments of college expenses such as tuition or fees. However, be careful about making direct payments to a grandchild’s school, since these payments could significantly affect how much financial aid she receives.
