Being a grandparent means showering your grandkids with love, affection and gifts. And one of the best gifts you can give your grandkids is to help them pay for their college education. For many, a chance to provide their grandchildren opportunities they missed, to supplement the efforts of parents, or even to completely fund their grandkids' college expenses can be very fulfilling. But most grandparents aren't sure what options are available, how to get started, or how to discuss the issue with their grandkids.
When you are helping your grandchildren pay for college, there are numerous funding options. A few of the most common ways are:
Direct Gifts: Providing direct gifts is an easy way to make a contribution that matches your comfort level. It is also the least complicated way to help grandkids pay for college, but it does have limitations. You can only give up to $13,000 per year (the 2009 gift tax limit) without triggering an estate or gift tax liability. Talk to a tax consultant to determine what level gift you can give without triggering addition tax liabilities
Paying for tuition directly: Another option to consider is pay tuition directly to the college rather than writing a check to your grandchild. The advantage here is that the amount is not subject to the gift tax limitation of $13,000 and you can be sure that the money is spent for college. Remember to consult your tax advisor and make sure that your payment, in this case, is made directly to the college.
UTMA / UGMA (Custodial Account): The Uniform Transfer to Minors Act / Uniform Gift to Minors Act is a fairly simple way to transfer assets to a minor. Essentially, it creates a trust with some tax advantages (it's generally taxed at the child's income tax bracket, unless the income exceeds the "kiddie tax" threshold of $1,900 per year). Keep in mind one important factor with the UTMA / UGMA accounts: once the child has custody over the account, they can spend it on anything they want, not just education.
529 Plans: If you want to help fund your grandchild's college education—but not for a few years—state sponsored 529 plans could be a good way to invest in your grandchild's future, while benefiting from the tax advantages it offers. 529 plans allow you to invest your contributions in mutual funds or similar investments and then withdraw the money tax-free to pay for qualified college expenses, when your grandkid is ready for college. You can open an account in any state offering 529 plans—but some states also offer their residents additional benefits such as state income tax deductions. As with all investments, before investing it is important to consider both benefits and risks associated with the plan and read the plan's program disclosure statement for important information on investment objectives, risks, charges and expenses.
Jobs: One other creative way to help your grandkids pay for college could be to give them a job! Summer jobs for high school and college students can be a good way to make money—and a great way to share life lessons and a work ethic that can be even more valuable than the money itself.
Grandparents have always played a crucial role in helping to pay for college. By providing grandchildren with money for college, you can help them achieve their dreams. When considering your options, be sure to look into all the benefits and risks as well consider the impact your gift has on your grandkids' financial aid eligibility. Thoughtful consideration of college payment options will enable you and your grandchild to make the most out of your gift.
Investments in 529 college savings plans are neither FDIC neither insured nor guaranteed and may lose some value. Some states offer favorable tax treatment to their residents only if they invest in the state's own plan. Investors should consider before investing whether their or their designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program and should consult their tax advisor.
Please note the plan's disclosure document includes investment objectives, risks, charges, expenses, and other information associated with municipal fund securities that investors should read and consider carefully before investing. You can obtain plan disclosure documents from each 529 plan.