Guest article provided by: Christopher Haymon of
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A Grandparent’s Guide to Helping Fund Your Grandchild’s College Education

College tuition in the United States is infamously expensive, often costing well over six figures once you factor in all four years of an undergraduate degree. If you’re a grandparent, you may want to consider helping your kids fund their kids’ education and give your grandchildren a helping hand. There are many ways retirees can offer financial support without jeopardizing their own retirement savings. Read on to learn about some of the ways you can help your grandkids realize their dreams of achieving a higher education.

Start a 529 college savings plan

Retirement savings plans are evolving thanks to changes in the SECURE Act. Passed in December 2019, this piece of legislation created new tax laws impacting individual and employer-sponsored retirement plans. One thing that’s been affected is the 529 education savings plan, which applies to repayments for certain student loans. It’s now possible to make a penalty-free withdrawal of up to $10,000 from a 529 plan. A financial advisor can answer questions you may have about the topic.

Try a Coverdell Education Savings Account

A Coverdell Education Savings Account, ESA, is a type of custodial account that can be used exclusively for paying for certain types of education expenses for the account’s beneficiary. So, as the grandparent, you can set up a Coverdell ESA and designate your grandchild as a beneficiary. The Internal Revenue Service, IRS, has details on how this ESA works. For example, contributions have to be made in cash. Also, beware that they aren’t tax-deductible. There are also limits on how much you can contribute to an account per year.

Look into custodial accounts for grandchildren

A Coverdell ESA is just one example of a custodial account. In general, custodial accounts refer to accounts set up by parents of grandparents for a minor child or grandchild. Money that goes into that account is for the beneficiary, even though they don’t control the account. Monetary transfers into these types of accounts are considered gifts. So, you can give a certain amount of money per year without using up your lifetime gift tax exemption. This is referred to as your annual exclusion. This guide to custodial accounts explains the details.

Consider setting up a trust for your grandkids

Another option is to set up a trust. Wells Fargo explains that this can be a useful tool for passing on assets to your grandchildren and, if set up correctly, can minimize the tax burden on their future inheritance. Trusts can be personalized in various ways. For example, you can designate how the money in the trust is to be used. If it’s only supposed to be for their college tuition, you can specify that. You can also pick milestones when money from the trust is released to the beneficiary, like when they graduate college—the perfect reward.

Set up an investment portfolio for your grandchildren

Making cash gifts to your grandchildren, for example through custodial accounts, has pros and cons. It’s important to weigh those advantages and disadvantages carefully. You can also explore alternatives, such as setting up investment accounts for your grandchildren. NASDAQ offers a roundup of the various ways you can invest in your grandchildren’s future, for example through a certificate of deposit, exchange-traded funds, a Roth IRA, mutual funds, or high-yield savings accounts. You might even consider investing in real estate.

As a grandparent, you want to do all you can to help your grandchildren succeed. Setting aside some money for their college education can be a big help. The above guide outlines some tools to consider, from 529 plans to trusts.

For more resources like this, visit the Big Top Kids Gifts blog.