College Fund for Grandchild

[frayne]

My wife and I were recently blessed with our first grandson about four months ago. Instead of buying some goofy X-mas presents that will be out grown or given away after a year or so I would like to start a savings account/college fund for the little guy. Any suggestion on what may be the best vehicle to do so ? Should it be in his name, his parents, mine ? Mutual fund(s), money market account, CD, regular savings ? Any tax inplications ?
Just curious as to what others may have done. Thinking about starting out with about a grand to get the ball rolling. Would appreciate and and all suggestions, comments, or ideas.

 

[MasterBlaster]

The thread linked below discussed many of the issues with these type investments...


http://early-retirement.org/forums/index.php?topic=10445.0;topicseen

 

[Rich_by_the_Bay]

You'll learn all about the dedicated college saving plans from others but just to introduce an alternate approach...

DW and I have decided not to gift money to our kids or grandkids now for the specific purpose of meeting college needs. The oldest grandkid is 4 and a half. The reason is that we have not yet quite reached our personal FIRE goals financially, and that money gifted may be sorely missed 15 years from now in the event of an illness, horrible economy, kid gone seriously adrift, or any number of other reasons.

Right now the money is growing tax deferred in our retirement funds (just like a 529 would, for example). If all goes well, we hope to help with college when the time comes. At that time we will know our own needs, assess where the kids and gkids stand financially and personally, and react accordingly.

We look upon it as smart planning to give money closer to when it may be needed, as long as it is growing as we wait. A final thought - I shared this with my kids so they didn't think we were stonewalling their college savings plans. Their reactions were positive - kind of like "sandwich generation insurance."

 

[MasterBlaster]

Rich_in_Tampa:

Your plan looks like a winner.

Keep in mind that some people like to fund kids funds cause' of the tax breaks associated with them. Whenever you take the money out of your qualified (tax deferred) investment you will pay income taxes on that amount. The remainder will only be left for gifting. Depending on your circumstances, your grandkid's income tax bracket could be consideralbly lower than your own. So you would need to save more (the gift plus the income taxes) to give your grandkids the same amount of money.

If your grandkid uses the money for college related expenses from their 529 plan, then the money is not taxed.

Also, if you give more than $11k/year (each from you and your wife) you are limited to a gift each year of $22k before additional gift taxes are due. The gift taxes are paid by the giver. So for gifts over $22k/year you would have to have money for the gift, for the income taxes on the gift, and money for the gift taxes.

That's why 529 plans are popular. They skip the associated taxes.

 

[brewer12345]

For now, we are doing what Rich mentioned for our own kids. No seperate pots of money, although we do make modest additions to the kids' custodial accounts every year (not necessarily college money, though). When we get over the hurdle of having enough for ourselves, we will start doing dedicated college savings. Until then, its all in there in the big pile.

 

[youbet]

If all goes well, we hope to help with college when the time comes. At that time we will know our own needs, assess where the kids and gkids stand financially and personally, and react accordingly.

I like that approach Rich.

I looked at it in a similar way. We have three gkids, 5, 4 and 1 yo. I like the idea of having their college savings grow tax deferred and spent, most likely, tax free. But, I don't like giving up control of the money so many years ahead of when it will be needed. Our own needs, or the needs of other family members then, are difficult to fully anticipate now. So, we've taken a compromise apporach. We contribute $2K per child annually to an ESA owned by their dad fbo each child.

Based on how things look today, we could contribute more. But who knows how things will be 13 - 20 years from now? If things work out as anticipated, we'll assist more when the time comes. Until then, we'll pay the taxes and keep control.

 

[Martha]

A few little tweaks on what MasterB says: The current gift limit is $12,000 per person in a year, so a husband and wife could give a grandchild $24,000 per year. There is no gift tax until the total gifts exceed a million dollars. Before you hit the $1,000,000 maximum, gifts in excess of the $12,000 gift limit will just effect your taxable estate. A section 529 plan allows for accellerated gifts.

Payments for tuition or medical care and medical insurance are exempt from gift tax if the money goes directly to the provider.

 

[FinanceDude]

For now, we are doing what Rich mentioned for our own kids. No seperate pots of money, although we do make modest additions to the kids' custodial accounts every year (not necessarily college money, though). When we get over the hurdle of having enough for ourselves, we will start doing dedicated college savings. Until then, its all in there in the big pile.

Not a bad plan. Right or wrong, I advise my clients to "take care of themselves" first. To me, it doesn't make much sense paying for 100% of your kid's college if they have to support you when you retire........... :

DW and I are funding some 529's for the kids on a DCA basis. However, I am pretty savvy on these plans, and believe in them, so for me not to have 529's and fund them would be foolsih.............

 

[Rich_by_the_Bay]

Your plan looks like a winner.
Keep in mind that some people like to fund kids funds cause' of the tax breaks associated with them.

Excellent point to reinforce.

Our calcs indicate that the opportunity cost of giving now (14-20 years in advance) v. retaining the tax deferred earnings ourselves more than offsets the tax implications (especially since I'd be in my 70s at the time, low bracket).

Furthermore, we get to control the investments (could not have done that well at my kids' ages). Of course, everyone's situation will determine the best case for them.

If you are a parent and have maxed out your other tax deferrals, the 529 route makes great sense.

 

[Rich_by_the_Bay]

Payments for tuition or medical care and medical insurance are exempt from gift tax if the money goes directly to the provider.

Is the gift tax exemption true for Gramma & Grampa as well as parents' (if paid to the college directly)?

 

[Martha]

Yes, you don't even have to be related.

 

[youbet]

so for me not to have 529's and fund them would be foolsih.............

You're saying that as a parent. OP was asking from the grandparents point of view. I think that unless the grandparents are extremely FI, there is a lot of sense in maintaining control of the money for possible alternative uses despite giving up tax savings. Giving token amounts that don't materially impact your overall financial position is a good compromise. Even realatively small amounts, given when the gkids are very young, can add up.

 

[FinanceDude]

You're saying that as a parent. OP was asking from the grandparents point of view. I think that unless the grandparents are extremely FI, there is a lot of sense in maintaining control of the money for possible alternative uses despite giving up tax savings. Giving token amounts that don't materially impact your overall financial position is a good compromise. Even realatively small amounts, given when the gkids are very young, can add up.

The ONE thing grandparents want most of all is CONTROL........ Most of the money I see grandparents give is large lump sums as an estate planning tool, and this folks are way FI.........

Most of the plans are done by parents for kids............. Keep in mind, the grandparent can get the money back, but have to pay a 10% penalty on the gains.......

 

[macdaddy]

Sometimes its not the amount but the thought that counts. My grandparents started a savings plan for me when I was born even though they weren't very wealthy. They put in a few hundred dollars a year and over time it added up. It wasn't a huge amount but I am still very grateful when I reflect upon their effort.

 

[chris2008]

My grandfather started a small fund/insurance combination (popular in Germany at that time) for me when I was 2 years old. My father continued to pay in when my grandpa died.
When I was 18 I got a small but nice amount of money.
I knew about it in advance but my parents made it clear that this was not a "car fund" or "vacation fund" but an "education fund".
The money came in time as my father had just lost his job.
I made it a matter of honour to pull myself through as long as possible without asking my parents for money.
I calculated that the money would get me half through the university if I was careful.
(University itself was cost free in Germany then).
I worked good and odd jobs. Every now and then I balanced and saw "one month more ... one semester more..."
When I graduated I had as much money as in the beginning. It became part of the downpayment for our house...
For us it worked out.
And I still appreciate that my grandfather cared for me so much.

However, there was risk attached. Some highschool friends financed their first cars with such funds and came back to their parents after the car was gone...
Also kids might be denied student loans or scholarships if they have too much money of their own.
On the other hand you cannot avoid all risks in life.

If you already have established a retirement plan for yourself + partner I would do something for the grandchild. But my own retirement would be priority no. 1.

Another thought: Your kids might feel neglected if the grandchildren are treated better than they were or are. Are your kids still paying off their students loans?