What is the best way to give grandkids $ of future education?

[Franklin]

Feeling blessed to have a 2 year old granddaughter and now a grandson in a few months. I am going to visit them next week (In Arizona) and wanted to broach the subject of DW and I starting them a college fund. Ive read about 529's and other methods. Are their pro's and con's I should consider? I know this forum has a lot of wisdom on this topic and I thank you in advance.

 

[Montecfo]

Feeling blessed to have a 2 year old granddaughter and now a grandson in a few months. I am going to visit them next week (In Arizona) and wanted to broach the subject of DW and I starting them a college fund. Ive read about 529's and other methods. Are their pro's and con's I should consider? I know this forum has a lot of wisdom on this topic and I thank you in advance.

Congrats on your grands! It definitely is a blessing to be able to participate financially in the kids' education.

In my opinion the 529s are the best option. Some people will do UGMA's or similar, but that's really a risk because there's no strings attached to the money once the kid turns 18, I think that's a bad plan since there's no way to know at this point how they will decide to spend it. Also UGMA's count against the student in aid computations.


haven't looked at the education IRAs recently but generally the contribution limits were so low that it seemed hard to really make a dent. I think they also have some of the same risk of the kid controlling the account when they turn 18.

On 529s you want to search out the best plans, not necessarily using your state's plan. I can't recall if Arizona's state plan is decent or not. You will definitely have some research to do in that regard.

State plans may also carry with them state tax benefits. That is true here in Virginia. Not sure if that's true in Arizona, and if you are not taxable in Arizona and decide to use the state plan, you may want to gift those funds to your kids and let them make the contributions and get the deduction, so it is not lost.

Best of luck.

 

[Rocky mtn high]

I have recently started monthly contributions to a 529 Colorado plan. That is what our FA advised.

 

[RetireeRobert]

As you mention, 529's are one good vehicle grandparents can use. There is some flexibility available with them in that both parents and grandparents can set up 529's for a kid, as I understand. And growth of funds over time is tax deferred.

Another thought, but not so flexible, some particular states/colleges allow "buying" four years education in advance at current tuition rates. But if when kid gets to college age and doesn't want to go to that college, options to "solve" that are more limited. Might check with your grandkids' state/colleges on any prepay plans available there.

 

[misanman]

As you mention, 529's are one good vehicle grandparents can use. There is some flexibility available with them in that both parents and grandparents can set up 529's for a kid, as I understand. And growth of funds over time is tax deferred.

Another thought, but not so flexible, some particular states/colleges allow "buying" four years education in advance at current tuition rates. But if when kid gets to college age and doesn't want to go to that college, options to "solve" that are more limited. Might check with your grandkids' state/colleges on any prepay plans available there.

We established 529s for our ten gc and they have worked well. And we get a tax break in our state.

 

[Souschef]

I established 529's for 3 of our grandchildren.
#1 graduated last year
#2 will be a senior this year
#3 is 7 years old and her fund is growing.

 

[swaneesr]

I established 529's for 3 of our grandchildren.
#1 graduated last year
#2 will be a senior this year
#3 is 7 years old and he fund is growing.

Nice! Great gift to pass on.

 

[corn18]

I may just pay for their college as they attend (we don't have any GC yet). The reason is they may not go to college. Most of my retirement money will end up in my Roth by the time any future grandkids are college age, so it will be tax free just like a 529. But if they don't go to college, the money is still tax free and no 10% penalty on the earnings.

 

[Rambler]

I may just pay for their college as they attend (we don't have any GC yet). The reason is they may not go to college. Most of my retirement money will end up in my Roth by the time any future grandkids are college age, so it will be tax free just like a 529. But if they don't go to college, the money is still tax free and no 10% penalty on the earnings.

My thoughts exactly. We have decided that we want to help the grands with school, but with certain conditions. For example, we feel fine supporting an education that will actually help them earn a living, but not so much about a few recent majors that have popped up that have absolutely no prospect of helping them earn a living. So while we want to help, we also want to support responsible choices. If we are going to waste money, either by just supporting a non-productive lifestyle, or by supporting a worthless degree, we may as well waste it on ourselves.

 

[RetireeRobert]

I may just pay for their college as they attend (we don't have any GC yet). The reason is they may not go to college. Most of my retirement money will end up in my Roth by the time any future grandkids are college age, so it will be tax free just like a 529. But if they don't go to college, the money is still tax free and no 10% penalty on the earnings.

Yes, good thought, IF one is of the right present age to be fairly sure one will still be around when the grandkids go to college!

 

[corn18]

Yes, good thought, IF one is of the right present age to be fairly sure one will still be around when the grandkids go to college!

You could put them in a trust and pass on the college money that way if you die before they make it to college age. Step up basis would be their friend. And you can stipulate that if it isn't used for college it goes somewhere else.

 

[RetireeRobert]

You could put them in a trust and pass on the college money that way if you die before they make it to college age. Step up basis would be their friend. And you can stipulate that if it isn't used for college it goes somewhere else.

Good deal!

To every problem, there is a solution.

 

[Koolau]

For grandkids, I would suggest helping them pay off student loans AFTER they get a "good" education. Since it's my money, I get to decide what "good" means. If their major includes the word "studies" in it, they're on their own. If their major implies a c*reer path within it (engineering, biology, chemistry, education, etc. etc.) then I'm all in - if they graduate and get a j*b.

Once they go through the FAFSA process and pick a "reasonable" school and see how much they have to borrow, hopefully they will base at least some of their decisions on what their education will actually cost (someone.) If they are unaware that Grams and Gramps MIGHT be willing to kick in at some point, they be a bit less free with someone else's money.

I've known too many families who more or less let their kids pick a school and a major that sounded "cool" and THEN were willing to pay for the kid's expenses. When the kids/parents/grand parents find out a major in Theater Studies qualifies the kid to apply for 5 positions out of 200 similar graduates - or to drive a cab, it's too late. I think kids should be on the hook for as much as possible and w*rk as much as possible so they will appreciate their education. THEN old Grams and Gramps can step in and help save the day when the kids are getting started in the REAL world.

Just my opinion and I'm sure I'm a minority opinion on this subject. By the way, that's how we did it with our kids. It was rather successful if I say so myself. The kids are successful and had relatively little debt for us to help them pay. YMMV

 

[Dash man]

I have 529 plans set up for our three grandkids. PA and Utah 529 plans each use Vanguard funds and they’re doing well. PA allows tax deductions for other states 529s, so we luck out there. We have control of the money, not the kids. Their parents are successors for the accounts after DW and I are both gone. If they choose not to go to college the money can either be used for vocational training or the beneficiaries changed to someone else of the many kids in our family. Anything not used can also be passed from generation to generation.
The trust idea posted above involves the cost of setting up a trust, paying trust tax rates on income, filing tax returns, and paying someone to manage the trust if you are gone or incapable of handling it.

 

[nap470]

We created a 529 plan for our daughter when she was 2 weeks old...20 years ago. It was age-based and became more conservative as she got closer to college age. She is now a sophomore in college and the 529 plan has performed well and provided a needed tax break for us over the years ($20K annual deductible contribution limit at least in IL). We are fortunate that she is a very responsible, serious student, and trending toward a Biology/medical career.
A few years back we thought we had enough money in the 529 fund to pay for 5 kids (we only have 1), but as tuition has shot past the moon, our fund will now deplete prior to her senior year. If college tuition doesn't change its course, some of these schools will cost $125K-$150K per year in about 10-15 years. Her current college is at $73K including room & board. Although this year we have not paid room & board since she is attending online the entire year.

 

[Franklin]

OP here, thanks for the opinions on 529 plans and other options. It does seem there are benefits in both investing in the plan and just gifting $'s to an account controlled by me for their benefit. I am still not clear about how the state tax deduction works. Can anyone explain this. I live in a different state (Ga) than the child (Az). I file 2 state returns (1 in GA and the other in California).

 

[Dash man]

OP here, thanks for the opinions on 529 plans and other options. It does seem there are benefits in both investing in the plan and just gifting $'s to an account controlled by me for their benefit. I am still not clear about how the state tax deduction works. Can anyone explain this. I live in a different state (Ga) than the child (Az). I file 2 state returns (1 in GA and the other in California).

This might help: https://www.savingforcollege.com/529-plans/georgia/path2college-529-plan

 

[misanman]

I am still not clear about how the state tax deduction works. Can anyone explain this.

We live in Michigan and participate in the Michigan 529. Contributions to the MESP show up as a "Subtraction from Income" on the Michigan tax form. The students need not be residents of Michigan or attend a Michigan educational institution.

 

[ITTN]

"One important caveat is the difference in treatment if someone other than the parents or student—such as a grandparent—owns the 529 plan. In that case, while these 529 savings are not reported as a student asset on the Free Application for Federal Student Aid (FAFSA), any distribution from this 529 plan is reported as income to the beneficiary, potentially resulting in a significant reduction in eligibility for need-based aid the following year."



The above is from Fidelity:
https://www.fidelity.com/learning-ce...-savings-plans

 

[Dash man]

"One important caveat is the difference in treatment if someone other than the parents or student—such as a grandparent—owns the 529 plan. In that case, while these 529 savings are not reported as a student asset on the Free Application for Federal Student Aid (FAFSA), any distribution from this 529 plan is reported as income to the beneficiary, potentially resulting in a significant reduction in eligibility for need-based aid the following year."



The above is from Fidelity:
https://www.fidelity.com/learning-ce...-savings-plans

I believe that can be avoided by simply paying the school directly.

 

[misanman]

any distribution from this 529 plan is reported as income to the beneficiary, potentially resulting in a significant reduction in eligibility for need-based aid the following year."

Or use the 529 at the end of the student's college years rather than the beginning, assuming that the 529 isn't big enough to fund the degree completely. Our oldest GS used it for the final year.

 

[frayne]

For grandkids, I would suggest helping them pay off student loans AFTER they get a "good" education. Since it's my money, I get to decide what "good" means. If their major includes the word "studies" in it, they're on their own. If their major implies a c*reer path within it (engineering, biology, chemistry, education, etc. etc.) then I'm all in - if they graduate and get a j*b.

Just my opinion and I'm sure I'm a minority opinion on this subject. By the way, that's how we did it with our kids. It was rather successful if I say so myself. The kids are successful and had relatively little debt for us to help them pay. YMMV

Ditto and agree 100% with your logic.

 

[Franklin]

This might help: https://www.savingforcollege.com/529-plans/georgia/path2college-529-plan

Thanks this is a super helpful link.

 

[copyright1997reloaded]

One of the advantages of a grand parent owned 529 plan is that the assets in the plan are NOT reportable on the grand child's FASFA. So this is good in terms of their initial FASFA application (and subsequent needs based financial aid). However, distributions to the grand child are treated as untaxed income and count 50% towards FASFA income calculations (that is, every $ given will reduce the students potential needs based grant by $0.50. This isn't exactly correct as the student gets a small asset protection allowance, but for the purposes of this discussion the analysis is "close enough").

Contrast this with a 529 in the parents name. In that case, the 529 is treated as a parent asset, and counts (approximately) at 5.64% in terms of needs based reduction. When a custodial parent uses these qualified assets toward the child's education, it does NOT count as income to the child in terms of FASFA calculations. (Note I said custodial, if the $ comes from a non-custodial parent in terms of divorce it is a similar situation to a grand parents contribution).

In terms of UTMA's, it is 18 or 21 (when the child gets unrestricted access to the assets) , depending on the state. Note that one advantage of a UTMA is that you can transfer assets (not just cash) to the UTMA, and possibly take advantage of "tax gain harvesting". (This is taking capital gains in the account each year up to the top of the child's 0% bracket). UTMA's can also be converted into 529's, but with the restriction that the 529 cannot easily be redirected to another child. There are also potential tax costs, because (as I understand it) unrealized capital gains become realized because the resultant 529 requires cash contributions. UTMA's also have the disadvantage that the assets in the UTMA count as 20% for FASFA EFC amounts (vs 5.64% for a parental 529).

Another approach (which requires waiting for them to be college age) is to gift money to your child who would in turn use it to pay for the grand child's college education. This will not be counted as the students assets in terms of FASFA, but you are limited to the annual gift exclusion. You could also pay the grand child's school tuition directly, and this amount is NOT subject to the gift tax exclusion limit (it is known as the "Gift Tax Education Exclusion for Tuition"). Unfortunately, that amount given WILL raise the student's EFC amount by 50% of the gift.

There are also strategies about giving during the middle of the student's junior year, as the FASFA is backwards looking and money given then (or tuition paid directly) won't change the FASFA results (at least for undergraduate).

ETA: I see by the time I typed this in some of these strategies/discussion points have already been made. Another thought/thread might be to discuss ways you can start to indirectly fund grand child retirement accounts (e.g. ROTH IRA's). But that requires them to have a j*b of some sort in order for the child/grand child to have earned income.

 

[Gumby]

Suppose the student takes loans to finance their education. Then, after the student graduates, the grandparents pay off the loan. Is that taxable income to the student? If not, that sounds like the best plan.