Starting a Grandkids College Fund

[street]

I see many here set money aside for their grandkid's secondary education. There are many ways to do this what seems to be the best way for funding college.

Do you have restrictions on a certain age before they can use the money? I'm not totally in agree with an account that is restricted to just education for the money use. Some kids may never go to college or pay their own way.

I'm more open to fund an account for them with restrictions when they can take it out and how they can use the money.

So, how do most fund an account and why they choose that type. I listed a few I'm sure there is other ways, so educate us on the best way.

Open a 529 Plan.
Put Money Into Eligible Savings Bonds.
Education Savings Account.
Start a Roth IRA as a College Fund for Kids.
Put Money Into a Custodial Account.
Invest in Mutual Funds.
Take Out a Permanent Life Insurance Policy.
Take Out a Home Equity Loan.

 

[Dreamer]

We have 529 plans for our 3 grandchildren. Hopefully, they will use it for college, but it can be transferred to another relative if needed. One of our grandchildren is going to a private christian school for high school, but her parents are paying for it. I believe that the 529 plan could be used to pay for the private school also.

 

[street]

We have 529 plans for our 3 grandchildren. Hopefully, they will use it for college, but it can be transferred to another relative if needed. One of our grandchildren is going to a private christian school for high school, but her parents are paying for it. I believe that the 529 plan could be used to pay for the private school also.

I see a lot use the 529 I'm not sure if it has to be used just for school though.

I'm in favor of starting some sort of account but would like to have restrictions on age they can take it out and it could be used only for education or home only.

Even if they can't touch it till 25 years old, they could still pay off school loans then. I don't want it to be too easy for them, but I want to be there to help them get a start. I also want them to be old enough in hopes that they make good decisions for the money.

 

[SecondAttempt]

I see many here set money aside for their grandkid's secondary education. There are many ways to do this what seems to be the best way for funding college.

Do you have restrictions on a certain age before they can use the money? I'm not totally in agree with an account that is restricted to just education for the money use. Some kids may never go to college or pay their own way.

I'm more open to fund an account for them with restrictions when they can take it out and how they can use the money.

So, how do most fund an account and why they choose that type. I listed a few I'm sure there is other ways, so educate us on the best way.

Open a 529 Plan.
Put Money Into Eligible Savings Bonds.
Education Savings Account.
Start a Roth IRA as a College Fund for Kids.
Put Money Into a Custodial Account.
Invest in Mutual Funds.
Take Out a Permanent Life Insurance Policy.
Take Out a Home Equity Loan.

Not for grandkids but we set up an educational trust for our neice when she was about 3. We restricted it to "educational or personal development activiities approved by the trustees" until she was 35. The thought was, if she turned out to be a rotten kid (she didn't) then she would not be able to use the money frivolously. Once she got a bachelor's degree she would get the money outright.

We kept the money in a brokerage account.

I completely agree that not every kid goes to college, or even should. But we wanted to encourage it.

The trust paid for a few things as she was growing up including private school tuition, some field trips, and summer camp activities.

I am not up to speed on 529 plans but back when we did it they had restrictions. Similarly we did not like some of the restrictions on UGMA trusts so we did something custom. It was not complicated and a lawyer friend helped us put it together for free. It had it's own brokerage and bank accounts through the years and it was never questioned. We only had to show a "Certificate of Trust Existence and Authority" which we had prepared to open accounts. Usually they would ask for a copy of the trust but we always provided that instead and it made them happy.

ETA: We funded the trust out of our income. We did not expect her to go to private school so we expected to have 15 years to build it up. When we started private school in kindergarten the trust turned into moreof a vehicle than a savings account. We put money in every month and wrote school checks trice a year. It built up slowly but had enough to fully pay fror 2 years of state university by the time she started college. I'm proud to say that she will be graduating with a master's degree soon!

 

[SecondCor521]

I see many here set money aside for their grandkid's secondary education. There are many ways to do this what seems to be the best way for funding college.

Do you have restrictions on a certain age before they can use the money? I'm not totally in agree with an account that is restricted to just education for the money use. Some kids may never go to college or pay their own way.

I'm more open to fund an account for them with restrictions when they can take it out and how they can use the money.

So, how do most fund an account and why they choose that type. I listed a few I'm sure there is other ways, so educate us on the best way.

Open a 529 Plan.
Put Money Into Eligible Savings Bonds.
Education Savings Account.
Start a Roth IRA as a College Fund for Kids.
Put Money Into a Custodial Account.
Invest in Mutual Funds.
Take Out a Permanent Life Insurance Policy.
Take Out a Home Equity Loan.

First, define "best".

The various approaches all have pros and cons, so you need to decide what's most important to you.

From what you've said so far on this thread, a 529 or a UTMA account are likely candidates.

You're sort of mixing two things in your list there: The type of investment vehicle (i.e. the container which determines the tax and ownership rules), and the investments inside (i.e., what is bought and sold inside the container). For instance, one can buy savings bonds inside a custodial account, or one can buy mutual funds inside a Roth IRA. Mostly you can mix and match, but not always.

Personally I like 529s and that's what I've mostly used for my kids' college educations. They get the remainder to use as they see fit for startup costs (house, car, wedding, move, apartment lease, whatever).

 

[Souschef]

I had 529 plans for 3 of our grandkids. One has graduated, the second is a senior, and the third is 8 years old. It has worked out well so far.

 

[SecondAttempt]

I don't pretend to know the rules, and they may have changed in the past 25 years, but I think our objection to 529s was that they had a stricter definition of education than we intended. And they were restricted by state. Also, if she did not use the money then there really were no other relatives to transfer to.

UGMA/UTMA accounts automatically go to the minor when they turn 18 or 21 and we did not want that to be automatic.

The price for doing it the way we did is you lose some tax benefits. But we did not expect those to be significant so we chose to accept the tax bill in exchange for freedom and flexibility.

But I can't emphasize enough that it was about 25 years ago that we looked into this. I don't know if there have been many changes to UTMA but I think 529 plans have gotten much more attractive since then.

It might seem heartless to look at a 3 year old and think the worst may happen. But at the time I had a nephew who was a very smart kid at 5 but had turned into a dropout and was using meth at the time so I was gunshy and wanted to take precautions to avoid inadvertantly funding that kind of behavior.

 

[ImThinkin2019]

We made a commitment to pay for one year of college expenses for each grandkid. We will pay those expenses out of our assets when the time comes.

If we are not living when the kids go to school we'll make a condition in our will requiring this bequest.

We are prejudiced against putting money in the child's name because when we applied for financial aid for our kids, the application made us list any money in the kid's name. Then the university counted it as theirs.

My take on the university financial aid application was that it said "Tell us how much money you have and we'll take it." So again we prefer to keep the money in our name.

We did put money in our kid's name thinking we were smart and we were not happy with how it worked out.

 

[Lewis Clark]

One possibility might be to create a separate bank/brokerage account for each grandchild. Keep the accounts in your name. Then you could write a check out of that account for any expense YOU deem appropriate. This way, the only restrictions on using the funds are set by you.

 

[f35phixer]

I started Maryland 529 for my three IMP’s ��. While working, at end of year that total would be deducted from MD state tax. Now I just throw money in for Bdays, Xmas etc. To keep some tax off my high Md taxes��

 

[street]

Interesting views and thoughts on the way to fund college for the special people in our lives. I'm not always the best with words so best may have not been a good word to choose. I am looking for the best way for me and best way for the way I want to give these funds to fit my wants. Looking at how to go about it with having restrictions for how and when. I suppose an attorney would have to be involved with that route.

 

[Kork13]

What's your relationship like with your children/their spouses? I would suggest not operating in a vacuum, and be sure you know what your grandkids' parents are doing, what their desires/intentions are for the kids, etc. You may choose to make them aware of your plans as well. The way kids are brought up will play a part in if they pursue college, require financial assistance earlier for private schools, or otherwise.

It sounds like you might benefit from a multifaceted solution. I have 3 wickedly smart kids (blessing & a curse) and I feel that anticipating their attendance at a college or trade school is a pretty safe bet (and I'll definitely guide in those directions). Still, for flexibility's sake, I'm using a combination of 529s for the bulk of our savings for them (maybe 80%), paired with UTMAs for the residual (20%). You can obviously balance to your liking. But the hybrid combo provides a blend of tax advantages with flexibility. Having multiple kids involved helps flexibility as well, because 529s can be shifted from one kid to another as required. Or if you want full flexibility, just go 100% UTMA.

For ownership/control issues, consider that the 529 remains under your name & ownership at all times, with only the beneficiary named as your grandkid. UTMAs do officially belong to the child, but they are custodial accounts that you manage & the kid only gets full access to on a state-defined date (normally, 18-23 years old).

 

[misanman]

We have funded 529's for our 10 grandkids. One is graduated and four are in college currently. One is taking a year off to play developmental hockey but he will definitely get back to college at some point. So far, three of them have "cashed in" their benefit. It has worked out fine with no issues.

 

[TripleLindy]

We let our son and his wife select the 529 plan and we contribute to it.

 

[athena53]

I chose the 529s for my 3 grandchildren because it permanently shelters the investment income from taxes as long as it's withdrawn for educational purposes. It also will not affect their eligibility for financial aid since I set it up and not their parents. I believe you can withdraw it without penalty if it's not needed because the kid gets a scholarship.

On the off-chance that some of it isn't needed for education, the worst that can happen is that when the remainder is withdrawn it gets taxed. I figure it will get used, though- the kids are home-schooled and I suspect DS and DDIL won't want to throw them into the public school system even if they want them to have formal schooling when they're in HS- they're devout Christians so they'll want a faith-based education and they're also in a so-so school district.

 

[SecondCor521]

Interesting views and thoughts on the way to fund college for the special people in our lives. I'm not always the best with words so best may have not been a good word to choose. I am looking for the best way for me and best way for the way I want to give these funds to fit my wants. Looking at how to go about it with having restrictions for how and when. I suppose an attorney would have to be involved with that route.

Right, so you have to decide what's important to you. Variables/inputs are:

1. Restrictions on use of the funds
2. Taxation of the income or growth
3. Investments available in the method
4. Cost/time/hassle to set up, manage, etc.
5. Secondary impacts on your taxes (federal, state, estate, etc.)
6. Financial aid considerations

etc. Once you nail down what's most important and the relative weights of your preferences, the best account for you is the outcome of that process.

I chose the 529s for my 3 grandchildren because it permanently shelters the investment income from taxes as long as it's withdrawn for educational purposes. It also will not affect their eligibility for financial aid since I set it up and not their parents. I believe you can withdraw it without penalty if it's not needed because the kid gets a scholarship.

On the off-chance that some of it isn't needed for education, the worst that can happen is that when the remainder is withdrawn it gets taxed. I figure it will get used, though- the kids are home-schooled and I suspect DS and DDIL won't want to throw them into the public school system even if they want them to have formal schooling when they're in HS- they're devout Christians so they'll want a faith-based education and they're also in a so-so school district.

You can withdraw from a 529 any time and in any amount. Sometimes there are taxes, sometimes there is a 10% penalty. The taxes and the penalty, if applicable, are only on the earnings portion of the withdrawal. Return of contributions are always tax free.

The 10% penalty is not applied if there is a scholarship involved. There are other exceptions as well.

My kids all have earned enough scholarships such that any leftovers not used for college can be withdrawn without 10% penalty, and at their tax rate. If you time it right, a graduating senior who went to college full time can probably have a very low income so even the income taxes on the earnings portion of the "leftover" withdrawal can be near or equal to $0.

My son did that. He graduated in December, I made the "leftover withdrawal" from his 529 that same month. A few weeks later in January, he started his first real job with a good salary. He paid $0 in federal and state taxes for that final year, even though he had a non-qualified withdrawal from his 529.

...

529s have gotten better over time. There are more things that count as qualified education expenses, such as some loan repayments and private K-12 tuition and trade schools. And from my point of view, the "there will be taxes if you don't use it for college" concern is overblown. There are ways to manage the tax burden so it is very low. Transferring it to others in the family is also a good option - grandkids, cousins, parents, and others can use the money. Oh, and they can also be used for graduate school. Oh, and you don't need to be getting a degree, you can use it just for classes.

 

[street]

Right, so you have to decide what's important to you. Variables/inputs are:

1. Restrictions on use of the funds
2. Taxation of the income or growth
3. Investments available in the method
4. Cost/time/hassle to set up, manage, etc.
5. Secondary impacts on your taxes (federal, state, estate, etc.)
6. Financial aid considerations

etc. Once you nail down what's most important and the relative weights of your preferences, the best account for you is the outcome of that process.



You can withdraw from a 529 any time and in any amount. Sometimes there are taxes, sometimes there is a 10% penalty. The taxes and the penalty, if applicable, are only on the earnings portion of the withdrawal. Return of contributions are always tax free.

The 10% penalty is not applied if there is a scholarship involved. There are other exceptions as well.

My kids all have earned enough scholarships such that any leftovers not used for college can be withdrawn without 10% penalty, and at their tax rate. If you time it right, a graduating senior who went to college full time can probably have a very low income so even the income taxes on the earnings portion of the "leftover" withdrawal can be near or equal to $0.

My son did that. He graduated in December, I made the "leftover withdrawal" from his 529 that same month. A few weeks later in January, he started his first real job with a good salary. He paid $0 in federal and state taxes for that final year, even though he had a non-qualified withdrawal from his 529.

...

529s have gotten better over time. There are more things that count as qualified education expenses, such as some loan repayments and private K-12 tuition and trade schools. And from my point of view, the "there will be taxes if you don't use it for college" concern is overblown. There are ways to manage the tax burden so it is very low. Transferring it to others in the family is also a good option - grandkids, cousins, parents, and others can use the money. Oh, and they can also be used for graduate school. Oh, and you don't need to be getting a degree, you can use it just for classes.

Thanks, SecondCor521. You have given me direction in what I want to do.

athena53 thank you as well! Your experience with the 529 and comments are very much appreciated.

 

[folivier]

We set up UGTM accounts for our boys when they were little. Didn't tell them about it until they were in college with full scholarships. Gave them the account info once they graduated so they could use it for down payment on their first house.
We also set up same accounts for our grandkids. Hope it works out the same for them.

 

[Mark1]

We have money set aside to help nieces and nephew fund their college. They are aware of its existence. Their mom and dad are blue collar workers so in order to make sure that it doesn't hurt their chances for for financial aid, we keep it in our name and send them a check every semester to pay for tuition (state school tuition cost only). The money resides within a Barclay on-line saving account and is not commingled with our other money.

 

[youbet]

The money resides within a Barclay on-line saving account and is not commingled with our other money.

Just curious, what difference would commingling make?

 

[Mark1]

None, but it is cleaner for me.

 

[sheehs1]

I see a lot use the 529 I'm not sure if it has to be used just for school though.

I'm in favor of starting some sort of account but would like to have restrictions on age they can take it out and it could be used only for education or home only.

Even if they can't touch it till 25 years old, they could still pay off school loans then. I don't want it to be too easy for them, but I want to be there to help them get a start. I also want them to be old enough in hopes that they make good decisions for the money.

Because I was unsure if my grandkids would go to college, if all of them would go or what "college" will look like then, I set up UGMA accounts with my Daughter as Custodian. Too hard to predict what the future will be and I wanted to treat them all as equally as possible. I deposit yearly into these accounts. Granted, I am foregoing the tax write off for depositing into 529 accounts but it was more important they be able to use it to meet their needs, start a business, educational or otherwise. The freedom and flexibility was important to me. Recently I realized they "vest in these accounts" at age 18. So I had my daughter sign the paperwork to give her the Custodial guardianship on these accounts until age 25.

I have also left my grandchildren money in my will. But most everything was titled to my Daughter. So just a couple of weeks ago, I transferred half of what was designated in the will to another retail account and titled it with a UTMA transfer of death directly into their UGMA accounts. I plan to make up the difference in the UGMA accounts in future years. (it is still mine to use though should I need it!) This prevents my daughter from having to take possession of the money and routing it per the will.

All at the same brokerage.

 

[rodi]

My dad seeded 10k in 529's for both my sons. I am incredibly grateful he did that. He owned the accounts. When he died I inherited the accounts, beneficiaries remained unchanged. California doesn't offer any tax breaks on 529 contributions - but some state's do if you use an account based in that state. My dad didn't like the funds offered by the CA plan so he switched to Nevada (may have been Utah) and got the 529 from there that used Vanguard. Since there was no tax benefit to using the California plan, there was no reason not to shop other state's plans.

When dad died, I inherited the accounts and we started making contributions. (Someone other than the child/beneficiary typically owns the account.) We funded it diligently and now both boys are in college. There should be enough to get them through 4 years of public university if they get through in 4.5 years of less.

I'm only withdrawing qualified educational expenses - so room/board (rent/sundries) is limited to the "Cost of Attendance" for room and board published by that college. That page needs some serious updating for one of my son's universities - rents have gone up far faster than that page reflects. I made my son get a job to make up the difference between the published "cost" and actual cost. The other son was already working and scored cheap rent in a shared house. I'm withdrawing less than the published cost of attendance to supplement his work income for living expenses and paying his school expenses.

I was also concerned that one or both boys wouldn't be interested in college. But since it can apply to trade schools, I wasn't too worried about it going to waste. Worst case would be paying a penalty and taxes on the EARNINGS. The principal was already taxed.

Also if you over-save - the extra can be transferred to another beneficiary - including the original beneficiary's kids (your great grandkids).

 

[athena53]

Also if you over-save - the extra can be transferred to another beneficiary - including the original beneficiary's kids (your great grandkids).

That's good to know! I have no idea what direction my grandchildren will take- DDIL is a stay-at-home Mom although she has a 2-year Associate's Degree in Accounting and had a decent job before the kids were born. I'm pretty sure they'll encourage all of them to get some secondary education that will provide them with good opportunities. Since the funds can be spread among siblings, if one wants a high-priced graduate degree we can do that. DS is my only child, so these are the only grandchildren.

I'm glad there's an option for great-grandchildren although now we're taking MANY years out and the laws could change.

 

[livingalmostlarge]

depends on how much are we talking about?

I wouldn't overfund a 529 but if you were able to do $75k on birth it might be worth it. Then contributing more to a ESA and UGMA. It depends to me how much you are gifting.

If it's not a lot like $10k then I think a 529 is reasonable if you are doing a 1x gift. If you you planning on giving something annually then a ESA. If it's a large amount then all bets are off and you should think about it.