Did you know that National Grandparents Day is less than a week away? While this "Day" is not as widely known as Mother's Day or Father's Day, it is nonetheless important, as it recognizes the key role that grandparents play. If you are a grandparent yourself, you might expect some cards or phone calls or emails from your own grandchildren - but you will probably experience even greater enjoyment in the gifts you can give them. If you're thinking of making a financial gift, consider your options carefully.
To begin with, don't forget about your own needs. As much as you love your grandchildren, you can't afford to provide significant financial gifts to them at the expense of your own retirement savings or the resources you might need for health care or long-term care. So, review your budget to determine what you can afford to give. This amount may change year by year, depending on your circumstances, so you may want to review your potential gifts annually.
However, assuming you can afford to give regularly to your grandchildren, how should you go about it? Here are a few possibilities:
- Establish a 529 plan. A college degree is a very good investment in your grandchildren's future - but higher education comes with high costs. If you want to help your grandkids go to college, you could establish a 529 plan. Earnings in a 529 plan can grow federal tax-free and will not be taxed when the money is taken out to pay for college. Plus, you may receive state tax incentives if you invest in your home state's 529 plan. (However, if withdrawals are not used for higher education expenses, the earnings portion is fully taxable and will incur a 10% penalty.)
Keep in mind, though, that a 529 plan could affect your grandchild's financial aid. While a 529 plan owned by a grandparents generally won't be reported as an asset under the Free Application for Federal Student Aid (FAFSA), withdrawals used for school will be treated as student income on the next year's FAFSA, and so could lower your grandchild's financial aid package. So you could wait for your grandchild's final year of college, when he or she won't be applying for future financial aid, before you allow withdrawals from the 529 plan. (You may want to discuss a 529 plan's potential financial aid impact with a financial aid professional.)
- Contribute to a custodial account. You can give money to your grandchildren through a custodial account, known as UGMA or UTMA. These are irrevocable gifts that minors gain control of at the age of majority. Be aware, then, that once they get the money, they can do with it as they choose, and their choices may be far different from what you had intended.
- Pay college bills directly. You can simply write a check to the college to help pay for your grandchild's expenses.
By making any of these gifts, you can help your grandchildren move forward through life - and their journey can provide you with the gifts of pride and joy.