Contributing to your grandchildren’s college savings is a wonderful idea. You can reduce worry and financial stress for your own children during their peak career years, enabling them to save more effectively for their own retirement. You can lower the likelihood that student debt will be a burden on the family. And your gifts may even be part of a smart estate plan.
Like many other things, however, the devil is in the details. Sometimes good intentions aren’t enough. Here are six ways you can help ensure that your generosity will be most effective.
Make sure to cover your own retirement expenses first
College costs have become a key driver of household debt, second only to mortgages. As a result, many grandparents want to help their grandchildren graduate without debt. But retirement costs are rising too, and research shows that many retirees aren’t sufficiently prepared for the many expenses they’ll incur, especially given how long their retirement is likely to last.
A recent Vanguard report shows that among people 65 and older the average retirement account balance is just $280,000, while the median balance is a mere $87,700. Meanwhile, healthcare expenses are rising faster than the overall economy, and studies indicate that a retiree may need over $150,000 to pay for out-of-pocket healthcare costs alone in retirement.
So while contributing to your grandchild’s college funds is a generous and worthy goal, consider your overall financial situation and make sure you’ll be able to meet your own needs before considering gifts. If need be, your grandchild can borrow to pay for college. She cannot, however, borrow to pay for your retirement expenses if you run out of money.
Coordinate your giving with your children, the parents
There’s no one-size-fits-all approach for grandparents saving for their grandchildren’s college education. But one rule-of-thumb holds true: Make sure to coordinate plans with your grandchild’s parents regarding when, where, and how you’ll contribute.
FAFSA Simplification helps grandparents and other family members saving with 529 plans considerably: Grandparent-owned 529 plans no longer count as untaxed student income on the FAFSA, which previously affected a student’s eligibility for financial aid.
But grandparent-owned 529 plans still count as untaxed income at schools that use the CSS Profile, which applies to about 200 mostly private schools, and that can affect a student’s eligibility for aid. So, if your grandchild is or planning to attend one of those, it’s critical to hold off on withdrawing funds. In addition, it’s important to note that timing is critical for students who are filling out the CSS Profile and who might qualify for financial aid. In those cases, gifting the money after the financial aid form is filed would prevent the value from being counted as an asset.
No matter which form your grandchild fills out, coordinating your contributions with the parents ahead of time cannot only relieve them of worry but also head off potential problems.
Don’t get your heart set on one college
Sure, it’s OK to dream. But it doesn’t make sense to fixate on your grandchild ending up at one particular school.
Students can use 529 funds for a range of educational pursuits, including community college or vocational schools. While saving for your grandchild’s education is an act of kindness, they’ll most appreciate the opportunity to use it to support their own college dreams.
Learn how to “superfund” an account
If you have the means to invest heavily in your grandchild’s education, you can use a special strategy to contribute to their college fund while reducing your tax liability. “Superfunding” a 529 account means using 5-year gift tax averaging, as outlined in the Internal Revenue Code. This rule allows grandparents to contribute a tax-free gift of up to $85,000 into a 529 plan, front-loading a grandchild’s plan and reducing their estate at the same time.
Here’s how it works: An individual may contribute up to $85,000 to each 529 Plan account, which equals 5 years’ worth of the gift tax exclusion amount of $17,000 in 2023. This means that a married couple can contribute up to a total of $170,000 per beneficiary. The gift-giver then must report 529 plan contributions between $17,000 and $85,000 on IRS Form 709 for each of the 5 years.
The large, up-front contribution can help a grandchild’s funds grow faster over time compared to smaller contributions added over time. In addition, this approach protects a grandparent’s lifetime gift and estate tax exemptions.
Don’t put all your college contributions in a single account
Will you be saving for more than one grandchild? It may seem simplest to open a single “communal” account. But in the long run, maintaining separate accounts for each grandchild is likely to work best. By keeping your savings segregated, you can better tailor them to each student’s situation, taking a more aggressive strategy for an infant or young child and decreasing risk as the child nears college enrollment.
Maintaining individual accounts can also save you the potential headache of needing to change beneficiaries later on. 529 accounts can name only one beneficiary at a time. So after using funds for the first grandchild, you’d need to change the beneficiary when it came time to draw funds for the second grandchild, and so on. But if your grandchildren attend college at the same time, you’ll have to deal with administrative or logistical headaches.
Finally, if you intend to support more than one of your own children’s families, separate accounts can be seen as more fair. It can also be much simpler and easier if your children ever need to take over from you as successor owner of an account.
Don’t forget to communicate with your family
Poor communication and lack of transparency can be problematic in many areas of personal finance. Too many grandparents are simply reluctant to share details about how much money they intend to provide for college. Yet without accurate information about how much external support they can expect, parents can either fall short in their own savings plans, or alternatively put other goals on hold to prioritize college savings.
It’s always best to communicate early, and often. Most parents are already juggling multiple long-term and short-term financial goals. So if you have plans to help with college savings, transparency allows them to make the best financial decisions for the whole family.
In the final analysis
Grandparents know firsthand the value of education, and they want their grandchildren to have every opportunity to reach their dreams. With open communication and some careful planning, you can avoid the most serious missteps in helping your grandchild, while making the best use of your hard-earned money for your family overall.