We recently published an article that focuses on opening a custodial Roth IRA for a minor who earns an income. This is part of a two-part series we are doing on generational wealth. In this video, the second part of the series, I wanted to address a question I often get from our clients:
How can I help my grandkids afford college?
The truth is that many people are burdened with student debt. In fact, even the percentage of borrowers over 60 is steadily increasing as more people take on loans to go back to school for secondary degrees.
With more and more people being impacted by student debt, ensuring that future generations are able to graduate debt-free tends to be a big focus for those interested in leaving a legacy.
Let me start by saying that this is a great goal to have. Helping your kids and grandkids sidestep student loans is a fantastic way to encourage them to start adulthood off on the right foot, and hopefully continue to create generational wealth for your family.
If you want to help fund your grandchildren’s college education, there are generally two ways to do it –
First, you could open a custodial Roth IRA, or have your children do it, and contribute a “matching donation” of any earned income your grandchild contributes. I’ll link our recent article on this topic, as the technical details of custodial Roth IRAs can be complex.
The second, and most impactful, way to help build a college fund for your grandkids is by opening or contributing to a 529 Plan.
A 529 Plan is a savings account that allows a beneficiary to save for college. Anyone can open a 529 Plan for any child – whether you’re a grandparent or parent. Additionally, anyone can contribute to a 529 Plan once the account is open. Funds contributed to a 529 Plan are invested based on the student’s college timeline, and can be withdrawn tax free for approved education expenses like tuition or books.
Before you get started, it’s important to make sure everyone who may contribute to a 529 Plan is on the same page. Oftentimes grandparents who think they’re being loving and helpful open a 529 Plan for their grandchildren – only to find out that their children already took care of this. Another common miscommunication we see happen is where grandparents and parents are both planning to fund a 529 Plan, and the account is then over-funded.
This may sound like a good problem to have. However, because funds in a 529 Plan can only be used for approved education expenses, an over-funding of the account might mean that some money is leftover and has to be withdrawn for unapproved expenses – and could be subject to a tax penalty. Of course, if an overfunding issue does happen, remember that the beneficiary of the account can be changed at any time. So, if your grandchild finishes college and still has a balance leftover due to overfunding, you can transfer that balance to a sibling or someone else in the family who still has to go to school.
Remember – college funding for the next generation can be a fantastic goal for grandparents and parents alike. If this is something you aspire to achieve, it’s wise to speak with your financial planning team to work it into your long-term strategy.
