As a grandparent, you want only the best for your grandchildren. But you want to provide for them in a way that truly helps them to live a better life, rather than just spoiling them (although that is fun sometimes, too!). If you want to help ensure a comfortable future for your grandkids, ensuring that they receive a college education might be the best thing you could do. According to a study by Fidelity Investments, more than half (53 percent) of grandparents are saving or paying for their grandchildren’s college tuition.
When researching ways to help with college tuition, keep in mind the financial situations of the parents, the grandchildren, and also yourself. There are several different options to help you save for college, but some plans provide better benefits than others. In particular, keep in mind the federal and state income tax advantages of various types of savings accounts.
In many situations, the best option is to open a 529 college savings plan. This is a great option for grandparents who want to lower the value of their taxable estate, while providing a tremendous value to their grandchildren. Other benefits of the 529 plan include:
● Withdrawals from the plan are free of income taxes. This means your grandchild can use the money for tuition, books, fees, supplies, and other approved expenses without having to pay taxes on the money.
● You control the account. You decide how much money can be withdrawn to pay for college expenses, and you can even change the beneficiary of the account if you ever need to do so.
● A 529 plan offers a range of investment options, to help you make the most of your money.
● You can contribute up to $70,000 to the account at one time, while avoiding the federal gift tax. A 529 plan allows you to “give” five years’ worth of annual gifts of $14,000 dollars each, all at one time.
A 529 plan owned by a grandparent is not counted as an asset belonging to the student or his parents, so it doesn’t count as part of the Expected Family Contribution (EFC) when the student applies for financial aid. In layman’s terms, this means your grandchild stands a better chance of receiving some financial aid. However, disbursements are counted as income, so if the disbursements are particularly large your grandchild may not qualify for financial aid. This is an issue to consider carefully as your grandchild applies for colleges, assesses various tuition rates, and chooses an institution for higher learning. Talk to your financial advisor for more information on 529 college savings plans.
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