How Grandparents Can Help Fund Higher Education For Their Grandchildren
The cost of higher education has become so expensive that many families struggle to afford it without sending young people into significant student loan debt that leaves them starting adult life off in the red.
Here are two ways you can use the wealth you’ve built over a lifetime to invest in your grandchildren’s future by helping to fund their college education.
Education Savings Plans
A 529 College Savings Plan is a tax-advantaged way grandparents can invest in a child’s education and retain control of the investment decisions in the account. The money can be used exclusively for qualifying education expenses, including tuition, books, supplies, and room and board, for a university education, accredited vocational training, or K-12 private school education.
The IRS doesn’t set annual contribution limits, but rules vary by plan and by state, so you’ll need to do your research. Individual plans may set contribution limits, but the limit is typically high. Keep in mind that, for tax purposes, contributions are considered gifts that qualify for the annual gift tax exclusion.
For 2022, and the previous few years, the limit is $16,000 per individual contributor, per child. You also have the option to treat the contribution as if it were spread over a five-year period and contribute up to $80,000, using a tax planning strategy known as superfunding.
This only scratches the surface of what’s possible and what you should know, so we encourage you to work with a qualified tax advisor to determine the most tax-advantaged ways to give.
Prepaid Tuition Plans
These plans are administered by the state and allow you to lock in tuition costs at today’s rates for any state public college or university. Essentially, you are purchasing college credits at the current price, and your grandchildren will cash in the credits when the time comes. Any gains from this program are exempt from federal income tax.
If your grandchild chooses to go to college out of state or attend a private university, the plan may still be beneficial, allowing them to receive and apply an amount equal to the average state school tuition.
Look carefully at the fine print, checking for guarantees of full tuition coverage and ensure you understand the details of the plan.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience, and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Before investing, contact the 529 plan provider for details on the college savings plan’s investment objectives, expenses, charges, risks, features, benefits, limitations, and other important details included in the Plan Agreement and Plan Description. Before investing in any 529 plan, always consult your financial, tax, and other advisors for guidance on considerations specific to your circumstances that may apply according to your state and the beneficiary’s home state. State-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
Keep in mind that the availability of tax and other benefits may be contingent on meeting other requirements. Please note that earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for educational purposes, not as advice.