2 Ways to Invest for Your Grandchildren’s Education
If you’ve worked hard to create a comfortable life for your family, you want to ensure your grandchildren are able to enjoy some of the benefits. Using your legacy to help them get ahead in life can be rewarding for you, offer some financial relief for your children, and prove to be a generous leg up for the next generation.
Here are two smart ways to help fund your grandchildren’s education.
Education Savings Plans
A tax-advantaged 529 College Savings Plan can be used exclusively for qualifying education expenses, including tuition, books, supplies, and room and board, at a university, accredited vocational school, or K-12 private schools.
Individual plans set life-time contribution limits. The limit is typically high, upwards of $500,000 in some states. Contributions are considered gifts that qualify for the annual gift tax exclusion.
For 2022, the limit is $16,000 per individual contributor, per child, or you can treat the current year contribution as if it were spread over a five-year period and contribute up to $80,000 — a strategy called superfunding. Consult your tax advisor if you superfund as there is a tax form that must be filed.
You can set up a separate 529 account for each grandchild with funds transferable to other family members if that child doesn’t have use for it. If they don’t use the money for qualified education expenses or you need it back, you can reclaim it by paying a 10% penalty and taxes on any earnings. And you retain control of the investment decisions in the account.
Prepaid Tuition Plans
If you live in a state that offers one, a Prepaid Tuition plan administered by the state allows you to lock in tuition costs at today’s rates for any state public college or university. Essentially, you purchase college credits at the current price, and your grandchildren can cash in the credits later. Any gains from this program are exempt from federal income tax.
If your grandchild chooses an out-of-state or private college, the plan may only return your original investment plus interest. As such, we advise considering this type of 529 plan when the child is within 3 years of college and has a sense of where they will go to school.
Check the fine print for guarantees of full tuition coverage and ensure you understand the details of your state’s 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.