Financial Focus: Brighten your grandchildren’s financial future (column)
September 7, 2017
Mother's Day and Father's Day may get more attention, but National Grandparents Day, observed on Sunday, has gained in popularity. If you're a grandparent, then you might expect to receive some nice cards, but if you want to make the day especially meaningful, then you may want to consider giving some long-lasting financial gifts to your grandchildren.
Consider 529 Plan
What might come to mind first, of course, is helping your grandchildren pay for college. You can choose from several college savings vehicles, but you may be especially interested in a 529 savings plan. With a 529 plan, your earnings accumulate tax free, provided they are used for qualified higher education expenses, such as tuition, books and room and board.
Keep in mind that 529 plan distributions not used for qualified expenses may be subject to federal and state income taxes and a 10 percent IRS penalty on the earnings. You may be eligible for a state income tax incentive for contributing to a 529 plan. Check with your tax adviser regarding these incentives, as well as all of tax-related issues pertaining to 529 plans.
“You might also consider giving them shares of stock, possibly held in a custodial account, usually known as an UTMA or UGMA account. One possible drawback: You only control a custodial account until your grandchildren reach the age of majority, at which time they can use the money for whatever they want, whereas distributions from a 529 savings plan must be used for qualified higher education expenses.”
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One benefit of using a 529 plan is contribution limits are quite generous. Plus, a 529 plan is flexible: If your grandchild decides against college, then you can transfer the plan to another beneficiary.
Working with FAFSA
Generally, a 529 plan owned by a grandparent won't be reported as an asset on the Free Application For Federal Student Aid (FAFSA), but withdrawals from the plan are treated as untaxed income to the beneficiary (i.e., your grandchild) — and that has a big impact on financial aid, a much bigger impact than if the plan was listed as a parental asset.
Beginning with the 2017-18 academic year, however, FAFSA now requires families to report income from two years before the school year starts, rather than income from the prior calendar year. Consequently, it might be beneficial, from a financial aid standpoint, for you, as a grandparent, to start paying for college expenses from a 529 plan in the year in which your grandchild becomes a junior. Contact a financial aid professional about the potential financial aid impact of any gifts you're considering.
Shares of Stock
A 529 plan isn't the only financial gift you could give to your grandchildren. You might also consider giving them shares of stock, possibly held in a custodial account, usually known as an UTMA or UGMA account. One possible drawback: You only control a custodial account until your grandchildren reach the age of majority, at which time they can use the money for whatever they want, whereas distributions from a 529 savings plan must be used for qualified higher education expenses.
Still, your grandchildren might be particularly interested in owning the stocks contained in the custodial account — most young people enjoy owning shares of companies that make familiar products. And to further interest your grandchildren in a lifetime of investing, you may want to show them how a particular stock you've owned for decades has grown over time. Naturally, you'll also want to let them know that stocks can move up and down in the short term, and there are no guarantees of profits, but the long-term growth potential of stocks is still a compelling story.
You'd probably do whatever you could for your grandchildren, and with a smart financial gift, you can make a big difference in their lives.
This article was written by Edward Jones for use by local Edward Jones financial advisers. Edward Jones and its associates and financial advisors do not provide tax or legal advice. Chuck Smallwood, Bret Hooper, Tina DeWitt, Charlie Wick, Chris Murray and Kevin Brubeck are financial advisors with Edward Jones Investments. They can be reached in Edwards at 970-926-1728, in Eagle at 970-328-4959 or 970-328-0361 or in Avon at 970-688-5420.