Grandparents’ Guide for College Funds

As college costs continue to rise, many grandparents are looking for ways to contribute to their grandchildren’s education. This article explores key considerations for grandparents who want to help fund their grandchildren’s college education, addressing common questions and concerns. 

Tax-Efficient Gifting Strategies 

Grandparents can contribute to their grandchild’s college fund without creating a significant tax burden through the strategic use of the annual gift tax exclusion. As of 2024, individuals can gift up to $18,000 per recipient annually without incurring federal gift tax. Married couples can collectively gift up to $36,000 per grandchild each year. (1) 

One effective consideration is to contribute directly to a 529 college savings plan. These contributions grow tax-free when used for qualified educational expenses, making them an attractive option for long-term college savings. 

Setting Up a 529 Plan 

Grandparents can indeed set up 529 plans themselves, without requiring parental involvement. (2) This allows them to maintain control over the account and its investments. However, it’s important to note that grandparent-owned 529 plans may have different implications for financial aid compared to parent-owned plans. 

Estate Planning and College Savings 

Integrating college savings with estate planning may be an effective way to support grandchildren’s education. Grandparents can specify in their will that certain assets or funds be used for educational purposes. This can work in conjunction with existing 529 plans or other college savings vehicles. 

It’s important to document these intentions to avoid misunderstandings and ensure the funds are used as intended. 

Age Considerations for 529 Plan Contributions 

There are generally no age restrictions on when contributions can be made to a 529 plan. (3) Grandparents can start contributing as early as they wish, even before the grandchild is born, by setting up an account with themselves as the beneficiary and later changing the beneficiary to the grandchild. 

Ensuring Funds Are Used for Education 

529 plans offer a level of control, as withdrawals must be used for qualified educational expenses to maintain their tax-advantaged status. Non-qualified withdrawals may be subject to taxes and penalties. Some grandparents choose to maintain ownership of the account to ensure funds are used as intended. 

Risks and Mitigation Strategies 

Investing in 529 plans carries some risks, primarily related to market volatility. To mitigate these risks, consider: 

Choosing age-based portfolios that automatically adjust to become more conservative as the beneficiary approaches college-age 

Diversifying investments within the plan 

Starting contributions early to allow more time for potential market fluctuations to even out 

Regularly reviewing and adjusting investment strategies as needed 

Accessing Funds for College 

Funds in a 529 plan can typically be accessed relatively easily when needed for college expenses. The account owner can request withdrawals, which can be sent directly to the educational institution, the account beneficiary, or the account owner. 

Geographic Considerations 

Grandparents can generally contribute to a grandchild’s college fund regardless of where they live. However, it’s important to consider potential state tax benefits. Some states offer tax deductions or credits for contributions to their state-sponsored 529 plan, which may influence the choice of plan. (2)

Record-Keeping and Tracking Growth 

Maintaining accurate records of contributions is crucial for tax purposes and tracking the fund’s growth. Most 529 plans provide regular statements and online access to account information. Grandparents should keep records of: 

• Contribution amounts and dates 

• Account statements showing growth and investment performance 

• Any withdrawals made from the account 

State-Specific Tax Advantages 

State tax benefits can vary significantly, making it important to research options carefully. Some states offer tax deductions or credits for contributions to their own 529 plans, while others may offer tax benefits for contributions to any state’s plan. Comparing these benefits alongside investment options and fees can help in choosing the most advantageous plan. 

A Meaningful Legacy

In conclusion, contributing to a grandchild’s college fund can be a meaningful way for grandparents to support their family’s future. By understanding the various options, tax implications, and strategic considerations, grandparents can make informed decisions that maximize the impact of their contributions while aligning with their overall financial and estate planning goals. 

Sources: 

(1) Kiplinger. “What is the Gift Tax Exclusion for 2024 and 2025?” Kiplinger, www.kiplinger.com/taxes/gift-tax-exclusion 

(2) Bennett, Matt. “529 Plan: What It Is, How It Works, Pros and Cons.” Investopedia, www.investopedia.com/terms/1/529plan.asp

(3) Saving for College. “Are There Time or Age Limits on 529 Plans and Financial Aid?” Saving for College, www.savingforcollege.com/article/are-there-time-or-age-limits-on-529-plans-and-financial-aid

Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or protect against losses. This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues. Our firm does not offer tax, legal or estate planning advice or services. Always consult with your own tax and legal advisors. We do not provide tax or legal advice or services. Always consult with qualified tax and legal advisors concerning your own circumstances.