Many of our clients list education as a priority for their family, and most have plans to help their children and even grandchildren pay for college. In this article we will discuss some tools that are available to support a grandchild’s college education. The right tool for you will depend on the age of the child, how much control you want to have over how the money is spent, and whether or not you want to protect the child’s eligibility for need-based financial aid.
Consider the Timing
The first question to consider is: how old is the child? If you are planning ahead for a young child, you will need to set the money aside in some type of account where it can grow. If the grandchild is nearly ready for college, it might make more sense to plan to pay the school directly or give gifts directly to the grandchild each year.
When College is in the Near Future
If your grandchild is approaching college age soon, it might make the most sense to plan to pay the college or university directly. With a shorter timeframe, the tax advantages of a 529 plan are less compelling. Payments made directly to an educational institution do not count as gifts for gift tax purposes, so the annual limits don’t apply.
In addition to making payments directly to the school, you can make gifts of up to $19,000 per year (or $38,000 if you are a married couple) to the grandchild directly for other living expenses.
When College is Years Away
If you are planning for a younger child, you will most likely want to set some money aside in an account where it can grow. To determine the best type of account, consider how much control you want to have over the money, and what are the potential tax benefits of each option.
529 Education Savings Plan
If you want to have control, and you definitely want the money used for education, the best vehicle will be a 529 plan in your own name, with the grandchild named as the beneficiary. This will allow you to control the investments and the distributions from the plan as long as you are alive. You will need to name a successor owner (if your state allows it) who can control the account if something happens to you.
Another potential benefit of this option is an income tax deduction on your state income tax returns for your contributions. For example, grandparents in Georgia can deduct up to $8,000 per beneficiary per year from their Georgia tax return for contributions made to the Georgia Path2College 529 plan.
Another potential benefit of using a 529 plan is the opportunity to “superfund” it. You are allowed to make contributions up to five times the annual gift limit to a 529 account if you indicate that you will not make any more gifts to that beneficiary during the five year period. This means that a grandparent can contribute $95,000 in 2025, or married grandparents can contribute $190,000 in 2025 without it counting toward your lifetime gift and estate exclusion amount.
While using the money for non-educational purposes down the road will trigger an income tax and a penalty on the earnings in the account, 529 plans allow for the beneficiary to be changed to other family members. So if that grandchild doesn’t use all the money, the remainder can be transferred to a sibling or a cousin, or even in some cases left in the account to grow for their own future children.
For grandparents in Florida, another option is the Florida Prepaid 529. These have an added benefit of locking in your plan price based on the age of your child for less than the projected cost when your child attends college. When you set up a plan, you will make regular monthly payments until that child enters college. If they decide to go out of state, they can still use the plan– it will pay the same amount toward the out-of-state school that it would otherwise pay in Florida. If your child later returns to a Florida school, the plan qualifies them for in-state tuition.
Custodial Accounts
If control is less important to you, and you would prefer that your grandchild get to use the money for non-educational purposes if they want, you might choose a custodial UTMA account instead. These accounts convert to the control of the minor beneficiary as soon as they reach the age of majority (18 or 21 in most states). These accounts don’t have any tax advantages and don’t allow for the gift tax-free superfunding, but they are a great vehicle for long term growth. It is important to note that UTMA accounts will count as student assets on the federal student aid application (FAFSA), so they will have an impact on the amount of aid the child will qualify for. Grandparent-owned 529s accounts, on the other hand, are NOT included on the FAFSA, so will better preserve the possibility of receiving some financial aid.
Education is a gift that will set your grandchild up for a successful future. Students are more likely to go to college and stay in college if the cost is covered or manageable. If this is something you would like to help your grandchildren with, please let us know and we can help you decide on the right strategy for you.
Together Planning is a registered investment advisor. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Together Planning has a reasonable belief that this marketing does not include any false or material misleading information statements or omissions of facts regarding services, investments, or client experiences. Together Planning has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.