Grandparents: Offer the Gift of Investing Early, Often for College

It’s one of the happiest days of your life. Your child just became a parent, making you a grandparent for the first time. Had this joyous event happened a half century ago, your gift to the baby might have been a piggy bank, along with a promise to drop deposits into it each time you visited.

Alas, piggy-bank deposits just won’t cut it anymore if your goal is to contribute to junior’s financial future. Inflation and the taxman have seen to that. So, for the grandchild still in diapers, what can you do now that will be financially helpful down the road? According to Ben Johnson, financial consultant for Thrivent Financial in Bloomington, the best option might be to invest in a 529 College Savings Plan.

“The 529 plan is similar to a Roth IRA,” Johnson said, “but the funds that grow in the plan can come out tax free prior to age 59-1/2 to pay higher education expenses.” The owner of the plan, grandma or grandpa, can name the beneficiary, and may each contribute up to $14,000 annually per grandchild without gift-tax consequences.

Each state has its own 529 plan, with varying maximum contribution limits. The Minnesota 529, for example, has a contribution cap of $350,000, which does not include earnings. Parents may also invest in 529 plans, but the value of the plan is assessed as an asset in their Free Application for Student Financial Aid (FAFSA), while it is not for grandparents (or for any other relatives).

Owners of 529 plans may change the beneficiary without tax penalties upon withdrawal so long as the funds go toward a student’s tuition, fees, books, computers, or room and board.

The Coverdell Education Savings Account also allows for tax-deferred growth and tax-free distributions, but has contribution limits of $2,000 per year, per student. Tony Ennis, a Thrivent representative based in Golden Valley, points out that funds in Coverdell accounts, unlike those in 529 plans, “may be used to pay for K-12 private school expenses, as well as for college. It’s a vehicle to help families pay for education before a child reaches 18.”

Life insurance contracts that accumulate cash value can be another way to save for college. Premiums paid, while mainly for the purpose of buying life insurance, “can build up funds that may be used to pay college expenses,” Johnson said. These funds may be accessed without tax consequences for the owner of the insurance policy. In addition, the cash value inside life insurance policies is not assessed in the FAFSA.

While the cost of college has changed dramatically over the years, the desire of grandparents to help their grandchildren has not. Buying fancy toys and cute clothes for grandchildren might be fun, but investing in their future education will be a legacy that grandparents can leave beyond their years. Start early. Invest often in the plan that suits your budget. Your grandchildren—and their parents—will long smile on you.