A top college savings resource for grandparents

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Being a grandparent today, you’ve likely witnessed your own children struggle through a slow economy strapped with student loan debt. As you begin to think about estate planning and transferring assets to your loved ones, you may be wondering how you can help ensure your grandchildren will receive a college education without this same burden. If so, you're not alone. According to a 2014 survey released by Fidelity Investments, 72% of grandparents believe it is important to help pay for college and more than half (53%) are already contributing to a grandchild's college fund or planning to do so.

There are a number of different ways for grandparents to help save for college, yet for many the process can seem overwhelming. That’s why at Savingforcollege.com we’ve dedicated an entire section of our website to providing grandparents with the resources they need to ensure their grandchildren have the best chance for success.

All That You Can Leave Behind - College Saving Survey Results

The Best Way to Help Save

So where should you start? We feel that for most parents and grandparents, a 529 college savings plan is the best tool to save for future higher education expenses. As a grandparent, you have a couple of options. You can simply make contributions to your grandchild’s existing 529 plan, which is probably owned by a parent, or you can open a 529 account in your own name and name the grandchild as a beneficiary. If you choose to open your own account, you’ll retain control of the assets until it’s time to pay the tuition bill but you’ll have to consider the effect your gift will have on the student’s financial aid eligibility. Either way, the money you save will grow federally tax-free and withdrawals will not be taxed as long as they are spent on qualified education expenses. Depending on where you live, you may also receive state tax incentives.

Research Your State's 529 Plan

Common Concerns Addressed

The idea of saving for college may be relatively new to you, and probably leaves you scratching your head a bit. College isn’t for everyone, so what will happen to your gift if your grandchild decides not to go? If a 529 withdrawal is not used toward qualified education expenses, you will incur a 10 percent penalty tax on the earnings portion, and the earnings portion will also be subject to income tax. The principal portion, the amount you contributed, is made up of after-tax dollars so it will not be subject to any additional tax or penalty.

However, it’s important to understand that qualified expenses are not limited traditional 4-year universities. In fact, you can withdraw 529 funds tax-free to pay for tuition at any eligible institution, including most vocational and trade schools. So even if your grandchild is not interested in being the next big man on campus, you can still help him get the training he needs for a solid career.

Can I Access My 529 Savings in the Event of an Emergency?

Additional Tax Perks for Grandparents

Contributions made to a 529 plan are treated as a gift to the beneficiary, which means they will qualify for the $14,000 annual gift tax exclusion. What’s more, you can make an up front contribution to a 529 plan of up to $70,000 and elect to treat the gift as made over a five-year period for gift tax purposes. This is an especially attractive benefit for those who have been advised to reduce their state tax exposure but want to retain control of the assets. Unlike other savings vehicles under the Uniform Gift to Minors/Uniform Transfer to Minors (UGMA/UTMA) Acts, the account owner, not the beneficiary, decides how the funds will be spent.

Are There Gift and Estate Tax Benefits for 529 Plans?