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To Your Wealth Michael P. Haubrich, CFP
October, 2004 Helping
Grandchildren Go to College |
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More and more American
grandparents are taking an active role in helping to finance the college
education for their grandchildren. In fact, a 2003 survey conducted by AIG SunAmerica Mutual Funds indicated that 54 percent of
grandparents were either already helping to carry the financial burden or
were planning to do so on behalf of their grandchildren. There are several cost effective
ways to go about making this important contribution to the future of your
grandchildren including outright gifts, direct payment of tuition, 529 Plans,
prepaid tuition plans and education savings accounts. Of the 54 percent of grandparents
who were already involved or planned to be involved in helping fund college
expense for their grandchildren, the majority of them did so through outright
gifts of cash or securities. The easiest option available, each grandparent
can give away up to $11,000 per grandchild, free of estate- or gift-tax. If
both grandparents contribute, that amounts to $22,000 a year per grandchild.
While this helps to make a considerable dent in the costs, today’s college
tuition and expenses could easily exceed $30,000 per year for a private
institution. It’s also important to note that gifts of this nature could
reduce the amount of financial aid a student is eligible to receive. Finally,
a cash gift, once given, is out of your direct control. While unlikely, it’s
possible that your would-be student opts for a new car over books and
homework and spends your gift on something other than you intended. One way to avoid this is to give
money directly to the institution to cover tuition. By paying directly you
not only ensure that the money is being put toward your intended cause, but
it does not count toward the annual $11,000 gift exemption. However, this generous
offer could still reduce the amount of financial aid that your
student/grandchild is eligible to receive. Good financial aid planning prior
to any gifts is advisable to maximize any available grants and loans for the
student. 529 Plans 529 Plans are state sponsored
college savings plans that are much like mutual funds with earnings growing
tax deferred from federal tax and state income tax. These are subject to
swings in market performance and many carry high investment fees. Various
states have different rules and funding choices for their 529 Plans and it’s
best to check into your specific state’s plan for details. In Coverdell Education Savings Account Another good educational savings
option is the Coverdell Education Savings Account (ESA), also known as an education
IRA. Up to $2,000 per child per year can be contributed to an ESA. This limit
is from all sources – parents, grandparents, etc. While the contribution is
not deductible, the earnings grow tax-free as long as the funds are used for
any eligible schooling costs. These costs include some pre-college expenses,
including tuition, books and computers for public, private or parochial
elementary and secondary schools. There are income limits for
contributors so be sure to check with your tax advisor before proceeding with
the Coverdell Education Savings Account. If helping a grandchild with
educational expenses is part of your financial life objectives, make this
part of your overall financial plan. As with any investment tactic, be sure
to seek competent professional advice before you commit. For a couple of good
resources check out www.edvest.com for the |