Helping Your Grandchildren Pay for College

Tuesday, April 24th, 2018

Good Morning Relaxing Retirement Subscriber,

In addition to answering your two biggest questions, i.e. “Do we have enough built up in our Retirement Bucket to do everything we want to do?”, and “How do we manage our money so we can confidently spend without income from work?”, one of the benefits of designing your Retirement Blueprint™ in our program is the ability to determine precisely how much you can afford to help your children and grandchildren without jeopardizing your long term financial security.

This has been a real eye opener for many new members over the years as they had no idea how much they could afford to help, so they held back.  Now that they know exactly how much they can afford to help if they choose to, their questions all center around “how” to help, i.e. where should they invest?

There are several factors that go into selecting the best approach, such as the child’s age, and thus proximity to college, the family’s financial aid strategy, and the amount of money you’re looking to invest.

However, in the overwhelming majority of cases with our members, the answer is pretty straightforward: 529 College Savings Plans.

For the purposes of this discussion, I’m going to assume that your children will be saving for their kids’ education costs, and not planning on receiving financial aid.

A strategy of hoping for financial aid is just that: hoping.  As you know, the priorities of the government change all the time so counting on financial aid is not a sound long term strategy.

How 529 Plans Work

Let’s take a look at the benefits of 529 Plans:

  • 529 plans are set up with you (or your child) as the custodian and the grandchild as the beneficiary. You may have all investment statements and correspondence sent to you exclusively, or to your grandchild as well.
  • You retain control of how the money is invested in the plan. Most plans offer a large selection of investment options as well as “age-based portfolios” where the company automatically adjusts the allocation of the investments to coincide with your grandchild’s age and years remaining before the money is needed to pay for college.
  • All money deposited into the plan grows tax deferred just like your IRA. This is the first BIG long-term benefit.  You will not receive a 1099 each year to report gains on your tax return.
  • As long as the money is used to pay for education expenses, such as room, board, tuition, books, etc., all money is withdrawn from the plan tax free, similar to a Roth IRA. This is the biggest benefit.  Imagine how 18 years of growth would be taxed under normal circumstances!
  • If your grandchild decides not to go to college, you have two choices:
    • you may transfer the balances in the plan to another grandchild without paying taxes, or
    • your grandchild will simply pay taxes on the gains generated in the plan over the years when he or she withdraws the money to pay for anything other than college.
  • Plans have become very liberal, so your grandchild may use the money to pay for virtually any college. In other words, most plans don’t have a limited “approved” list such as in-state schools only.
  • In the new tax law that was passed in December, 529 balances may now also be used for private high school expenses (with certain limitations).
  • The last big benefit is that 529s are an estate planning tool for you. All funds deposited into a 529 Plan are considered a gift and are removed from your taxable estate.  Over the years, many Relaxing Retirement members have used this technique to systematically move funds out of their estate which would otherwise be taxed as high as 50% when they pass away.

The last factor you will want to consider is which 529 college savings plan to invest in.  There are several good ones out there.  Take your time to evaluate the quality of investment options offered and the fees they charge to run the program.

Tax deferred or not, what drives the real value of these plans, like all other investments, is the quality of the underlying investment options available.

If you need help selecting a plan, let us know.

Once you have set the plan up, step back and feel great about the fact that you’re helping your grandchildren get off to a better start than you did.

Imagine how your grandchild may feel someday when he or she finds out that the reason they’re able to go to the school of their choice is because you helped pay for it by investing for them!

That will make it all worth it.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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I appreciate the trust you place in us. Thank you!

(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)