Christmas is always a magical time of year for youngsters. They have thoughts of Santa, reindeer, toys, and elves dancing in their heads. So what comes to mind if you are a grandparent thinking of the perfect gift for a grandchild? I would like to suggest the best gift any child can receive…the gift of the best education!
If you look at financially successful adults, one common statistic is a good education. Of course, that’s not always the case, and there are many exceptions, but study after study shows that higher education results in more lifetime income.
Unfortunately, college tuition and associated costs continue to rise at rates higher than inflation. As a result, many children either end up not going to college, incurring large amounts of student debt, or choosing a lesser college because of a lack of financial resources.
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The best choice for funding college for a young grandchild is the 529 College Savings Plan. Here are just a few of the most important benefits of this savings plan:
- Federal tax benefits. While you don’t receive a tax deduction for contributions to a 529 plan, all earnings grow tax-deferred, and distributions used for qualified expenses are tax-free.
- State tax benefits. Many states offer a state income tax refund for contributions. For example, in Alabama, you receive a 5% refund for up to a $10,000 contribution per year.
- You control the money. As the person funding the 529 plan, you can maintain ownership and control of all the funds. Funds can be shifted from one grandchild to another as you deem appropriate. Funds can also be used to pay for graduate school expenses. You can even take back the money for your own use. However, any earnings will be taxed as ordinary income, and a 10% federal penalty will be imposed.
- Large contributions are allowed. You can gift up to $15,000 per year per grandchild without tax consequences. If married, you can jointly double this amount. You can ‘front-load’ these annual gifts for up to 5 years if you choose. For example: as a couple, you could contribute up to $150,000 per grandchild. Note that these ‘gifts’ use up your allowed annual gifts for the respective years.
- Simple investing strategies. Most plans offer an ‘age-weighted’ investment strategy whereby the mutual fund manager automatically becomes more conservative as your grandchild approaches college age, which can help take a lot of the guesswork out of investing.
Ok, I get it…your grandchildren will be less than excited to receive a note telling them you donated to their college fund. If that is the case, go ahead and give them a gift they will enjoy realizing it will be one of many and, likely, soon forgotten. However, the gift of education will be one they will remember for a lifetime.
Be sure to contact your financial advisor or tax professional for more information on 529 College Savings Plans. For more information, you can also visit www.savingforcollege.com.
Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including 50 Rules of Success; J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.
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