All grandparents want the best for their grandkids and a big part of that is ensuring they’re set up financially. But with various laws, regulations and taxes to consider, it’s not always as simple as writing a check.
Fortunately, there are numerous methods and tools for grandparents to give money to their grandkids. Learn about some of the most popular and discover which one is right for you.
Open a Savings Account
An easy and effective way to put money aside for your grandchild is funding a savings account for them. Putting money in an account when they’re still young allows the funds to grow for decades.
This is also a good way to teach your grandchild about saving, allowing them to watch the savings grow over the years.
Start a 529 plan
A 529 plan is a popular tool to assist in paying for a grandchild’s higher education. These savings accounts are opened in the child’s name but anyone can contribute to them.
The earnings in a 529 plan accumulate tax-free and no taxes are applied when the funds are withdrawn so long as the money is used for school expenses, such as tuition, fees, books and supplies. Additionally, a state tax credit or deduction is usually given to any individual who contributes to the plan.
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Download Now!Contribute to Their Retirement Plan
If your grandchild is older and has begun working, consider helping them out by padding their retirement account. Any person who’s earned income – even if it’s just a summer job – can open an individual retirement account. (If your grandchild is a minor, you’ll need to open a custodial IRA for them.)
You may also be interested in a Roth IRA. Funds are taxed as they are contributed to a Roth IRA, but once there, the money grows tax-free. Funding such an account when your grandchild is just entering the workforce could be an especially good idea. At this stage in their career, they’re likely not being taxed heavily and can allow the funds to grow for decades.
Utilize a UGMA/UTMA Account
The Uniform Gifts to Minors Act and Uniform Transfer to Minors Act allow individuals to give or transfer assets to underage beneficiaries. These are custodial accounts in which the assets are held in the minor’s name. This eliminates the cost and time that comes with establishing a traditional trust fund.
There are pros and cons that come with the UGMA/UTMA. Because these accounts are in the grandchild’s name, any contributions are irrevocable. Additionally, because the account is treated as the grandchild’s asset, it could impact their federal financial aid.
On the other hand, any earnings the account accumulates are tax-free up to a certain amount and while donors don’t receive a tax deduction, up to $15,000 can be given free of federal gift taxes per individual per year. Furthermore, unlike a 529 plan, there is no penalty if the funds are not used for schooling. Once handed over to the grandchild, the account’s assets can be used for anything.
Write Them Into Your Will
Although not the cheeriest task, writing a will is an effective tool for giving money to grandkids and the only way to ensure your assets go to the individuals you want to receive them. Without one, you’ll have no control over who gets what. The advantage of a will is that it won’t affect your retirement savings the way other accounts may. If you’ve put aside money for your grandchildren through other means and an unexpected cost comes up, you may not be able to get that money back without a penalty or at all.
A will also allows you to provide instructions on how the assets should be distributed. For example, you can state that your grandchild not receive an inheritance until they turn 18.
Introduce Them to a Financial Planner
If you don’t have the means to pass down money to your grandchildren – or even if you do – the best gift may be knowledge. They can learn a substantial amount in just a few hours of speaking with a professional financial advisor. Now your grandchildren know the best ways to save money themselves. This can give them a financial leg-up not just in the short-term, but the rest of their lives.
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Comments are subject to moderation and may or may not be published at the editor’s discretion. Only comments that are relevant to the article and add value to the Your AAA community will be considered. Comments may be edited for clarity and length.
Encourage working grandkids to open a Roth 401K if it is an option. Explain what corporate matching and profit sharing means and how it can add thousand to their retirement savings.
I plan to give appreciated long term stock to my minor grandchild. When he sells the stock, he will have a long term gain of $2000. This is only income. Will he have to pay federal income tax on the the $2000 profit?
“Write Them Into Your Will” – I will never forget 50 years ago when I was 15 and my grandfather passed. He left me $500 in his will and it meant so much.
“Open a savings account” should be scratched from the list, bad advice. Interest is minuscule to nonexistent ,and any interest would be overwhelmed with inflation. How about when the need arises, the grandparent writes check up to $14,000, simple and effective.
The annual gift limit is now up to $15,000.