“Grandchildren are the dots that connect the lines from generation to generation.” — Lois Wyse.
Many grandparents desire to financially support their grandkids during significant moments, such as college education or buying a first home. While it’s great to help, ensuring sufficient funds for your own retirement needs is essential. If you are in a position to make gifts, here are some practical ways to assist:
529 Plans for college
The 529 plans are a popular choice for college gifting. Many state plans offer state income tax deductions, ranging from $0 to $20,000 for joint gifts (e.g., $10,000 in Connecticut). These accounts grow tax-deferred, and distributions for qualified higher expenses are federally tax-free. However, tax benefits vary by state, and not all states waive state income tax on qualified distributions like Connecticut.
A 529 account owned by grandparents is advantageous on the FAFSA, affecting the Student Aid Index (SAI) more favorably. Additionally, if a 529 plan was established 15 years ago and funds remain unused, up to $35,000 can be rolled into the grandchild’s Roth IRA under certain conditions. Always consult with your financial adviser to understand the guidelines before converting.
One downside to 529 plans is the limited investment choices. Most state plans offer a predetermined selection of options, which isn’t always appealing to someone who prefers researching and buying individual stocks and bonds. Additionally, if a grandparent enters a nursing home, these accounts might be considered assets for spend-down purposes.
Gifting for a first home
You can gift up to $18,000 per individual or $36,000 per couple to your grandchild for purchasing a first home without incurring gift taxes. This type of gift is beneficial as it is likely to be used for a significant investment rather than spent on nonessential items.
Occasions for gifting
Birthdays and holidays are ideal for contributing to 529 plans or making other financial gifts. Regardless of the gifting method, fostering responsible financial habits is essential. Educate your grandchild about savings and investing before and after making the gift. Financial literacy is a valuable skill to pass on, ensuring economic success from generation to generation.
By making thoughtful financial gifts and imparting financial wisdom, you can create a lasting impact that connects your family across the generations.