Reaching a point where you can share your wealth with others is both rewarding and a wonderful opportunity to support future generations. Seeing the positive impact firsthand versus leaving all gifts as an inheritance is a goal for many — financially supporting a grandchild's college education is a perfect opportunity.
When you’re ready to contribute, simply handing over a check may not be your best option. Let’s brush up on the cost of college, savings options, and a few other tips. Like most financial decisions, a bit of planning will help you make the most of your gift.
What does college cost these days?
The cost of a college education can vary drastically. And contributing doesn’t have to mean covering the entire expense. But at the same time, you surely want to understand the effect of your contribution.
The current in-state tuition at the University of Delaware is just over $14,000/year plus room and board. This is slightly over the national average for in-state tuition at public universities of $9,687. The average private college comes with a price tag of approximately $35,087 per year.
Guidance for planning and saving
Some begin planning well before their grandchild turns the tassel at high school graduation, where others decide to withdraw funds from an investment account when the hopeful student heads off to college.
Many planners will opt to utilize a 529 Plan. This state-sponsored tax advantaged plan is perfect if you’re set on using the funds for education. The benefits include tax-free growth and tax-free withdrawals when used for tuition, books, or college fees.
As you invest in a 529 plan, it’s important not to compare college savings to retirement savings. The overall timeline associated with a 529 Plan is often far shorter than that of a 401k. Because there is overall less time to recover from possible downturns in the economy, many will opt to invest more conservatively.
At the end of the day, you’re counting on fund availability on a specific maturity date. At Integrated Wealth Management, we shy away from age-based plans due to the lack of control. Age-based or target-date funds typically make changes based solely on a timeline. The time of these changes often does not consider current stock market trends.
It’s important to remember the variables associated with college. Your grandchild will be an adult at this point, and you simply can’t predict the path they will take with certainty. For this reason, many will not solely rely on a 529 Plan and may simultaneously save elsewhere. Funds used outside of the 529 Plan’s parameters may be subject to both income tax and a 10% penalty on the gains.
For consistent contributions, consider making regular deposits associated with your grandchild's birthday or make an annual contribution part of their Christmas gift. The state of Delaware also allows you to direct tax refunds into a 529 plan.
Other investment accounts and even CDs are ways to save for goals that have a specific timeline. A financial advisor can assist in building a portfolio that considers your gift-giving desires and your personal financial goals and needs.
Tax consideration related to college contributions
The IRS states: "the general rule is that any gift is a taxable gift", and in the scenario of gifting money the donor is the one on the hook for the tax liability. But like many tax laws, there are exceptions.
While 529 Plan contributions are considered a gift, there is a $15,000 annual exemption per recipient. There is also a 5-year rule allowing you contribute up to five times the annual gift exclusion. This means a single person could accelerate a lump sum gift of $75,000 in year one and still avoid the gift tax. A married couple's max contribution is $150,000. In both instances no additional contributions to the specified beneficiary can made by them in the following 5-year period. While no gift tax will be due you are required to file a gift tax return. Please consult with your tax advisor about filing requirements.
You can avoid the gift tax altogether, by writing a check directly to the university instead of to your grandchild. The payment can be applied to your grandchild's balance but you will have bypassed giving the money directly to your grandchild.
Make a lasting impact
While your contribution will undoubtedly help your grandchild gain a higher education, you can also play a role in the education piece. Talk to your grandchild about debt and interest rates. Many kids today think student loans are just a part of life, you can help change this outlook.
These same kids grow into adults that resent the financial choices of their younger years, often wishing they were a bit smarter with their money. This street smarts financial education you provide to your grandchild can prove just as valuable as the financial gift you provide towards their education.
At Integrated Wealth Management, many of our clients are grandparents looking to benefit the next generation while still living out the retirement of their dreams. Individuals and couples come to us at varying stages of life, each with their own unique goals.
If your goals include helping a grandchild offset the cost of college, our financial advisors are here to help. We can assist in 529 Plan investment options, tax considerations, and other strategies to help you reach your goals.