National Grandparents Day is Sept. 12. If you’re a grandparent, this day is meant to honor you – but you can also celebrate by investing in your grandchildren’s future.
Of course, much of their future success may depend on their ability to receive a college education, but college is expensive.
In fact, according to the College Board, for the 2009–2010 school year, the average cost (tuition, fees, room and board) for an in-state student for one year at a public, four-year school was more than $15,000, while a student at a private, four-year school paid, on average, more than $35,000.
Furthermore, in recent years, college costs have risen considerably faster than the general inflation rate, so if your grandchildren are still quite young, their college bills may easily eclipse the numbers shown above.
Fortunately, if you want to help your grandchildren pay for college, you have some good savings vehicles to choose from, including the following:
* 529 savings plan – A 529 savings plan allows you to put money in specific investments, managed by an investment professional. You can gift $13,000 per year to each grandchild without incurring gift taxes. All withdrawals from a 529 savings plan will be free from federal income taxes, as long as the money is used for the beneficiary’s qualified college or graduate school expenses. (Withdrawals for expenses other than qualified education expenditures may be subject to federal and state taxes, plus a 10 percent penalty.) Also, if you participate in your own state’s 529 savings plan, your contributions may be eligible for a state tax deduction or credit.
* Coverdell Education Savings Account – Depending on your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account (ESA). (Unless extended by new legislation, however, this contribution limit will fall to $500 per year, beginning in 2011.) Coverdell earnings and withdrawals are tax-free, provided the beneficiary uses the money for qualified education expenses. Any nonqualified withdrawals from a Coverdell ESA may be subject to federal and state taxes, plus a 10 percent penalty.
* Zero coupon bonds – When you purcha se a zero coupon bond, it is priced at a discount to its principal, or face, value. You receive the principal value when the bond matures. You could purchase a zero coupon bond that matures when your grandchild is ready to go to college – and you’ll know exactly how much you’ll be getting. Although you won’t be receiving regular interest payments throughout the life of the zero coupon bond, as you would for a typical bond, you’ll still be liable for the taxes on this interest. But by putting the bond in your grandchild’s name, the interest will be taxable at his or her tax rate, which will likely be much lower than yours. Before purchasing or titling a zero coupon bond, though, consult with your tax advisor.
By making any of these gifts to your grandchildren, you will remind them, once again, of how lucky they are to have grandparents – which is, after all, the true meaning of Grandparents Day.
This article was submitted by Richmond Hill financial advisor Laura Evans on behalf of Jones.