Posted on 10/20/2011 7:56:36 AM PDT by Kaslin
Dear Carrie: I have $85,000 to invest for my grandchildren's education. Where would you suggest I invest it? -- A Reader
Dear Reader: I applaud your idea wholeheartedly, with just one caveat. Before you move ahead, make absolutely sure you won't need that money for your own retirement. Err on the cautious side, and proceed with this gift to your grandkids only if you're confident you'll have the financial resources you'll need for yourself. You are being incredibly generous, but when it comes to retirement, it's hardly selfish to think of yourself first!
ACCOUNTS: LOTS OF CHOICES
That said, let's get to the meat of your question. Essentially, you're looking at four options: a 529 plan, a custodial account, a trust account, or simply investing using your own account (with the plan to make gifts to your grandchildren later).
The 529 plan: The most obvious answer, but not necessarily the right one, is a 529 plan -- the popular tax-deferred vehicle for college investing. (A Coverdell Education Savings Account can offer even greater benefits, but is limited to annual contributions of no more than $2,000 and then only if you qualify based on your adjusted gross income.) In a 529 account, investment income is never taxed, as long as it's withdrawn for "qualified" higher education expenses. Qualified means about what you'd expect: tuition and fees, room and board, and books and supplies.
Some additional benefits of 529 plans:
--You can make substantial contributions without triggering gift taxes. An individual can contribute $65,000, and a married couple can give $130,000 in a single five-year period (this requires a special election on your gift tax return).
--You control the assets. The child is the beneficiary, but the assets are in your name; your grandkids cannot access the money directly.
--You can transfer unused assets to a wide range of family members, which could be important. Say one grandchild was college bound, but the other wasn't; 529 plan assets could be shifted to the one headed for college without penalty.
--You might get a state tax break. Some states offer tax credits for 529 contributions.
So what's not to like? Well, 529 plans offer fewer investment choices than custodial accounts or trusts, and trading and exchanges are often limited. Plus, the funds can only be used for higher education. If you withdraw them for some other reason, you'll pay federal and state taxes on any investment income plus a 10 percent penalty.
A Custodial Account: If you're sure your grandkids will go to college, a 529 plan makes sense. But if your goal is simply to give them some financial assistance later in life, you might consider a custodial account. It's more flexible than a 529 in terms of what you can invest in and how your grandkids can use the money.
That can be a double-edged sword. You would control the investment now, but the assets must be given to the beneficiary when he or she turns 18, 21 or 25 (depending on your state and your wishes). Theoretically, your grandchild could reach the legal age and cash out the account to buy a Ferrari, and there'd be nothing you could do about it.
Earnings don't grow tax-free as they do with a 529 plan, but a custodial account may offer a tax benefit. Under the current tax code, the first $950 of investment earnings is tax-free and the next $950 is taxed at the child's, usually quite low, rate. After that, the marginal tax rate goes up to the parents' rate.
A Trust Account: If you want more control over the money, look at a trust account, either a Crummey Trust (the odd name comes from the first person who successfully set one up) or a 2503(c) Minor's Trust. These are more complex and more expensive than your other options. If they sound appealing, consult a trust expert to see if one of these structures would be right for you. With either a custodial account or a trust account, you will be limited to the annual gift tax exclusion of $13,000 per year per recipient ($26,000 for spouses electing to "split" their gifts).
Keep It in Your Own Account: One final option is simply to earmark that money for your grandchildren and keep it in your own name and your own account. Of course, you would need to stipulate your intentions in your will (or set up a trust), and potentially have part of it eaten up by estate tax. But the pluses are that you'll have complete control over how the money is invested and how and when it's disbursed. In addition, if you should happen to need the money yourself, it'll be available.
So you have a lot of options, though given the amount of money you plan to invest and assuming you are very confident you won't need it yourself, the 529 plan may make the most sense. Pick a plan with low expenses and a wide range of investment choices. Then make investment choices that match the time horizon you need and offer plenty of diversification. Target funds, which rebalance automatically as the date of matriculation grows nearer, offer a simple solution, so check them out.
Good luck -- and I am sure your generosity will be remembered for years and years to come.
John Ratzenberger’s mission these days is to push for the importance of trade schools and changing the culture to make it honorable to be a plumber, electrician or heavy equipment operator. We are in need of these people as a lot of them are retiring and because everyone is encouraged to go to college. I agree. I learned more practical stuff from guys in the trades than I did in four years of college.
He has a great statement on this near the bottom of the page.
Vote the Marxist Bass Turds and all those who support their policies (RINO's) OUT!
Like IRA's, I feel they are a scam, this one to the benefit of the "education establishment." Let the little people feel like they are doing something by gathering little pots of money for themselves or their kids. It is all registered and declared anyway, and will eventually wind up in our hands one way or the other....
Send them to trade school for two years. Then they caan work and pay their own way through college.
Really? Most of the people I went to college with and went into the line of work they degreed in are in dead end jobs that earn less than the couple of us who said the hell with what our degree says and went off and did our own things. In some cases they are making less than some plumbers and electricians I know. A friend of mine knows how to use heavy machinery. No college at all. He makes $100K+ a year.
This meme that college is the only way to succeed is an outdated relic from the Great Depression when you needed an edge. Now everyone and their brother has a degree. They are meaningless.
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This article is a perfect example of how broken our tax system is. You can’t even give a gift to your grandkids without hiring someone to account for the tax ramifications. And then, there is no right answer, just guesses based on current estimates. It’s past time to scrap the whole rotten tax code and start over.
“What’s The Best Way to Invest for Your Grandchildren’s College Education?”
Hands down the most cost effective way, would be not any specific investment vehicle, but to work to put in power politicans who will end the BigEducation hog trough.
Specifically, an end to government subsidizing of “higher education” will overnight make these grossly inefficient and hideously expensive institutions conform more to the disciplining fiscal rigor of the free market.
Net result: Markedly more affordable, reasonable and practical programs and educational paths.
College is fine for some and we need some to go to college but it doesn’t mean squat if we can’t build anything for ourselves.
Both of my sisters went to college. One manages a billing call center the other is a photographer. I’m a high school drop out and I’m a photographer (among other things) and have always landed in management positions in factories. I’m not going to get rich but that sounds like a hassle to me anyway.
look at all these STUPID rules~!!!!!!!!!!!!!!!!!!!!!!!!!!
scrap IT ALL~!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
9-9-9
Horse hockey. Put the money someplace where nobody can get their mitts on it until you are certain that the little cretins aren’t worth sending to prison instead...
The best way to invest for your grandchildren’s college education is to take the time and love necessary to teach them how to work and why work is a good thing. This skill is often neglected by parents who can’t or won’t find the time.
Junk Bond Fund - steady income, up and down with the market.....
Excellent post.
I knew John was on our side, but I had no idea how involved he was.
This is a point I have been pushing for years.
We need people who can make, build, invent and repair THINGS. If we somehow could turn 50,000 of our destructive/make-work lawyers and government inspectors into constructive skilled tradesmen, this country would be on a much more sane future glide path.
Pay off your kids’ mortgage and let them pay for tuition from their savings each month. What helped us was paying off our mortgage in 15 years. We then had about a thousand dollars a month to use to pay for our son’s college education. True, the state university still cost about $15,000 a year to attend, but there was no way for us to save that kind of money AND pay on a mortgage.
That way, they are mature enough for college, and can go ROTC or OCS after they complete their BA.
My grandson is in high school and in the JROTC. He's looking forward to the Air Force not only paying his college tuition but also providing him with a monthly allowance while he's in college. Of course, upon graduation, he'll be a officer in the Air Force.
What I find strange is that a nearby school with an Army JROTC program wants him to transfer to their school. They called - again - yesterday. One of their arguments is that the Army needs more personnel than the Air Force and there is a possibility that mid-way through college the Air Force will determine that they're 'overstaffed', will not need new officers, and will discontinue his scholarship. I wonder if that's true?
I am not saying that it is the be all end all. I am saying that it helps to vey in the door. If you have a trade that is great. Military is great. But not everyone can do either of those. To be blue collar, you need some abilities.
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