When older adults start planning for their later years, they often want to help family members while they are alive rather than just leave behind an inheritance. One area where they may be able to contribute is providing money for their grandkids’ college education. The cost of college today is sky-high. According to U.S. News and World Report, over the last 20 years, the average tuition and fees at private universities have jumped 144%. For public universities, it’s 211% for in-state rates and 171% for out-of-state residents. As a result, parents are turning to a host of funding sources such as scholarships, federal grants, loans or withdrawing money from their own retirement accounts. Another choice that many people are not aware of is a 529 plan. A 529 plan offers significant benefits including the fact that grandparents can set up one for their grandchildren and get all the same tax benefits as parents would.

What is a 529 plan? It is a tax-advantaged account that grows tax-free and allows tax-free withdrawals to pay for certain eligible education expenses. Anyone can set up a 529 plan and name any beneficiary. Most states have their own 529 plan, but they are also available from companies like Charles Schwab, Vanguard and TIAA-CREF. There is no requirement that you must use your own state’s plan. However, there may be tax benefits to doing so.

Are all educational expenses covered? The money can be used to pay for tuition at a college, vocational or trade school, or elementary or secondary school. Room and board, meal plans, books and supplies, electronic devices, software and internet service are also eligible expenses. However, costs like transportation, extracurricular activities, health insurance, medical expenses and student loans cannot be paid for with funds from the 529 plan.

What are the tax benefits? As noted above, contributions to a 529 plan grow tax-free and withdrawals are not taxed provided they are used to pay qualified expenses. In addition, parents and grandparents can contribute up to $15,000 per person per year to the plan without incurring federal gift taxes. There is no federal income tax deduction for the contributions, but many states allow residents to take a state income tax deduction for contributions to their own state’s 529 plan.

What happens if the child doesn’t go to college? If you don’t use the money for qualified expenses there is a 10% penalty. However, the penalty is waived if the child dies, goes into the military or gets a scholarship. In addition, you can change the beneficiary to someone else.

It is a good idea to speak to a financial advisor regarding how much you can afford to contribute to your grandchild’s education and what is the best plan for you. You should also speak to an attorney about other ways you can set aside money such as through a trust so that the funds can be used for any purpose. It is rewarding to be able to help out your family but consult qualified professionals to help you assess your choices and implement them correctly.

Contact me if you need assistance with your estate planning.