| CHICAGO, July 18
CHICAGO, July 18 Many grandparents want to help
their grandchildren pay for college, but don't know the best
ways to do that. Financial advisers who can show them how to
make those contributions and reap financial advantages for
themselves can shine.
Nearly half of grandparents expect to contribute to their
grandkids' college savings, with more than a third expecting to
give $50,000 or more, according to a 2014 Fidelity Investments
study. That generosity can also be channeled toward significant
tax and estate planning benefits for the grandparents.
Enter the 529 plan, a college savings investment account
that provides tax-free growth as long as the money is put toward
tuition and most types of college expenses such as fees and
books. What's more, grandparents can score their own financial
perks, said Matt Golden, vice president of college savings for
Fidelity Financial Advisor Solutions.
Grandparents can use 529 accounts to reap tax deductions or
reduce the value of their taxable estates.
Furthermore, 529 plans have limits that might be comforting
for grandparents who worry that their grandchildren might spend
the money frivolously, or that they might end up needing it
themselves. Grandchildren must use the funds only for certain
college expenses, such as tuition and books. What's more,
grandparents can keep the money if they need it, subject to
penalties and taxes, say advisers.
WORKING THE ANGLES
Conversations with clients about these issues can build
trust, said Charles Wareham, a Hartford, Connecticut-based
adviser specializing in college funding strategies. Wareham's
firm holds Sunday brunches for parents and grandparents to teach
them about college funding. The events have become
relationship-builders, he said.
One way to showcase 529 accounts is by highlighting their
advantages over other savings strategies.
"Many grandparents give EE bonds for holidays and birthdays,
which can hurt more than help as far as tax purposes," says
For example, grandchildren who receive Series EE bonds as
birthday gifts can later be socked with federal income taxes on
the interest if they don't use the funds for college, according
to the U.S. Department of Treasury.
A 529 plan, in contrast, provides for tax-free distributions
for college. It also allows grandparents to give the funds to
another grandchild if the intended recipient does not go to
college or need the money.
Grandparents may also be eligible for state income tax
deductions when they make 529 contributions - they are available
in 34 states and the District of Columbia, according to FinAid,
a website about financial aid. They can also take required
minimum distributions from their IRA accounts and transfer those
funds to the 529 plan, where they can continue to grow
tax-deferred, Fidelity's Golden says.
Savvy advisers can compare plans from various states and
help their clients find the best ones, though usually tax breaks
are only available to people who invest in their own state's
A 529 plan is also a unique way for grandparents to reduce
the value of their estates: they can contribute up to five
years' worth of allowable gifts in one year without triggering
federal gift taxes. That means clients filing jointly can invest
$140,000 in one lump sum per grandchild.
One caveat: 529 accounts could make a grandchild ineligible
for financial aid, says Golden. That is because the money, once
withdrawn for the beneficiary, counts as income that schools use
to determine financial aid awards. But grandparents can avoid
the problem by waiting until the recipient's junior or senior
year to hand over the money, when students may not need as much
aid, Golden says.
(Reporting by Suzanne Barlyn; Editing by Lisa Shumaker)