Isn't it grand: A financial gift for your grandchild
April 04, 2013
Having a grandchild can be one of life's great joys. You can have all the fun of buying adorable outfits and cool toys, without the responsibility of late-night feedings or diaper changing.
Like many grandparents, at some point—either when the baby's born or years later—you might feel the desire to give your grandchildren something more lasting than those clothes or toys, such as a monetary gift. Fortunately, financial gifting is pretty simple and you can give significant amounts before gift taxes kick in.
College savings: As simple as 529
If you're considering giving money for college, 529 college savings plans have a lot going for them. Benefits that appeal to many grandparents include:
- Any adult can open a 529 account—a parent, grandparent, other relative, or friend.
- Investment earnings are free from federal income taxes, and so are withdrawals spent on tuition, textbooks, room and board, or other qualified expenses. (Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.)
- Your home state may offer tax breaks on 529s.
- You can invest up to $14,000 per year ($28,000 if married filing jointly) into each grandchild's account without incurring federal gift taxes.
- You can make an even larger gift by contributing a lump-sum of up to $70,000 ($140,000 if married filing jointly) and treat it as if it were made over a five-year period. If you give that grandchild any other large gifts during the ensuing five years, you'll be using up some of your lifetime gift-tax exclusion of $5.25 million.
- The account's value is excluded from your estate for tax purposes in most cases. However, a portion of the account will be included in your estate if you make a large gift, decide to spread out the tax treatment over five years, and then die during that time.
- You control the money. The account owner designates a beneficiary and controls distributions.
- You can switch beneficiaries. So if one grandchild ends up getting a full scholarship (or decides not to pursue college), you can direct the money toward another's aspirations.
How Vanguard can help you reach your college goals
529 plans offer tax advantages, high contribution limits, and investment flexibility—a combination you won't find with other savings options. As a leader in 529 plans, Vanguard offers low-cost 529 options in 28 plans across the United States.
Things to do before you open a 529 account
- Compare costs: FINRA cautions investors to shop around and offers a tool to help you compare sales loads, fees, and other expenses among 529 plans.
- Compare investment choices. Look for a plan that offers a range of investment options—stocks, bonds, and short-term reserves such as money market funds. In 18 short years, your grandchild will need that money. So consider diversifying your 529 contributions over several types of investments in case one falls short. Many plans offer age-based options that automatically reduce the portion invested in stocks, which generally carry more risk, and increase holdings in bonds and short-term reserves as the child approaches college age.
- Weigh risk: 529s are subject to all the risks associated with investing. You can lose money by investing in a 529 account.
- Research tax advantages: You can open an account in any state's 529 plan, but if your state sponsors one, find out if it offers residents a state income tax deduction.
How 529 savings affect financial aid
Although a grandparent-owned 529 isn't counted as a parent or student asset on the Free Application for Federal Student Aid (FAFSA), any money paid out of a grandparent's 529 is considered untaxed income that must be reported on the student's FAFSA the following year. The upshot: A grandparent's 529 can end up reducing the student's aid even more than a parent-owned 529 would.
One way grandparents can avoid interfering with financial aid is to use a 529 only during the grandchild's senior year of college—the income issue becomes irrelevant once the student is no longer applying for aid. If you want to pay for more than just the final year, you may wish to give the child's parents money to contribute to their own 529 instead. It won't be treated as untaxed income on the FAFSA as long as you don't give it directly to the child.
If your grandchild isn't likely to qualify for need-based aid anyway, you could simply write a check payable directly to the college once he or she is enrolled. Such direct payments aren't counted as gifts potentially subject to taxation, though they may hamper aid eligibility.
Opening a Vanguard 529 College Savings Plan takes just a few minutes.
Two other financial gift options
- Cash. True, there are more financially savvy gifts than cash. But from your grandchild's perspective, shiny coins and crisp bills may rank right up there with candy and toys. Or, if you want to score points with new parents, a no-strings-attached check is hard to beat.
- Stocks. Grandparents sometimes have favorite companies they've invested in over the years and would like to "keep in the family." And even though low-cost stock mutual funds offer a number of advantages over owning shares in individual firms, stock shares may have a place in an otherwise well-diversified investment mix. From a tax perspective, consider giving stocks that haven't increased in value since you originally acquired them but that you think might gain over time. Why? Because if the share price has risen since you bought the stock, the recipient could end up owing taxes on the difference between what you paid and the current value.
No matter what kind of financial gift you give, it's a good idea to discuss your plans with your accountant, tax advisor, or financial planner before you act to understand how you might be affected by the gift. And, of course, you'll also want to talk to the child's parents. During the conversation, you can share ideas about how you'd like your grandchild to use your gift, such as for that college education.
- All investments are subject to risk, including the possible loss of the money you invest. Investments in bond funds are subject to interest rate, credit, and inflation risk. Diversification does not ensure a profit or protect against a loss.
- For more information about The Vanguard 529 College Savings Plan, call 866-734-4533 or obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor and Underwriter.
- If you are not a Nevada taxpayer, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
The Vanguard 529 College Savings Plan is a Nevada Trust administered by the Board of Trustees of the College Savings Plans of Nevada, chaired by State Treasurer Kate Marshall.
The Vanguard Group, Inc., serves as the Investment Manager and through its affiliate, Vanguard Marketing Corporation, markets and distributes the Plan. Upromise Investments, Inc., serves as Program Manager and has overall responsibility for the day-to-day operations, including effecting transactions. The Plan’s portfolios, although they invest in Vanguard mutual funds, are not mutual funds. Investment returns are not guaranteed and you could lose money by investing in the Plan.
- This article is for educational purposes only. Consider consulting a tax advisor concerning your individual situation.
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