Searching for a meaningful gift for your grandkids this holiday season? Try money for college. If you do it the right way, you might also end up with a little extra for yourself or your kids: maximized financial aid or lower taxes.
Your best choice depends in part on the amount you're giving and the age of your grandchildren. Your children's finances matter, too, since that will affect how much your grandkids get in need-based aid. And if you expect to have a large estate—$10.9 million for married couples and half that for singles—know that any per-person gift over $28,000 ($14,000 if you're single) in a year will reduce the portion of your estate exempt from taxes.
Here are the top ways to help your grandkids pay for college.
Be smart about a 529
A 529 savings plan is ideal for kids elementary-school age and younger, and not just because your contributions will have many years to grow tax-free. (Withdrawals are also free from federal taxes if used for qualified school expenses.) To increase your investment's chances for growth, you can put up to $140,000 at a time in any one child's plan ($70,000 if you're single) every five years without reducing your estate-tax exemption.
You can open a 529 account in any state, no matter where you or your grandchild lives. Look for a low-cost plan sold directly to consumers, such as Utah's; find a full list of plans at Savingforcollege.com. But rather than opening a 529 yourself, do your adult child a favor by simply contributing to an account that he opens for your grandchild, suggests James Holtzman of Legend Financial Advisors in Pittsburgh. That's because any money withdrawn from a nonparental 529 counts as student income and cuts a need-based aid package by up to 50% of the distribution. In contrast, only 5.6% at most of a parent-owned account is counted against an aid package. And while rules vary, you or your kids might be able to get a state income tax deduction on money you put in an account or give to them to deposit themselves.
Avoid the middleman
A simple way to help a student already in college is to send money directly to your grandchild's college. Payments for tuition— but not for other expenses, such as room and board—are immune from gift taxes. If your grandchild receives need-based aid, however, your money will count as income on her next financial aid application, slashing her eligibility by 50% of what you paid. In some cases, warns financial aid consultant Kalman Chany, your money will reduce her aid dollar for dollar.
Wait until later
Worried about messing up your grandchild's financial aid? Then help her family pay off loans after she graduates, suggests Chany. Don't co-sign loans, since you'll be on the hook if your grandchild stops paying. But if your child or grandchild takes out loans based on your promise to help repay, you might want to provide for that in your will, in the unhappy event you aren't around to write the checks.