With graduation season just about a month away, grandparents may want to consider one of several “financial gifts” that can keep on giving.
These may include Roth IRAs. Roth owners must have earned income to be able to make contributions, so they are not for very young kids. But for students working during high school, they can start an account and grandparents can contribute a matching percentage of earnings that kids put in their Roth IRA. Set up and fund a Roth IRA for grandchildren as soon as they have enough earned income from part-time or summer jobs. This will ensure that the five-year “holding” requirement for Roth IRAs is met when the (then-grown) child is ready to make a withdrawal to buy a home, for example.
Grandparents can also name grandchildren on their own Roth account as their primary beneficiaries, and when their grandchildren inherit it, they’ll be able to make tax-free withdrawals to help them meet their financial goals later in life.
You can also make a direct gift of your grandchild’s tuition under current tax law. You can make gifts of any amount to cover your grandchild’s tuition without incurring gift taxes. You need to pay the college directly, however. This will not reduce your federal estate tax exemption ($3.5 million in 2009) but will reduce your taxable estate. You can also make additional gifts per grandchild of $13,000 annually without incurring gift taxes to help with other college expenses.
Be sure to remind the parent claiming that college-bound student as a dependent on his/her tax return that up to $4,000 paid for tuition/fees for attendance at an eligible postsecondary institution might be deductible from their taxable income in 2009. There are restrictions that limit this deduction, so be sure to consult a qualified tax advisor first.
A better gifting tool for kids several years from graduation is a 529 plan. It has estate planning benefits as well and can benefit more than one child. Grandparents can establish the account designating a grandchild as beneficiary, or they can make contributions directly to a 529 account already established by the grandchild’s parents.
Withdrawals from 529 plans used to pay for qualified higher education expenses are tax-free.
A 529 plan owned by grandparents should not affect the grandchild’s eligibility to receive federal financial aid because a grandparent’s assets are not reportable on the free application for federal student aid, or FAFSA, and the tax-free withdrawals from a grandparent-owned 529 plan are not counted as student income or student resources.
Grandparents can treat their 529 contribution as completed gifts, meaning they can contribute $13,000 per year or give an accelerated contribution of up to $65,000 using a special five-year election with no gift tax consequences. Again, consult your tax advisor before contributing.
Have your financial adviser help you sort through the details of various state plans.
Various services — including Morningstar Inc. — now rank the offerings of each state’s plan. Web sites like www. SavingforCollege.com and www.FinAid.org are leading sites for education about 529 plans.
Karin Grablin, a certified financial planner with Dictor & Martin, 2 N. Tamiami Trail, Sarasota, can be reached at (941) 906-7222.