College Savings for Your Grandchild: What’s the Best Option?

There is no denying it: college is quite expensive these days. If your grandchild is still a baby or toddler, imagine how much costlier it will be for them to complete a degree almost two decades from now. It’s never too early to start boosting their college savings so they never feel held back from achieving their dreams.

There are multiple options for grandparents who want to contribute to a grandchild’s college savings, ranging from outright cash gifts to savings bonds. What’s the best way to make your money go farther for your grandchild?

A 529 Plan is Ideal

Many financial experts agree: a 529 college savings plan is one of the smartest ways to save money for your grandchild’s education. You can set up an account with yourself as the owner, but your grandchild as the beneficiary, and it functions like any other investment, such as an IRA.

One of the main benefits of a 529 plan is its tax benefits. You contribute after-tax money, but you don’t have to pay taxes on the growth, as long as the account value is used for qualified education expenses. However, if you decide to withdraw the money and use it for something else, you will have to pay a 10 percent penalty and taxes.

Setting up the Fund

When you open a 529 college savings plan, you can select the state in which the fund will be based. Each state administers their own range of funds, and you can select the plan you prefer out of the available options. Though each state has its own restrictions, funds can be transferred to an institution in any state in which your grandchild decides to attend school.

Many states offer age-based funds which invest aggressively at first, then become more conservative as the child reaches college-age. This helps insure against drastic stock market dips around the time they will begin their college education.

You always maintain ownership of the account, unless you decide to transfer it to the parent’s name in the future. The benefit of maintaining ownership is if your grandchild receives a scholarship or decides not to go to school, you can simply name a new beneficiary without any penalty.

Consider the Prepaid Tuition Option

Besides the traditional 529 college savings plan, there is also the 529 prepaid tuition plan that allows you to lock in today’s price for college. The funds are paid to any of your chosen state’s institutions, but if your grandchild decides to go out-of-state for school, you can transfer the value to another public or private university.

Get Professional Advice

Because of the financial aid implications, it’s wise to sit down with a professional financial advisor and discuss different scenarios. You want to add to your grandchild’s college savings, but you don’t want to take away from their eligibility for federal aid.

If you find that a large portion of your budget is going towards your own medical costs, maybe it’s time to sit down with an insurance professional too. At My Senior Health Plan, we can help you find insurance coverage that fills in the gaps, freeing up your funds so you can fulfill your dreams of contributing to your grandchild’s college savings without putting too much stress on your budget.

Pete Blasi