Want to Help the Grandkids, but Not Sure How? Keep Reading.

We’ve written previously about ideas for holiday gifting for grandparents who want to provide a financial boost along with important money wisdom. But there are multiple approaches to providing these gifts, depending on the particular goal you want to achieve. Creating a lasting financial legacy is definitely worthwhile, but what’s the best way to go about it? Let’s take a look at some various goals and discuss ways to set the grandkids up for a brighter future—while also gaining some tax advantages for the grandparents.

The first step is to think carefully about what you hope to achieve for your beneficiaries. Is minimizing their college education costs a priority? Do you want them to understand the potential rewards of long-term investing? Are you concerned they might struggle to save for a down payment on their first home? Defining your financial goals for your grandchildren will help guide you in selecting the right savings or investment options.

For example, if your main goal is to open an account and contribute funds that could grow significantly over your grandchild’s lifetime to help provide income in their retirement, a custodial Roth IRA (individual retirement account) might be the perfect solution. This account allows you to manage the funds, demonstrate how investments can compound over time, and offer access to tax-free money after five years. Conversely, if your focus is on covering your grandchild’s educational expenses, a tax-advantaged 529 education savings plan could be ideal. Although there are restrictions on how the money can be used, you can establish the account, manage the funds, and help pay for tuition tax-free.

Education Funding

First, let’s consider education funding, since that’s typically at the top of the list for grandparents who want to give a hand up to the younger generation. There are several options worth consideration.

• 529 education savings plan: A 529 plan is a tax-advantaged investment account; deposited funds grow without federal income taxation. The funds can cover qualified K-12 tuition as well as college expenses. In 2024, individuals can contribute up to $18,000 ($36,000 for married couples) per beneficiary per year without incurring federal gift tax—a real advantage for those who need to reduce the size of the taxable estate as part of their estate planning strategy. Note that each state has its own tax treatment for in-state or out-of-state 529 plans. The flexibility of 529 plans is appealing; leftover funds can be transferred to another family member’s plan, used to pay down qualified student loan, or rolled over into a Roth IRA for the beneficiary.
• State-sponsored prepaid tuition plan: If you reside in one of the nine states offering a pre-paid tuition plan and your grandchild might attend an in-state college or university, this tax-advantaged account is an option. Currently, these states are Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Texas, Virginia, and Washington. The main advantage is paying tuition at current rates, with the plan investing those funds to cover tuition when your grandchild enters college. However, these plans can be less flexible than 529 plans, with potential limitations on qualifying expenses, contribution limits, resident requirements, and transferability.
• Private college 529 plan: Similar to a state pre-paid tuition plan, this allows you to tuition at today’s rates for future education costs at approximately 300 participating private colleges. Gains are tax-free, and some states offer tax deductions for contributions. If your grandchild doesn’t attend one of the private colleges, you can change the beneficiary or roll the funds into a state-sponsored 529 plan. Refunds are possible but adjusted for net investment returns, up to 2% per year.
• Coverdell education savings account (ESA): A Coverdell ESA differs from a 529 in that it covers only tuition for K-12 education, though allowing other expense categories for higher education. Contributions must end when the beneficiary reaches age 18 (unless they have special needs). In 2024, the annual contribution limit to a Coverdell ESA is $2,000 for individual with a modified adjusted gross income (MAGI) up to $95,000 (joint taxpayers up to $190,000); those with a MAGI of $110,000 (joint taxpayers $220,000) or more are ineligible to contribute. Contributions are not tax deductible, but beneficiaries receive tax-free distributions for qualified education expenses. Funds must be used or transferred to another beneficiary within 30 days after the designated beneficiary turns 30 (unless they have special needs). ESAs allow you to self-direct the investments and choose from a broader array of options.

Saving for Retirement and Other Long-Term Goals

 For those who are interested in helping their grandchildren focus more on the longer horizon, there are also a number of appropriate options, both tax-advantaged and otherwise.

• Custodial Roth IRA: Typically used for adult retirement savings, a Roth IRA can also be set up for an income-earning, taxpaying minor by an adult custodian and transferred to them upon reaching adulthood. Contributions are made with after-tax money, and gains are tax-free. In 2024, contributions can be up to $6,000 per year but cannot exceed the minor’s earnings. The potential growth from decades of compounding interest can significantly benefit your grandchild in retirement and possibly their heirs. For example, a single $2,000 investment today could grow to more than $93,803 in 50 years, assuming an 8% annual return. After five years, distributions up to $10,000 can be taken penalty-free and tax-free for major expenses like a home down payment or qualified education expenses. These assets do not affect federal financial aid eligibility for college.
• Custodial brokerage account: This account allows you to control the funds and investments until your grandchild typically turns 18 or 21, depending on the state, at which point the account is transferred to them. It’s a great option for teaching the fundamentals of investing. Anyone can make after-tax contributions, and there are no contribution limits, but the annual gift tax limit of $18,000 per person applies. Note that asset transfers into the account are irreversible. Unlike some accounts, there are no restrictions on the use and timing of fund distributions. However, the account assets are considered the beneficiary’s property, which could impact their eligibility for federal financial aid for college. Custodial brokerage accounts are not tax-advantaged. There are two types: Uniform Gifts to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA). The main difference is that UGMA accounts hold financial assets, while UTMA accounts can hold both financial assets and property.
• Gifting Through a Taxable Brokerage Account: Another approach is for grandparents to open a taxable brokerage account in their own name, invest in a range of assets, and then gift the account or specific investments to their grandchildren once they reach an age or life milestone the grandparent deems appropriate. This method gives grandparents full control over the account during their lifetime, with flexibility in how and when to transfer assets, which can be advantageous for a variety of future needs. Unlike some tax-advantaged accounts, a taxable brokerage allows for broader investment options and fewer restrictions on fund use. This approach can empower grandchildren later in life, providing them with a significant financial gift while the account remains under the grandparent’s management until they’re ready to transfer it.

Other Options

Of course, some may prefer to keep things simple by opening a savings account for their grandchildren. High-yield savings accounts are currently available that pay interest in the range of 4%. These are not tax-advantaged, but depending on the amount of interest earned, the grandchild may not be in a sufficiently high bracket to make this a problem. Some grandparents prefer certificates of deposit which, while sometimes paying a higher interest rate than savings accounts, are less liquid, depending on the term of the certificate.

If you’d like more guidance concerning the best way to provide a financial gift to your grandchildren, your Aspen wealth advisor can conduct a comprehensive review of your financial situation to assist you in identifying and selecting the goals you want to achieve, as well as developing a plan of action. We offer integrated expertise in financial planning, investment management, and other financial services. To learn more, get in touch with us.