Many grandparents want to spoil their grandchildren with gifts, and the excitement and affection they receive in return are priceless. In addition, making a contribution to your grandchildren’s financial future could be the best gift you can give—and one for which they will truly thank you.
Here are a few ways to be a discerning and smart financial gift giver.
1. Help your grandchild start a Roth IRA.
A minor can have a Roth IRA so long as he or she earns income from a job, and contributions do not exceed the amount of money the child earns in a year, up to a maximum of $5,500. Grandparents can contribute to help reach that maximum, which could be money well invested. For example, a $2,000 contribution to the Roth IRA of a 16-year-old could grow to more than $60,000 by the time he or she is 67 if the investment earns 7 percent per year. But do some research first. Rules and logistics for minors with Roth IRAs vary among financial institutions, including whether a parent or legal guardian must be the account custodian.
2. Help pay for college without hindering your grandchild’s financial aid options.
If a family qualifies for financial aid based on need, a gift toward a grandchild’s college tuition may reduce the amount of aid he or she receives. This contribution may help decrease the amount of student loan debt the child must take on, but other options to help a grandchild pay for education are available as well.
By routing a financial gift through the child’s parents, the child may qualify for more aid as students are expected to contribute more of their assets than their parents. Also, if the parents already have a 529 plan—which is generally tax free when used for qualified education expenses of a designated beneficiary—look into whether you can contribute to that existing plan vs. opening a new account.
“Money paid to the school from a grandparent’s plan won’t affect need-based aid in the student’s first year, but [it] counts as student income in future years,” according to an article on the AARP website. “As a result, aid could drop sharply. Payments from parents aren’t considered student income.” Note that rules for 529 plans vary by state.
By January in a student’s junior year of college, however, grandparent gifts “become a nonissue,” the AARP says. That’s because students will have already filed an aid application for their senior year at that point, and any gifts after that won’t be on the record.
3. Reconsider the savings bond.
EE savings bonds are historically popular gifts for grandchildren, but if you are considering this, you may want to consider checking current interest rates on these bonds to decide whether they are the right investment for you.
For example, at the end of 2015, the fixed interest rate (through April 30, 2016) was only 0.10 percent, according to the U.S. Treasury website. While savings bonds are exempt from taxation by any state or political subdivision of a state, they are subject to federal income tax (unless they are used to finance education).
“It’s very important to recognize the world has changed, and savings bonds don’t deliver the same solutions that many people remember from years past,” Marc S. Freedman, CFP®, wrote for Time.com.
If you want your grandchild to cash in a savings bond to use toward college tuition or other expenses, you may want to consider buying that bond as early as possible in the child’s life.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.