Saving for Children & Grandchildren: What to Know
We asked our financial consultants to share their top three ways parents and grandparents can save for the next generation.
Parents and grandparents want bright futures for their children and grandchildren.
Our financial consultants discuss ways to invest for education and other goals.
Learn which accounts may work best for your children or grandchildren and why.
Back-to-school time means registrations, new clothes, school supplies and physicals. And if you have older kids or grandkids, you may be packing them off or back to college or a vocational school. Through it all, you may also be thinking about the costs.
Some parents and grandparents also think about what's down the road for the child. Others put off planning when there are so many demands on their time. But at some point, you might consider how you can best save for their futures. Financial consultants Jonathan Belay, Ryan Heidenreich, Rachel McLain and Don Thomas share their thoughts.
College Saving May Rise to the Top (Eventually)
Our financial consultants see parents and grandparents going through different stages when considering college costs for their children and grandchildren. Parents with babies and toddlers are often more focused on the newness of parenting—and the additional expenses they may encounter with diapers and daycare—rather than what's ahead for their child.
"It's not usually until a child reaches age 8 or 10, when parents start seeing the future after high school coming quickly," says Ryan. "Before that, a child's college education or future career seems less urgent."
Don agrees, "You deal with the dog that's barking the loudest." Many parents are busy taking care of the day-to-day. They may be earlier in their careers, saving for a house or still dealing with their own student loans. It's when they get some breathing room that parents start thinking seriously about their kids' future.
Unfortunately, parents can miss out on a few years of putting away money for future education, such as in a 529 education savings account. "It really is best to start saving from the get-go," says Ryan, "But that doesn't mean it's too late when parents are ready."
What about grandparents? "Grandparents are in a completely different stage of life, so it's easier for them to think about a grandchild's future and perhaps college," says Rachel. And it's often the grandparents who have most of the discretionary money.
Still, some grandparents in early retirement may focus on whether their money will last as long as needed. They may be reluctant to spend in the earlier stages of retirement, especially if higher inflation has put a dent in their retirement budget.
Some of the Best Ways a Parent or Grandparent Can Save for a Child
Our consultants agree that a 529 plan may have the most benefits for a student's education. It's true if you start saving early or even if you start later. "It's tough to beat the triple tax advantages that 529s offer for education expenses," says Ryan.
Parents (and grandparents or anyone) may receive state tax deductions on amounts contributed to a 529 plan.
529 savings grow tax deferred.
Withdrawals for qualified education expenses are tax-free.
What Holds People Back From 529s?
Even with the tax advantages, investors can have misconceptions about 529 plans and believe them to be too rigid. "Clients may be reluctant to invest in a 529 because they don't know early in a child's life if they will or won't go to college," says Don. If the child is older, they may think it's too late to start saving (but it's not).
Parents and grandparents also may not know the qualified expenses 529 funds can be used for, such as vocational schools, room and board, and books. Qualified expenses also include tuition for private K-12 schools, and a recent rule change means students can use up to $10,000 toward student loans.
And what if the child doesn't attend college or gets a full-ride scholarship? Account owners can transfer the funds to another beneficiary—another child, grandchild, or even themselves.
Starting in 2024, the Secure Act made it possible to transfer up to $35,000 from a 529 plan to a Roth IRA owned by the beneficiary.
"In the future, the ability to transfer money from a 529 to a Roth IRA will be a huge benefit and offer clients the flexibility they're looking for," says Rachel. "And give them a way to pass on the money to their child or grandchild to jumpstart retirement savings."
How Else Can You Save for a Child or Grandchild?
If a 529 plan is the first way to save for a child’s or grandchild’s education, what else is there? Our consultants see clients using other vehicles that can be used for both education and other goals, even though they don't have the same tax advantages.
"Roth IRAs can give parents and grandparents a choice," says Don. "You can use them for both college and retirement." With a Roth IRA, parents and grandparents can contribute after-tax dollars. The money in the account grows tax-free, and qualified withdrawals are not taxed for retirement.
Roth money you’ve contributed (the principle) can be used for education expenses without taxes or penalties. However, if you exceed your principle, the earnings would likely be taxable.1
Traditional IRAs offers the same penalty-free exception for educational expenses as a Roth IRA. While the funds will likely be taxed from your traditional IRA, it’s money that would probably be taxed anyway in retirement. That’s different from Roth IRA earnings that are most often tax free later on.
Whether from a Roth or traditional IRA, using retirement accounts for college expenses does take additional planning to make sure you’ve accounted for it in your retirement plan.
"I see many clients setting up Unified Transfers to Minors Act (UTMA) accounts for younger children, especially by grandparents," says Rachel. The high costs of college and the nationwide drop in college enrollments may have something to do with it.2 However, she also says that as children get closer to college, there are more questions about 529s.
UTMAs allow adults to transfer assets to minors for any expenses, including education. When the child becomes an adult, they fully control the money. A drawback of UTMAs for education expenses is that the amount you can contribute annually is lower than that of a 529 ($17,000 for UTMAs versus no annual limit for 529s). However, each state may have an aggregate amount limit for 529 accounts, ranging from $235,000 to $500,000 in 2023.3
Where Should Parents and Grandparents Start?
Saving for a child or grandchild's future is really a decision of the heart because parents and grandparents want the best for those they love. "If a parent had a great experience in college, helping them plan for college usually comes from that," says Don. "They want their kids to have that same experience."
"It also helps when we talk to parents and grandparents about what they would have done differently with finances if they had to do it over again," says Jonathan. Parents and grandparents don't want their kids and grandkids to make similar mistakes. Teaching them smart money lessons before college can go a long way.
Like any other investment decision, saving for a child or grandchild starts with a goal. Early on, it may be the adult's goals and wishes. Saving now will help set your child or grandchild on the right foot to achieve their own goals later. And they'll watch how you were faithful to invest for the future.
Can a Roth Be Used for Education? Bankrate, March 2023.
Why More Americans Are Skipping College, PBS Newshour, March 2023.
How Much Can You Contribute to a 529 Plan in 2023, Saving for College, July 2023.
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This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.