Many individuals aspire to help the next generation build wealth; it’s human nature to want our kids, and their kids, to have bigger and better of everything we had. With that in mind, below are a few ways that individuals can help set their family members up for financial success.
- College Savings 529 Plans. Most folks are aware of 529 college savings plans, however, there have been a few developments over the years that may be new to you! A newer feature of 529 accounts is that they can now be used for a portion of the tuition costs of private schools. This can be elementary, middle, or high school. There are some limits to this, so it is important to make sure the costs are within the current limits. Another new feature is that a portion of 529 assets can also be used to pay back student loans. Again, there are limits so be sure to double-check with a tax professional before taking any action. According to educationdata.org, the average 4-year college education now costs a little over $100,000.00 so every penny you can save towards that goal is helpful! As a grandparent, your contributions are considered gifts for tax purposes. 529s are a great way to let funds grow tax-free, and then come out tax-free if the funds are used for acceptable educational expenses.
It’s worth noting that if the student does not use these funds for education, you can simply transfer the balance to one of their siblings, or perhaps their future child.
- Savings Bonds. Buying bonds directly from the US Treasury is a nice way to help your family secure a good financial future. Backed by the US Government, Treasury Bonds can often pay higher interest than a CD from a local bank. It should be noted that there are expected time periods when the bond would be held. This may not be suitable for short-term investing, but the lower risk and consistent interest rates are attractive savings options for many families!
- Roth IRA (Custodial). Many grandparents and parents have been utilizing custodial Roth IRA account for years. If the minor on this Roth IRA has income, they can make (or you can make for them) contributions each year up to the maximum contribution limit which is set each year. Roth IRAs will grow tax-free and come out tax-free after age 59.5. Before age 59.5, there are many exceptions that allow the child to access their funds’ penalty free such as a down payment on a first home, educational expenses, medical expenses, etc. As with all things, it would be beneficial to consult with a tax professional about the taxation of any taxable withdrawals before making the withdrawal.
- Custodial Brokerage Account. Unlike a Roth IRA, there are not as many tax benefits to a brokerage account for a minor child. However, because it’s a custodian account, the owner still controls the assets. Many families will use this type of account to help their children gain exposure to the world of investments and maintain flexibility. Need the money for a space camp? Great, no problem. Need the money for a car? Great, no problem. If you set this account up as a UTMA or UGMA account, the growth may qualify for taxation at the minor’s tax bracket.
No matter what path you choose, families will always benefit from getting a jump start in the world of finance. Budgeting, saving, and investing are invaluable lessons that can only serve to improve the lives of our family members and those around them!
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