Nowadays, paying for higher education entails large sums of money. According to CollegeBoard, the average published yearly tuition and fees is $32,410 for a private four-year college and $23,890 for a public four-year school (for out-of-state students).
As the popular saying goes, it takes a village to raise a child. If you have grandchildren and they are having a hard time paying their college tuition, you can explore several ways to help them.
Check financial capability first
While it feels good to help our grandchildren with their financial needs, it is imperative that retirees check their financial capability first. They have to make sure that they have sufficient funds for their own needs before offering to help others, including their grandchildren.
For many grandparents, retirement limits their income flow. It means that they have to rely on their savings time. College tuition can be expensive. To better understand your finances, you can consult professionals to guide you in assessing your capabilities.
Section 529 plans are under the management of state or educational institutions. It is regarded today as the most popular way to save up for college tuition. Here, a grandparent can deposit as much as $15,000 in one year without the need to file a gift tax return.
One good thing about this is that the funds can be transferred between siblings or between cousins without the need to pay a penalty fee. One drawback is that as a grandparent, you will not get a tax deduction for your contribution.
Individual Retirement Account (IRA)
You can use your Individual Retirement Accounts (IRA) to pay for your grandchildren’s college education. One positive benefit from choosing to pay using IRA is that it does not matter what age your grandchild is. However, your age at the time of withdrawal would matter.
Those who have traditional IRAs age 59 and a half and older can withdraw money without paying a 10 per cent penalty on distributions. This is not the case for grandparents lower than age 59 and a half, however. If this is your case, a Roth IRA will have no 10 per cent penalty on distributions, as long as your account has existed for five years.
Savings bonds are issued by the U.S. government, making it one of the safest investments. Grandparents can use Series EE and I bonds to pay for their grandchildren’s college education for qualified institutions. The good thing about choosing savings bonds is you don’t have to pay a federal income tax on bonds’ interest income.
Paying the tuition fee in cash is an alternative option. It may be in the form of earned or unearned income like Social Security, interest income, capital gains, or investment dividends.
Take note that grandparents are limited gift a maximum amount of $14,000 per child. In case your grandchild has a spouse, you can give them as much as $28,000. Any amount that exceeds these limits needs a gift tax return.