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Wealth Column: College planning options for grandparents

Many of our clients have children that they either were able to help, or wanted to help, get an education. And that value on education and helping their families doesn't usually end at the second generation, but continues on to the third, or even...

Many of our clients have children that they either were able to help, or wanted to help, get an education.

And that value on education and helping their families doesn't usually end at the second generation, but continues on to the third, or even fourth. But times have changed since their children were in school. Tuition prices have hiked, savings strategies have evolved and there are hundreds of options for programs and degrees that weren't always available for their own kids.

As we near the start of classes in the fall, we thought we'd go through a couple of college planning options for grandparents who want to help their grandchildren further their education.

529 Plans

These savings plans involve grandparents, or other relatives, contributing to a fund that will later help pay for a student's college tuition and fees, and in some cases, housing and other necessities. The perk for the beneficiary is obvious, but there are upsides for you as the purchaser as well, including possible tax deductions and savings in the long term.

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There are generally two options for these plans, a prepaid tuition plan or a savings plan. The options available depend on the state you live in, though you can use plans from other states if you find another plan that would work better for your situation. The savings plan is the most common and the savings can be withdrawn tax-free if used for qualified education expenses. It also allows you to put away between $235,000 and the federal limit of $520,000, depending on the state's specific parameters.

Another benefit to the 529 plan is that if a grandchild does not use all the funds or decides not to go to college, you can transfer the account to another child or grandchild in most cases.

Coverdell Education Savings Accounts (Coverdell ESAs)

Coverdell ESAs are similar to 529 plans in that they are a tax-advantaged savings vehicle designed to help people save for their family members' education expenses. Just like the 529 plan, Coverdell ESAs allow you to withdraw money tax free to use on tuition, housing, books and other education expenses for your grandchild, making them an option worth considering.

One of the things that differentiates these from our previous option is that Coverdell ESAs are only available to individuals with a modified adjusted gross income of less than $110,000 for individuals and $220,000 for married couples filing jointly. Despite that limitation, this is a still great option to consider for people within that income range.

Paying Out of Pocket

If you have the money and weren't able to start planning ahead of time or simply feel the need to draw down your estate, this is still a fine option to help out grandchildren. While costs continue to rise, you can still see a personal financial benefit for those tuition payments in the form of tax savings. If you pay the costs of your grandchild's education directly to the institution itself, your payment is tax deductible, which could bring you into a lower tax bracket for the year. While other options get you more bang for your buck, this is still an option to consider.

These are just a few of the ways you can help contribute to a grandchild's education and pass on a legacy of giving and education to future generations. With careful planning, you may find that you can both give the gift of learning to your family and see a personal benefit for your own financial future.

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Prior to investing in a 529 Plan investors should consider whether the investor's or designated

beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program.

Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax adviser before investing. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Related Topics: EDUCATION
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