Frequent letters and e-mails from new grandparents ask the same thing. “I became a grandfather for the first time and would like to ensure my grandson’s future,” a recent letter began. “Is a Roth IRA the way to go? Or a 529 college savings plan? Any thoughts will be appreciated.”
We’ll share our thoughts and also suggest ways to enrich your grandchild’s life other than by giving him money, as well as keeping your financial generosity from spoiling your kid.
The Roth IRA - just about all of you ask about it - is a terrific idea, but you’ll have to wait. A Roth IRA is an account in which the money can grow tax-free for retirement. With many years to compound, even a modest contribution early on can blossom into a large sum by the time your grandchild retires.
The problem: Although it’s legal to open a Roth IRA at any age, the IRA holder, or at least the spouse of the IRA holder, must have “earned income,” tax jargon for income from work.
Therefore, you can’t fund your grandchildren’s IRAs until they get paying jobs, which could be baby-sitting or mowing lawns. They do not have to use the same dollars received from work to fund the IRA. They can use money from any source, including a gift from grandparents or parents or anybody else.
Other than an IRA, you can open a custodial account for your minor grandchild at any time without any income requirements. Legally, the money belongs to the child, who can do with it as he or she pleases when reaching majority age, usually 18 or 21 depending on the state. If you worry your child will blow the money on a sports car rather than use it for education, a custodial account may not be the way to go.
Of the many ways to help pay for college, our favorite is the Section 529 savings plan. These plans allow a donor to open an account with the child as beneficiary. Besides parents, donors often include grandparents.
“Costs for higher education continue to climb,” said John Roth, a federal tax analyst. “As a result, saving for college is increasingly becoming a family affair.” The state-run 529 savings plans allow large contributions - some in excess of $250,000 - to grow tax-free for college expenses.
Aside from money, give your grandchildren your time and involvement.
Enrich their lives as they grow up by taking them to parks and museums, to concerts and fairs and sporting events. If you can afford it and everybody in the family agrees, offer to pay for three-generation vacation trips together. The money you spend this way won’t grow in the sense of earning interest, but your grandchildren will grow emotionally and intellectually and the memories will last a lifetime.
But don’t try to buy your grandchildren’s love and make sure you don’t upset the money values their parents are trying to teach. Linda Leitz, a certified financial planner with Pinnacle Financial Concepts in Colorado Springs, Colo., and author of “The Ultimate Parenting Map to Money Smart Kids,” suggests parents and grandparent discuss and agree on ways grandparents can help.
- Think beyond holidays or birthdays. Instead of many toys or new clothes all at once, consider helping with camp tuition for the summer, equipment to participate on a school