What is the Best Way To Save for Your Grandchildren?
I recently had a client tell me that they had been thinking about saving some money for each of their grandchildren but were unsure about the best way to do that. I’ve seen families over the years put off saving because they weren’t sure exactly how to go about that.
Start by asking yourself what you want the money to accomplish. Is it something specific like college or a first home, or is it more general like setting them up for success early in life?
Here are a few different ideas to consider -
529 plan – If your goal is education, a 529 plan is a great option.
Benefits
The money grows tax-free and is withdrawn tax-free if used for education expenses.
The law has been loosened over the years to allow expenses for K-12 private schools to be paid from a 529.
You can change beneficiaries within the same family so if one child doesn’t use it, another can.
The SECURE ACT 2.0 introduced flexibility in converting an unused 529 to a beneficiaries Roth IRA after 15 years so if the child ends up not using it, it is not entirely lost.
Earmarked Investment Account – If you want to set them up for success more generally, just simply earmarking funds in an investment account in your name is a simple way to accomplish this. I have several clients that have utilized this. The account is still titled in their name but we have renamed it on their reports as “Tommy’s account” for example.
Benefits
Very simple to set up.
You retain control over when or if they get the money and how it is used.
You can add a “transfer on death” to the account so that if you pass away before giving it to them, it passes automatically.
UTMA Account – This would serve a similar purpose to the earmarked account but the gift into the account is irrevocable and at age 18 (in most states) the account becomes theirs and you are no longer in control.
Benefits
They have complete flexibility over how the money is spent.
Usually, better tax benefits than an earmarked account because some income is taxed at lower rates.
No estate planning considerations need to made – the gift is done and irrevocable.
Roth IRA – If you want to get them started on retirement savings, a Roth IRA is a great tool to use. They have to have earned income so this can usually be started in the teen years when they get their first job. I love the idea of “matching” their contributions to get them in the habit of saving money too.
Benefits
Grows tax-free for decades, which allows a small contribution the ability to compound and have a tremendous impact on their retirement.
If they really need money early, they can withdraw contributions tax and penalty-free at any point.
Any of these ways would be a great start to a young child’s financial future. If you are unsure which makes the most sense, I would encourage you to start with an earmarked account since that gives you the flexibility to pivot as needed and the mental separation from the money that will make giving it much easier in the future.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.