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Navigating College Expenses:  How Grandparents Can Help Plan a Brighter Future

Navigating College Expenses: How Grandparents Can Help Plan a Brighter Future

February 23, 2024

As young families start to grow, the focus of many financial decisions becomes the immediate need for housing, childcare, increased expenses and sometimes going from a two-income household down to one. While the thought of college education is a distant decision, the cost of higher education continues to rise. Parents bear the primary responsibility, but grandparents (or other relatives) can play a crucial role in alleviating some of the financial burden and ensuring their grandchildren have access to college or vocational education. In this article, we will explore two effective strategies that grandparents can employ to help plan for college expenses: the 529 college savings plan and utilizing permanent life insurance on the parents as an investment vehicle.

529 College Savings Plan:

One of the most popular and effective ways to save for college is through a 529 college savings plan. This tax-advantaged investment vehicle allows contributions to grow and be withdrawn tax-free when used for qualified education expenses. Grandparents can open a 529 plan for their grandchildren and contribute to it regularly or in a lump sum, providing a valuable financial resource for their future education.

One of the most compelling aspects of a 529 college savings plan is its significant tax advantages. Contributions to a 529 plan grow tax-free, meaning that any investment earnings within the account are not subject to federal income tax. This tax-free growth allows contributions to compound over time, maximizing the potential for long-term savings. Additionally, when funds are withdrawn from the 529 plan to pay for qualified education expenses, such as tuition, books, and room and board, those distributions are also tax-free at the federal level. This dual tax benefit makes 529 plans an attractive option for families seeking to save for college while minimizing their tax liability.

Another key benefit of a 529 plan is its flexibility and accessibility. Grandparents can contribute any amount they choose up to $80k in one year (equal to 5 years of the annual $18k gifting limit). The funds can be used at any eligible institution, including colleges, universities, and vocational schools nationwide. The Tax Cuts and Jobs Act of 2017 expanded the use of 529 plans to cover K-12 educational expenses, allowing for annual distributions of up to $10k per beneficiary for qualified expenses at private, public, or religious elementary or secondary schools. Additionally, many states offer tax incentives for contributions to 529 plans, providing further financial benefits for both the contributor and the beneficiary.

Recent updates under the Secure Act relating to 529 plans have introduced new provisions that enhance their flexibility and utility. One notable provision allows the unused portion of a 529 plan to be converted to a Roth IRA for the beneficiary (up to $35k). This means that if a grandchild receives a scholarship or decides not to pursue higher education, the remaining funds in the 529 plan can be repurposed for retirement savings, providing additional financial security for the beneficiary later in life.

 Utilizing Permanent Life Insurance:

Another innovative strategy for grandparents to consider is utilizing permanent life insurance on the parents of the future student as an investment vehicle. Permanent life insurance policies, such as whole life or universal life insurance, offer a dual benefit of providing financial protection and accumulating cash value over time.

By purchasing a permanent life insurance policy on the parents, grandparents can ensure that their grandchildren will have a financial safety net in the event of a premature death. The death benefit from the policy can be used to cover college expenses, ensuring that the children's education goals are not derailed by unexpected tragedy.

Furthermore, the cash value accumulation component of permanent life insurance can serve as an additional source of funds for college expenses. Grandparents can leverage the cash value through policy loans or withdrawals, providing flexibility and liquidity when needed.

Moreover, permanent life insurance policies offer tax-deferred growth and potential tax-free access to cash value, providing a valuable tool for estate planning and wealth transfer. By incorporating life insurance into their financial strategy, grandparents can leave a legacy for their grandchildren while also protecting their family's financial future.

 Conclusion:

With careful consideration and strategic planning, grandparents can play a pivotal role in ensuring their grandchildren have access to higher education. By utilizing tools such as the 529 college savings plan and/or permanent life insurance, grandparents can provide financial support while also safeguarding their family's future. And with the recent provision allowing the conversion of unused 529 plan funds to a Roth IRA, the benefits extend even further, providing additional security for the future.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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 advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.