The college loans you took out to finance higher education for your children have long been paid off. Now, you have happy grandchildren, and you're in a position to invest in their college tuition. What's the best way to help?
Two New England states...Massachusetts and New Hampshire...along with others, have developed the U. Fund, which is known in investment circles as a 529 Plan. Education costs are rising faster than inflation and college aid is not as available as it was when you were paying the tuition bills.
To help meet future college expenses, U. Fund states allow grandparents (and parents) to establish IRA-like investment accounts in the name of the child. State and Federal taxes on assets in these accounts are deferred until the child reaches college age and funds are withdrawn for tuition and other related expenses like room, board, books, etc. At that time, the money will be taxed at the student's tax rate, presumably significantly lower than that of the contributor.
This money can be used at any college. If you live in Massachusetts, you may recall the Massachusetts U. Plan which followed a similar plan, but limited use of the funds to a Masschusetts school. That plan, in fact, is still available in Massachusetts...along with the new U. Fund.
Conservative Investment
There are some limitations on U. Fund accounts. Each state determines how the funds will be invested...opting for conservative investments like bonds or stock/bond mix mutual funds. You do not have discretion over the investment of the contribution. In some cases, the state determines the placement of the entire amount. In others, you have a choice of a limited number of options.
Limiting risk limits potential loss. However, it is one of the minus points of the program. Investors may prefer a more aggressive program and/or to manage their own account. Only time will tell which of these choices is better from a tax standpoint.
(We'll have more on U. Fund accounts soon on Grandboomers.com including tax benefits for grandparents and transferring funds from one child to another. Check back frequently for this important new posting.)
U. Fund -- Grandparents Helping Grandchildren Go To College
In our first article on U. Fund (529 Plan), we noted that a number of states now offer conservative investment programs that permit grandparents (and parents) the opportunity to put aside tax deferred money for a grandchild's higher education. Email us if you missed that item and we will send you a copy.
Here is more information regarding the U. Fund opportunity.
Placement of funds into a U. Fund provides grandparents with significant estate planning benefits. Currently, the limit of what a parent or grandparent can give a child as a cash gift in a year is $10,000. After that, taxes kick in and certain estate tax benefits are lost. However, U. Fund permits the grandparent to give the child up to $50,000 in a single year ($100,000 per couple). If you select this option, you can add no more money to the account for five years. The advantage is that the funds start to work immediately and there are also estate tax benefits.
Is Your Grandchild Not Going To College?
What happens if the child ultimately decides not to go to college? It is an easy step to transfer the account from the initial child to another child. There is no penalty for this transaction. You can even move the funds to your children or their spouses (that's right, the grandchildren's parents), without penalty. However, the funds must be used to finance higher education including, as noted earlier...tuition, room, board, books, etc.
Early withdrawal of funds, or use of the funds for anything other than college costs results in a tax bill based on your tax rate, plus a 10 percent penalty.
The U. Fund concept is best applied when it is used by grandparents (or parents) for very young children. It insures there will be some money available when the child is ready for college and creates a longer period of investment. Investing in a U. Fund account for a child who will enter college within a few years produces negligible savings.
While not perfect, U. Fund demonstrates states have taken an interest in helping you finance your grandchild's higher education. Grandboomers.com recommends you contact your state government offices to see if the program exists in your state. If so, you can get immediate details. If not, it might be something to recommend to your local legislator.
© 2012 Created by Myles Bristowe.
