Balancing Grandkids’ College Savings Plans with Your Retirement Goals

As a grandparent, you naturally want to support your grandkids’ education. You want to see them succeed and know they’ll go on to live happy, productive lives with their children and grandchildren. You also want to be sure your multi-generational generosity doesn’t impact your financial goals and retirement savings later in life when you need it the most.

Here at SGL Financial, our retirement planning and CFP® professionals in Buffalo Grove understand the complexities of this balancing act and are here to guide you through it every step of the way. Let’s get started.

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Family Financial Planning: Advice from a Buffalo Grove, IL CFP® Professional

Ways to Save for Your Grandchildren’s College Education

Saving for your grandchildren’s college educations is a generous and impactful way to contribute to their future careers when you and your spouse may be gone. Consider combining various savings methods based on your family’s current and future situation. For example, you might use a 529 plan for its tax benefits and flexibility while setting up a trust to control larger sums of money.

• 529 Plans are one of the most popular and flexible options for saving for education expenses. Here’s why:
  • Contributions grow tax-free, and withdrawals for qualified education expenses are also tax-free.
  • You can contribute up to $18,000 per year per beneficiary without incurring gift taxes, and each state sets a range of lifetime contribution limits.
  • The funds can be used for various education-related expenses, including tuition, books, and room and board. You can transfer the account to another beneficiary if one grandchild doesn’t need the funds.

• Custodial accounts under the Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) allow you to transfer assets to a minor without setting up a trust.
  • The first $1,150 of unearned income is tax-free, the next $1,150 is taxed at the child’s rate and amounts over $2,300 are taxed at the parents’ rate.
  • The child owns the assets, which can be used for any purpose once they reach the legal age of majority (usually 18 or 21, depending on the state).

• Coverdell ESAs are another tax-advantaged savings vehicle for education expenses.
  • You can contribute up to $2,000 per year per beneficiary.
  • Funds can be used for K-12 expenses as well as higher education.
  • There are income restrictions for contributors, making it less functional for high-income individuals.

• Roth IRAs are traditionally retirement accounts, but they can also be used to save for education.
  • Contributions are made with after-tax dollars, but earnings grow tax-free. Withdrawals for qualified education expenses can avoid penalties, though taxes may still apply to earnings.
  • If the funds are not needed for education, they can be used for retirement.

• Setting up a trust can provide control over how and when the funds are used.
  • Education or general family trusts can be tailored to meet your specific goals.
  • Trusts offer more control over the distribution of funds and can include specific instructions on how the money should be used.

• Giving direct cash gifts is a simple way to contribute to your grandkids’ education.
  • You can gift up to $16,000 annually per beneficiary without incurring gift taxes.
  • This method allows the parents or the grandchild to decide how best to use the funds.

• U.S. Savings Bonds can be used for education expenses and offer certain tax advantages.
  • Interest earned is tax-free when used for qualified education expenses.
  • Purchase Limits: There are annual purchase limits ($10,000 per year per Social Security number for electronic bonds).

• Prepaid Tuition Plans allow you to pay for future college tuition at today’s rates.
  • These plans are usually state-sponsored and may offer significant savings on tuition costs.
  • They protect against tuition inflation by locking in current rates.

• Encourage your grandkids to apply for scholarships and grants.
  • Scholarships and grants do not need to be repaid and can significantly reduce the cost of college.
  • While you don’t control this savings method, supporting your grandkids in finding and applying for scholarships can make a big difference.

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Balancing Your Retirement With Funding a College Education

While there are plenty of options to help you build an education fund for your grandkids, you must also consider your savings efforts if you’re nearing or have already retired. To illustrate where things can go wrong with retirement planning, the following scenarios highlight the importance of balancing these two important goals.

• Prioritize Retirement Savings First:

Prioritizing your retirement savings is essential to ensure financial stability in your later years. Ensure you contribute the maximum amount to your retirement accounts, such as a 401(k) or IRA. If you’re 50 or older, take advantage of catch-up contributions.

Also be sure to leverage employer match contributions, if available. Make sure you’re contributing enough to get the full match. It’s essentially free money for your retirement.

• Regular Financial Reviews: 

Consider working with a team of financial advisors to review your retirement plan regularly. This will ensure you’re on track to meet your retirement goals and can adjust contributions as needed.

Two Examples of Balancing Retirement and Educational Savings

Case Study #1: Overcommitted to Grandkids’ Education

A widowed grandmother contributed $10,000 annually to her three grandkids’ 529 plans. While this generosity was appreciated, it left her retirement savings underfunded. With the help of financial advisors in Buffalo Grove, Mary re-evaluated her plan. She reduced her contributions to $5,000 annually and increased her retirement contributions, boosting her probability of having enough assets and income later in life.

Case Study #2: Balanced Approach

John realized he needed to reprioritize his retirement savings and educational funding efforts. He needed a more balanced approach. He began by maxing out his retirement contributions first. Once he was confident his retirement plan was on track to meet his goals, he allocated extra funds toward his grandkids’ 529 plans. This strategy made John feel more secure about his retirement plan while supporting his grandkids’ education.

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Moving Forward

Now that you are armed with new strategies, how can you move forward to create a more balanced approach for your retirement savings and educational funding efforts?

1. Start with a Comprehensive Review of Your Financial Plan: Life circumstances and financial markets are constantly in flux. Regular reviews with Buffalo Grove financial planners from SGL Financial can help you adjust as needed.
2. Stay Informed About Tax Laws: Tax laws affecting 529 plans and retirement accounts can change. Keep yourself updated or work with an SGL financial advisor who stays on top of these changes for you.
3. Be Flexible: Be open to adjusting your contributions based on your financial situation. Flexibility can help you balance both goals more effectively.
4. Seek Professional Advice: Navigating the balance between college savings and retirement planning can be complex. Professional advice from a Buffalo Grove CFP® professional can provide you with personalized strategies and peace of mind.

Ready to get to work on your retirement planning efforts? Connect with us today.