Ways Grandparents Can Help their Adult Kids Pay for the Grandkids’ College
We have a passion for college planning here at AIWM. Partially this is because we are parents, too. Many of us are currently putting our kids through college, have just finished doing that, or we are getting ready to do that. We also love helping grandparents contribute to their grandchildren’s college experiences!
Grandparents are in a unique position to help their grandchildren when they have their own financial plans in place. So, the first tip? Get your own financial affairs in order. After you are sure that you can afford your own retirement with dignity, then consider what you might do to help your grandchildren, then you are ready to decide how you want to help the rest of the family!
Grandparents: You May Use Your Own Retirement Account
One of the ways to help your grandchild pay for college is through your own retirement account. Assuming that you are older than age 59 1/2, then withdrawals from your retirement account are not subject to a 10% early-withdrawal penalty. Younger grandparents? Skip this tip until you are more seasoned! You do not want to pay an additional, unnecessary amount.
Many grandparents set aside money that they will not use during their lifetimes. Sometimes, this money is in an IRA or a Roth IRA. If a grandparent pulls money out of an IRA to pay for education, it does not count against the annual gift tax limits. If this money comes out of a Roth IRA, then it’s also tax-free!
An additional benefit of using your own retirement account is that you can gift the money to your grandchild for other purposes than just a college education. If your grandchild does not need the money for college, you may still want to make a gift to them. Perhaps she earned a scholarship. Perhaps he does not want to go to university, but into the military instead. Some kids start a career that does not require a traditional four-year degree. The money in an IRA is available for any purpose. Quite a bonus!
A Grandparent May Want to Pay Strategically
Timing matters when it comes to financial assistance and college tuition. A grandparent can pay for a grandkid’s college tuition anytime, but often it’s wisest to wait until the child has two years or less before college graduation. Why? Because a grandparent’s gift increases the student’s income in the financial aid calculation, also known as the Expected Family Contribution (EFC). So, if a grandparent pays for the first and second year’s tuition, the contribution pushes the family’s EFC up, and grant money down, for the third and fourth years of college. If your grandchild has a chance at getting need-based financial aid, then consider waiting until years three and four to assist.
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