Put "Extra" Income to Work... for the Grandkids

If you are a grandparent, helping your grandchildren succeed in life may be a meaningful wealth management goal. And with the grandkids now back in school, you may be hearing about the classes they most enjoy. Whether their passions are for arts, sciences, business or trades, you can help them prepare financially to pursue their future academic interests.

One source of funding for the scholars in your family may be found in the required minimum distributions (RMDs) you must take from your tax-deferred retirement accounts starting at age 70-1/2. Should you not need every dollar from your RMD, you might put some of it to work by using one or more of the following financial tools to help offset costs of tuition, room and board.

Set up a custodial account

Although your grandchild will be listed as the account owner, you control it until the child reaches the age of majority. Many colleges count 20% of a student’s assets as available to pay for college each year. So once the child becomes the owner of the account, these assets could reduce the amount of financial aid he or she receives.

Establish a 529 plan and name your grandchildren as beneficiaries

With a 529 plan, potential earnings accumulate tax-free, provided they are used for qualified higher education expenses. (Any 529 plan distributions not used for qualified expenses may be subject to federal and state income tax and a 10% IRS penalty.) Furthermore, your 529 plan contributions may be deductible from your state taxes, depending on your state’s tax guidelines.

A grandparent-owned 529 is not reported as either a parent or student asset on the Free Application for Federal Student Aid (FAFSA). However, distributions from the grandparent-owned account are considered student income and must be reported as such on the next year’s FAFSA.

Open a Coverdell Education Savings Account

A Coverdell account can generate tax-free earnings if the money is used for K-12 or higher education expenses. You can typically contribute only up to $2,000 per year, but it may offer more investment flexibility than a 529 plan. For financial aid purposes, the Coverdell account will be treated the same as a grandparent-owned 529 plan.

Providing for a college education can be an investment that pays dividends in terms of career opportunities, earning power and intellectual well-being over the course of your grandchildren’s lives. Please contact your RBC Wealth Management financial advisor or use the advisor locator tool to find an advisor near you.

RBC Wealth Management is not a tax advisor. All decisions regarding the tax implications of your individual investments should be made in connection with your independent tax advisor.

For more information regarding college savings plans, please visit www.collegesavings.org. Participation in a 529 Plan does not guarantee the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses. State programs vary and therefore you should carefully review individual program documents before investing or sending money. Federal income tax on the earnings and a 10 percent penalty on distributions for non-qualified expenses may apply.

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