Grandparent’s Guide to Paying for College: Creative Financial Strategies for

As a grandparent, you are probably among the 94% who generously contribute to their grandchildren’s financial well-being. Statistics reveal that such monetary support averages out to around $2,562 annually. It’s an act of love, demonstrating that the family tree’s roots run deep.

The largest chunk of your support, as borne out by a 2019 report,  likely finds its way into buying gifts. With 86% of grandparents opting for this avenue, it’s a significant expenditure, averaging $805 annually.  

However, the nature of this financial support may be diverse. Among 62% of grandparents supporting their grandchildren financially, 40% cover the basic expenses, 29% pay for education, 15% help develop savings, and 21% take care of medical bills or wedding expenses. 

Whether your resources are substantial or limited, what matters most is that your contributions align with your financial landscape and personal values. So, if you’re planning to fuel your grandkids’ education and help them develop a secure financial future, this post may come in handy! It reveals six unique and tried-and-true strategies for your grandchild’s education. Read on and find everything involved. 

6 Strategies To Fund Your Grandkid’s Education

Leverage ROTH IRAs

Did you know that Roth IRAs can be your ideal tool for securing a robust financial future for your grandchildren? Although typically seen as a retirement nest egg, the Roth IRA can double up as a strategic education funding resource for them.

Roth IRAs are funded with after-tax dollars. Besides, they allow you to withdraw your contributions tax-free and penalty-free once the account is five years old. It’s like having a secret weapon that lets you support your grandchildren’s education while safeguarding your retirement.

Let’s imagine a tangible scenario. Suppose you’re a grandparent in your early sixties with a grandchild who’s just entered their teenage years. You’ve wisely allocated a portion of your after-tax income to a Roth IRA. 

Let’s say you contribute the maximum limit of $7,000 (as of 2023) each year.

Over time, this yearly contribution grows, not only from your additions but also from the compounded interest. After five years, when your grandchild prepares for college, your Roth IRA will have a principal amount of $35,000 — tax-free and penalty-free.

Now, for instance. The tuition fee for your grandchild’s preferred college course is $30,000. You could withdraw this amount from the Roth IRA, leaving a balance of $5,000 in the account.

However, the story doesn’t end there. As you continue contributing towards the Roth IRA, the balance of $5,000 will also keep growing until your retirement. Plus, the earnings on the principal, which aren’t included in this calculation, will continue accumulating. You can withdraw that tax-free amount once you reach the age of 59.

This way, you can fulfill your desire to support your grandchild’s education while ensuring a financially secure retirement for yourself. It’s a classic win-win! 

Few things to keep in mind

However, to make the most of this strategy, you need to keep three essential aspects in mind.

• Roth IRAs have income limits. If your income exceeds a certain threshold, Roth IRA might not be an option. However, you’re good to go as long as you’re within the limit.
• There are also contribution limits. While it might not fully cover the costs of a private school or college for multiple grandchildren, every bit helps, and these funds can make a significant difference.
• Once you withdraw the contribution dollars, you can’t put it back into the account. It’s a one-way street, so careful planning ensures you’re not compromising your retirement funds.

Take Advantage of 529 Plans

529 plans can be a powerful catalyst in your strategy for amassing assets to manage your grandkids’ future education costs. Named after their respective section in the Internal Revenue Code (IRC), 529 plans allow you to contribute post-tax dollars into a state-sponsored account. These accounts are usually invested in mutual funds, and you can utilize them to pay for qualified educational expenses.

Although originally intended for higher education, the versatility of 529 plans has expanded over time. They now allow you to spend up to $10,000 per year per beneficiary on tuition fees for grades K-12 without incurring federal income tax.

Let’s take an example to illustrate this.

Suppose you start contributing $15,000 annually to a 529 plan when your grandchild is born. With an assumed annual return on investment of 6%, by the time they turn 18, the plan will grow to approximately $500,000. 

This broadened reach of 529 plans can be particularly beneficial if you’re considering transitioning your grandkid from a public to a private primary or secondary school. However, withdrawing funds early for primary or secondary school tuition could potentially exhaust your 529 plan funds…