GRAND Magazine - Spring 2020 - 13

money

3 ways to help grandkids build a financial foundation
BY DANIEL K. SMITH, CDFA

f you're in a financial position to do so, giving
money to your grandchildren can be a satisfying
experience. Often grandparents want to help their
children and grandchildren get a step up in life but
doing so can be overwhelming when considering the
options available.
One major consideration when making gifts is
timing: should you do it while you're alive, or after
you've passed? If you have more than enough money
to support yourself for your lifetime, giving while
you're alive can be rewarding and possibly tax advantageous to either you or the grandchild.
If that's the boat you're in, here are three common
ways to gift money to your grandchildren.

owner of the account can change the beneficiary to
another family member.
If a child has "earned income" (compensation), conNo matter which vehicle you choose, an important
tributions can be made to a Roth IRA up to the lesser
thing to remember is the difference that can be made
2
of the earned income or the annual limit . "Earned
by investing these funds. Investing in various ETF's,
income" includes all compensation, whether it be from stocks, bonds, or mutual funds offers the potential to
working a part-time job, babysitting, or even housecompound the contributions you've made resulting in
hold chores. While contributions to a Roth IRA are
a larger impact to you grandchild's future. Make sure
after-tax contributions, all earnings within the account to take only as much risk as is necessary, based on the
time horizon and investment option available to you.
are tax-free upon distribution.
Consulting your financial advisor to figure out the tax
advantages and potential risk scenarios is probably
3. Open a College
the best place to start.

2. Open a Custodial Roth IRA.

Savings 529 Plan.

Many large financial institutions will hold these
1. Open a UTMA or UGMA account accounts. Likewise, many states offer their version
of a 529 Plan. Generally, contributions to a 529 Plan
in the grandchild's name.
are not tax-deductible3. The benefit is the tax-free
UTMA and UGMA are acronyms for Universal
growth of your contributions when monies are disTransfer to Minors Act and Universal Gift to Minors
tributed for qualified education expenses. Qualifying
Act, respectively. Generally, these accounts are for
minor children and, as such, require a custodian to be education expenses include tuition to private schools
for K-12th grades, apprenticeship programs, and colnamed; usually the parent or the grandparent. Any
earnings within the account are taxable to the grand- lege tuition and fees, books, and room and board
(subject to limitations). The new SECURE Act also
child, not the custodian1. Once the child reaches his/
her state's Age of Majority (18, 21, or 25), the account allows tax-free distributions from a 529 Plan to repay
must be cashed out or transferred to a new account in up to $10,000 of student loan debt. There is no
the child's name, giving the child full legal control of
requirement to withdraw the funds by a certain age.
the assets.
Actually, if unused funds remain in a 529 Plan, the
13 GRAND

SPRING 2020

If unearned income of a minor is over the annual IRS limit, there may
be income tax filing requirements. Additionally, the income may be
subject to tax at the parent's tax rate. Consult your tax preparer for
more information and advice.
2 For 2020, the annual contribution limit to a Roth IRA is $6,000,
subject to income phaseout. Consult your tax preparer for annual
limits and phase-outs.
3 Many states offer a tax incentive for contributions to a state sponsored
529 Plan. Consult your tax preparer for details.

Daniel Smith CDFA ® is an Investment Advisor
Representative. He has been in the personal financial
services industry since 2011. He primarily works with
clients who are preparing for or are already living in
retirement, helping them handle cash flow, income
and investment needs. www.WFA-asset.com
Dan@wfa-asset.com

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GRAND Magazine - Spring 2020

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