3 Tax-Savvy Ways to Help Pay For A Grandchild’s College Education

9:08 pm Estate Planning

College 122x150 3 Tax Savvy Ways to Help Pay For A Grandchild’s College EducationOne of the best gifts grandparents can give is to help pay for a grandchild’s college education.  And it’s not that uncommon anymore as college tuitions rise and families are still struggling to recover from the recent recession.

If you can help pay for your grandchild’s tuition, do yourself a favor at the same time by doing it in one of these tax-advantaged ways as outlined at SmartMoney.com:

529 College Savings Account.  The 529 college savings plan accumulates earnings free of federal income taxes and when the beneficiary reaches college age, withdrawals can be taken tax-free to pay for college expenses.  A grandparent’s contributions to a 529 plan are treated as gifts to the grandchild, and are eligible for the $13,000 annual gift tax exclusion.  If you give more, you can make a larger lump-sum contribution and spread it over a five-year period for gift tax purposes.  And if you want to get your contributions back, you can do so, although you will owe taxes on any withdrawn earnings and will have to pay a penalty of 10 percent of the withdrawn earnings.

Coverdell Education Savings Account (CESA).  For grandchildren under the age of 18, you can contribute up to $2,000 annually to a Coverdell Education Savings Account (CESA).  Earnings in a CESA accumulate free of federal income tax, and withdrawals can be made to pay for tuition, fees, room and board, books and supplies, etc.  The ability to make a CESA contribution is phased out between modified adjusted gross income of $95,000 and $110,000 for individuals and $190,000 and $220,000 for married couples filing jointly.

Direct Tuition Payments.  You can make tuition payments directly to a college without any federal tax consequences.  The gift will not reduce your federal gift and estate tax exemption, but will reduce your taxable estate.

Get started by contacting  our Orange County asset protection estate planning law firm as soon as possible.

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