College savings options for grandparents
- Grandparents continue to give, even in wake of economic downturn.
- Popular options include 529 plans, Coverdell accounts, UGMA/UTMA.
- Some argue that "cash is king" when saving for grandchildren.
A grandparent's college savings generosity knows no bounds, even in hard economic times.
A July poll by the MetLife Mature Market Institute in New York found that two-thirds of American grandparents provided financial support to their grandchildren during the past five years. The average amount given over that time period was $8,661, and 25 percent increased giving as the economic downturn unfolded.
The proliferation of attractive long-term investment opportunities -- as well as a few counterintuitive giving strategies -- has nudged aside the creaky old tradition of starting a grandchild's college fund with a savings account and a fistful of U.S. savings bonds.
Steven Foldes, a Miami-based Certified Financial Planner and recent first-time grandfather, says no right-thinking grandparent would tie a grandchild's college tuition fund to savings bonds when inexpensive, higher-yielding portfolio options abound.
"If you do the math, the differential between the 4.5 (percent) to 5 percent long-term return of bonds and the 9 (percent) to 10 percent return of equities over a period of 18 years becomes huge," he says.
Popular strategiesHow are grandparents investing for the grandkids' education these days? Here are a few popular college savings strategies:
- Section 529 college savings plan. This 14-year-old educational investment vehicle, named after the Internal Revenue Code that created it, is administered at the state level, although a student may use the funds anywhere in the country.
The popular plan enables investors to choose from a menu of mutual funds, much like an IRA or 401(k) plan. The parent retains full control of the fund, which is revocable. Anyone may contribute and there is no age restriction on a 529 plan.
- Section 529 prepaid plan. Many states and public colleges and universities offer the option to prepay all or part of the cost of an in-state public college education. An Independent 529 Plan offers a similar program for private colleges.
The return on investment will usually decrease should the recipient attend school out of state or choose a different college.
- Coverdell education savings account. Think of Coverdell as an educational Roth IRA, although its annual limit of $2,000 per child and parental income limits make it an awkward fit for some families.
The parent typically acts as custodian for this irrevocable fund; investment options may include mutual funds and/or individual stocks and bonds. On the plus side, the fund can be tapped for certain K-12 expenses. On the minus side, K-12 flexibility will expire -- and contribution limits will drop to $500 annually -- in 2010 unless Congress extends them.
Coverdell contributions end when the recipient turns 18 and must be withdrawn by age 30 to avoid fees and penalties.
- UGMA/UTMA. This supercharged, modern-day equivalent of a grandchild's savings account was made possible by the Uniform Gifts to Minors Act, or UGMA, of 1956 and the Uniform Transfer to Minors Act, or UTMA, of 1986. It essentially allows donors to give or transfer assets into a custodial account for a minor without creating a trust.