Investing in Your Grandchild’s Future: A Comprehensive Guide

Grandparents often provide their grandchildren with unconditional love, reassuring hugs, and endless patience. But beyond these invaluable gifts, they can also offer a head start on financial success by investing on their behalf. At O1ne Mortgage, we understand the importance of securing a bright future for your loved ones. In this blog, we’ll explore various ways to invest for your grandchild, ensuring their financial stability and success. For any mortgage service needs, feel free to call us at 213-732-3074.

How to Set Aside Cash for a Grandchild’s Future

Whether you want to help your grandchild with retirement, a wedding, or a down payment on a home, there are several investment options to consider:

Savings Bonds

U.S. savings bonds are securities issued and guaranteed by the federal government that earn interest for up to 30 years. They are a safe investment and can be held in a minor’s name, making them an excellent way to introduce grandchildren to investing. There are two types of U.S. savings bonds:

• Series EE bonds: These earn a fixed interest rate and are guaranteed to double in value in 20 years.
• Series I bonds: These combine a fixed interest rate with a variable rate tied to inflation, helping to offset inflation’s effect on earnings.

You can purchase savings bonds online at TreasuryDirect.gov in increments of $25 to $10,000 or buy paper bonds using your federal income tax refund.

Custodial Brokerage Accounts

A custodial brokerage account allows you to invest in securities such as stocks and mutual funds on behalf of a minor grandchild. The grandchild owns the account, but you manage it until they reach legal age. There are no limits on contributions, but capital gains taxes may apply. Keep in mind that money in a custodial brokerage account is considered part of a child’s assets, which could affect their eligibility for college financial aid.

Custodial Individual Retirement Accounts (IRAs)

If your grandchild earns income through a part-time job, consider opening a custodial IRA. You can choose between a traditional or Roth IRA. Contributions to traditional IRAs are tax-deductible, while Roth IRAs are funded with after-tax dollars, making them more suitable for minors with low incomes. In 2023, contributions to a Roth IRA are limited to the lesser of the child’s annual earned income or $6,500.

How to Invest for a Grandchild’s Educational Expenses

Investing in your grandchild’s education is one of the best gifts you can give. Here are some options:

529 Plans

A 529 plan allows you to save for college and postgraduate education with tax-free investment earnings if used for qualifying education expenses. There are two types of 529 plans:

• Education savings plans: These can pay for tuition and other expenses related to college, postgraduate education, K-12 private school tuition, some apprenticeship programs, or student loans.
• Prepaid tuition plans: These let you buy credits toward tuition at current prices for future use, typically at in-state public schools.

In 2023, you and your spouse can each contribute $17,000 to a grandchild’s 529 plan without triggering gift taxes. The plan owner controls the funds, even after the beneficiary turns 18. Unused funds can be rolled over into a Roth IRA in the beneficiary’s name starting January 1, 2024.

Coverdell Education Savings Accounts

Similar to a 529 plan, a Coverdell ESA allows you to invest money for qualifying education expenses with tax-free gains. Contributions are limited to $2,000 per year per beneficiary, and income limits apply. You can have both a Coverdell ESA and a 529 plan for the same grandchild.

Alternatives to Monetary Investments

If setting aside liquid cash isn’t an option, consider incorporating your grandchildren into your estate plan. Leaving valuable property such as a home, car, collectibles, or fine jewelry can provide a financial windfall without affecting your retirement funds. Creating a will or living trust ensures your assets are distributed according to your wishes.

The Bottom Line

Before opening any investment account for a grandchild, discuss your options with their parents to avoid duplicating efforts. Consider potential tax implications and the effect on college financial aid eligibility. Consulting a tax planner or financial advisor can help you make the best decision for your grandchild’s financial future.

At O1ne Mortgage, we are committed to helping you secure a bright future for your loved ones. For any mortgage service needs, call us at 213-732-3074. Let’s work together to build a prosperous future for your grandchildren.