Ask the Adviser: How can I give to my grandkids in a way that supports my own retirement plans? - Rodgers & Associates

Ask the Adviser: How can I give to my grandkids in a way that supports my own retirement plans?

Once you’ve taken some time to enjoy this exciting new addition to your family, it’s a good idea to meet with your adviser to weigh the different options on how to best provide financial support for their growth and devel­opment. Assuming you’ve deter­mined that you can contribute without materially affecting your own retirement plans, you should carefully consider the best way you can help.

Annual Gifts

You may have heard that the maximum annual gift amount is $18,000 per year. That’s really an oversim­pli­fi­cation that borders on being inaccurate for most people. $18,000 is the most you can gift to a person in a year without reducing your lifetime gift-tax exemption amount. The lifetime gift-tax exemption amount is currently $13.61 Million. For most people they probably won’t ever give anywhere close to that amount during their life or at their death. Gifting above $18,000 would require you to file IRS Form 709 when you file your taxes to show that you’ve used up some of your $13.61 Million. For married couples, each spouse can give $18,000 per year to an individual and each have $13.61 Million (i.e. a $36,000 a year and $27.22 Million over their lifetimes). In addition to the $18,000 per person, you’re also allowed to do an unlimited amount of gifting in the form of tuition payments and medical bill payments. With both of those additional excep­tions, you would need to write the check directly to the educa­tional insti­tution or medical provider. In the case of educa­tional insti­tu­tions, this exception only applies to costs associated with tuition and not books or room & board.

Funding College Savings Accounts

A 529 Plan is an educa­tional savings account that is designed to be used for college. You can make contri­bu­tions to these plans and as long as the withdrawal is for a qualified expense, the growth is tax free. Qualified expenses include college tuition, room and board, books, computers. There’s also a provision that allows a $10,000 maximum annual withdrawal for qualified K‑12 expenses. Additionally, some states offer a state tax deduction on amounts contributed to a 529 plan. While contri­bu­tions would normally be limited to $18,000, there’s a special exception that allows a donor to do up to 5 years’ worth of contri­bu­tions at once ($90,000) without reducing the lifetime gifting allowance. The downside of this type of plan is that the money needs to go towards qualified education expenses, otherwise the gains would be taxed as ordinary income and would be subject to a 10% penalty. That said, the recently passed SECURE Act 2.0 created a provision that would allow certain transfers from 529 plans to make Roth IRA contri­bu­tions on the beneficiary’s behalf. This is an inter­esting potential “escape valve” that could ease concerns of parents and grand­parents worried they might be overfunding college savings accounts without any guarantee that the benefi­ciary will even want to go to college. The rules on this are new and quite compli­cated so it’s best to review this with an adviser before trying to accom­plish this.

Paying for opportunities

If your kids aren’t in a financial position to pay for some of the experi­ences you know you want your grand­children to have, you could consider offering to help with these types of costs. These would be things like camps, pre-school, private school tuition, or vacations. If you know your own children are working incredibly hard, but also know that despite that, paying for pre-school would still be a strain on their finances, that would be an amazing gift that would help your children and grand­children. If a family vacation would be unaffordable for them, figure out an amount that they could contribute comfortably and then you can help cover the rest.

Just spend time with them

The best thing you can give your grand­children is a relationship. To build a relationship, it takes time and effort and if they aren’t close by, it might also take money. Budget for plane tickets, hotels, rental cars, etc. so that you’ve got a plan to see them regularly. Put yourself in their shoes and ask what they would want from a relationship with a grand­parent. Take an interest in what they have an interest in. But also open their eyes to things they might not normally get to experience. Maybe that means a trip to the driving range where you teach them to swing a golf club, maybe it’s taking them fishing for the first time, or taking them to a Broadway play.

Your grandchild’s memory of you will likely last for the rest of their lives. It may be hard to imagine, but you’re likely setting in motion a virtuous cycle of how they will treat their children and eventually their grand­children when the time comes. They won’t remember every­thing you say to them or do with them, but they’ll remember the way they feel when they’re around you and the things that you did for them along the way. This is your oppor­tunity to lead by example and to help them get started on the right foot in life.