Wise Investment Choice for Grandchildren
Grandparents enjoy buying gifts for their grandchildren. They like taking them on trips to the zoo or overnights to the beach; but when it comes to making an investment for them there is some confusion about the best course to take. This guide discusses ways to make wise investment choices for grandchildren. There are four good paths to take, each with some individual choices that involve amounts you can afford to invest and the tax repercussions for the child later in life.
The primary goal of investment for children should be providing for college education. Next to saving for retirement the grandkids college education is probably your biggest challenge. It helps if parents and grandparents can work on these goals together, especially in financially challenged families. Two excellent plans for tax free earnings are the Coverdell Education Savings Account (here-in-after called the ESA), and the 529 plan. Roth IRA’s for children are great ways for the child to participate in the savings plans and the Uniform Gift to Minors Account allows a parent or grandparent to set up a custodial account for a child’s future.
âÂ?¢ ESA is a savings account that was actually created specifically to help families save for educational expenses. The contributions for children under the age of 18 cannot be more that $2000. in any calendar year. Grandparents (actually anyone) can contribute to an ESA if the contributors modified adjusted gross income is less than $110,000 (or if you are filing a joint return, $220,000.). If your income is in a higher tax bracket the amount of tax free contributions are reduced accordingly. Distributions are tax-free if they are used exclusively for qualified education costs. Things that qualify are tuition, books, fees, etc. at eligible educational institutions. If there is money left in the ESA at the time your grandchild reaches age 30 it has to be distributed within 30 days of the beneficiary’s birthday. The earnings on the account remainder will be taxed. The taxes can be avoided if the ESA is rolled over to another family member. You can set up the account at nearly any bank, mutual fund company or stockbroker.
âÂ?¢ 529 College Savings Plan is also known as a Qualified State Tuition Plan and is a state sponsored investment plan that offers special tax treatment under section 529 of the IRS code. You deposit funds to the 529 account at your asset management company on behalf of your grandchild. The contributor of the account (you) are the account owner and you control the withdrawal of the assets. Your grandchild for whom the account is set up is the beneficiary of the account. You pay no taxes on the earnings from the account. Your grandkid does not have control of the account during those unpredictable years of adolescenceâÂ?¦âÂ?¦you do. If the beneficiary of a specific account does not go to college you can roll the account over to another family member. Anyone can contribute to the account (the child’s parents and the child himself should be encouraged to contribute). If your grandchild gets a scholarship any unused funds can be taken out without paying any penaltiesâÂ?¦.just the taxes. Actually when you open the account you have the option of prepaying tuition at a qualified educational institution or saving it in an earnings tax deferred account. The savings account option makes the most sense given the unpredictability of future events.
âÂ?¢ Roth IRA’s for children give them a great head start on financial well being. To start a Roth IRA for your grandchild he or she needs to have actual earned income. Not money for doing household chores or an allowance but something like delivering newspapers or babysitting. As soon as the child starts earning money they can invest the amount of the earned income (up to $4,000 in 2006). For you as a grandparent it avoids problems if you just give the child a gift of money equal to their earned income and let them and a parent open the account. Some IRA managers fuss about kids opening an IRA because legally minors cannot sign binding contracts. The fund companies who welcome Roth IRAs for Kids are Charles Schwab, Merrill Lynch, T.D.Waterhouse, Vanguard, T. Rowe Price, Dodge & Cox, and Oakmark, they just have the parent cosign.
âÂ?¢ Uniform Gift to Minors Accounts is especially beneficial for financially challenged families. This account is set up as a custodial account for your grandchild with you (or the parent) as the custodian even though the money is in the grandchild’s name. The UGMA allows the first $700. of investment income tax-free and the next $700. is taxed at the child’s 15% rate. If the investment income tops $1,400. before the child reaches age 14 it is taxed at the custodian’s rate. From age 14 on the income is taxed at the child’s rate of 15%. Part of the good thing about the UGMA is that anyone can establish it and there is no limit on the amount invested. (Just be aware that amounts over $10,000 a year are subject to a gift tax). Another very good aspect of the UGMA is that if there is a need for “the good of the child” the money can be used before college. Remember that if you do choose the UGMA that the money actually belongs to the kid. You cannot decide later to “get it back” and give it to another family member if your darling becomes a drug addict at 16 and never goes to college. (You could however use it to pay for a Rehab program). To get it started go to a broker, your favorite bank, or a mutual fund manager. When you assign the custodian be sure to also assign a successor custodian in case the first pick is deceased before the child reaches age 18. When you go to set up the UGMA you will need the Social Security Number of your grandchild.
The best investment for your grandchild’s future is an investment of your time, sharing and caring; and second to that, securing a good education will be the best thing you can do. These choices are reachable goals for almost any family.
