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Investing in Your Grandchild’s Future: A Guide by O1ne Mortgage

Grandparents often provide their grandchildren with unconditional love, reassuring hugs, and endless patience. At O1ne Mortgage, we believe they can also give their grandchildren a head start on financial success by investing on their behalf. There are various ways to invest for a grandchild, and it’s essential to review your options to choose what aligns best with your goals and your grandchild’s future.

How to Set Aside Cash for a Grandchild’s Future

If you want to help your grandchild with retirement, a wedding, or a down payment on a home, consider these investment accounts:

Savings Bonds

U.S. savings bonds are government-issued securities 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 impact 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 for 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. Note that funds in a custodial brokerage account are considered part of the child’s assets, which could affect their eligibility for college financial aid.

Custodial Individual Retirement Accounts (IRAs)

If your grandchild has earned income, consider opening a custodial IRA. You can choose between a traditional or Roth IRA. Contributions to traditional IRAs are tax-deductible, while Roth IRA contributions are made after-tax, with no taxes owed upon withdrawal. For 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

For those dreaming of providing the best college education for their grandchild, consider these savings vehicles:

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. Some states offer tax deductions or credits for contributions. There are two types of 529 plans:

• Education savings plans: These can pay for tuition and other expenses related to college or 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 up to $35,000 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 feasible, consider incorporating your grandchildren into your estate plan. Leaving valuable property such as a home, car, or collectibles can provide financial benefits 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 impact on 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 here to assist you with all your mortgage-related needs. Call us at 213-732-3074 for expert advice and support.

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