FOR GRANDPARENTS

Three Things Grandparents Can Do to Help Their Grandchildren

Doting grandparents can provide more than just love and attention for their grandchildren. They can help in financial ways that benefit the family. Here are 3 ideas:

1. Pay for a grandchild’s IRA or Roth IRA

If your grandchildren have a summer job or part-time job during the year, help them get started on savings for retirement with an IRA or Roth IRA. As long as they have earned income, you can use your money for their contribution. (They can spend or save their earnings.) The contribution ceiling for 2013 is $5,500, but you can’t add more than their earned income to the account. Thus, if they earn $3,800 for the summer, this is the most that can be added to their IRA. The $3,800 will become nearly $27,000 after 40 years if the account earns just 5% annually.

Because of their young age and long savings horizon, it’s probably better to use a Roth IRA than a traditional one. The tax deduction from a traditional IRA may do them little or no good; the Roth IRA builds up tax-free income for their future.

2. Fund a 529 plan

Saving for college may be challenging for both your grandchildren and their parents, but you can help. You can add money annually to a college savings plan that they can draw from tax free to pay qualified higher education costs.

You can shop around for the best plan for your family. It may be one in the state in which your grandchildren live, where you live (especially if you get tax benefits for contributions), or any other state. Compare plans at SavingForCollege.com.

3. Pay medical costs or tuition

If you have the financial ability to help, you can make direct payments of medical costs or tuition, including private school. There is not dollar limit on how much you can pay annually; it depends on what you can afford and what your grandchildren need. All such direct payments are free from gift tax (in contrast to gifts to individuals, which are capped in 2013 at $14,000 per person).

Conclusion

These are only 3 ways that you can help your grandchildren. Other ideas include:

• Hiring them to work in your business. They earn wages and gain work experience.
• Using a UPromise credit card to earn funds that are contributed to a 529 plan of your grandchild.
• Fund a Coverdell education savings account with up to $2,000 annually per beneficiary; funds can be used tax free for any level of education.

To find other ways to help your grandchildren, talk with a tax and financial advisor.