College Gifting: How to Open a Grandchild Savings Account

The cost of a college education is on the rise, and many grandparents are asking themselves what they can do to help their grandchildren plan for the future. If this is you, you’re not alone. A recent study found that 21 percent of grandparents help with college tuition.

Planning for your grandchild’s education is a tremendous gift to them and their parents. You may have struggled yourself to pay for college, or you just want to give your grandchild a head start in life. Now, you need to figure out the best place to put your money so it can have the maximum benefit for your grandchild’s future.

Education Savings Options for Grandparents

There are several savings options you can choose from to save for primary education and college gifting.

• Savings Account – There’s nothing wrong with a good old-fashioned savings account at your local bank. However, they generally offer low-interest rates. You can keep the account in your name and name the grandchild as the beneficiary.
• Custodial Account – This type of account names the child as the owner and the grandparent as the custodian. You will manage the account until the child becomes an adult. In North Carolina, a teen reaches adulthood at age 18. At that point, your grandchild controls the money and can do anything they want with it, which may not include your wishes that they go to college. The most common type of custodial account is a Coverdell Education Savings Account (ESA).
• 529 Account – Nearly every state has a 529 plan option for families to save for K–12 tuition and college expenses. In North Carolina, we have the NC 529 Plan. It’s a tax-advantaged education savings account that allows earnings to grow tax-free when they’re used for qualified education expenses. The person who opens the account is the owner or participant, and the child is generally named as the beneficiary. The child does not gain access to the money when they become an adult unless you transfer ownership of the account to them.

Your grandchild may already have an NC 529 Account where a parent is saving for their education. You can choose to contribute to that plan directly by submitting a gift form. Understand that once you contribute to an existing account, you no longer have any legal say in how the money is used.

Depending on your family situation, you may want to retain control over financial decisions. For that, you can open an NC 529 Account in your grandchild’s name.

Opening an NC 529 Account for a Grandchild

Opening an NC 529 Account for your grandchild, or anyone else is a simple process. You will need some basic information about the beneficiary, including their Social Security Number (SSN) or Taxpayer Identification Number (TIN), birth date, address, and email address.

You’ll also want to think about how you want to fund the account. You can write a personal check to make one-time contributions for college gifting, or you can set up automatic withdrawals from your bank account.

When deciding how much money to contribute to the account, remember that contributions are considered gifts to the beneficiary. The donor could be subject to a federal gift tax if you contribute more than $15,000 ($30,000 if you’re married) per year. You can even superfund the account with five years of contributions all at once. That would mean contributing up to $75,000 ($150,000 if you’re married) to really jump-start the savings.

Remember, that as the account owner, you have the final say about how the funds are used. You can decide if the money can be used to pay for your grandchild’s K–12 tuition or remain in the account until the child needs the money for college. It’s your call.

Tax Benefits of 529 Accounts

As we mentioned earlier, 529 accounts are tax-advantaged education savings accounts. Even with college gifting, the earnings grow free from federal and state taxes if it’s used for qualified education expenses. These include K–12 tuition, college tuition, room and board, books, a computer, student loan payments, and more.

Do Grandparent-Owned Accounts Affect Student’s Financial Aid?

A grandparent-owned NC 529 Account does not have to be reported on the student’s financial aid application when they complete the Free Application for Federal Student Aid (FAFSA). However, distributions from the account will count as student income for the year the withdrawal was made. Financial experts recommend that students use the money in their junior or senior years of college to minimize the impact on their income and financial aid.

What if My Grandchild Doesn’t Go to a Four-Year College?

The career path your grandchild chooses may not mean attending a four-year university. And that’s okay because NC 529 is flexible! Your grandchild can still get the tax benefits if they use the funds to pay for community college programs, trade school, and eligible apprenticeship programs.

What Happens if There are Leftover Funds?

If your grandchild doesn’t use all the money in the account, the funds can be transferred to another family member to continue their education. Finally, if you want to withdraw the funds for non-educational expenses, that’s also an option. However, the earnings would be subject to a 10 percent penalty plus state and federal taxes. You should discuss your savings options for a grandchild’s savings account with your financial advisor.

An education savings account is a wonderful gift to give to your grandchildren. It can help them graduate from college debt-free and give them a firm foundation to start building their life. Click here to open an NC 529 Account and start saving for the future.