Your Grandkids’ Education And Your Retirement: Can You Fund Both?

Adequately funding your retirement should be your first priority, but what if you also want to contribute to your grandkids’ education? We asked Larry Mathis, CEO of Mathis Wealth Management in Phoenix, Ariz., to explain how to do both.

Larry Light: Is it true that one of the best things you can do for your children and grandchildren is to make sure they don’t have to support you in your old age?

Larry Mathis: It may sound a little selfish at first, but when you think about all the stresses and strains that are put on a family by caring for aging parents who have no resources of their own, it is really one of the most unselfish things you can do.

Light: That said, are there some actions you can take now, that can be a huge help for making sure the next generation also get the education they need to be successful, while still contributing to your retirement fund?

Mathis: Yes, there are some ideas for helping pay for grandkids’ college and other educational needs without sacrificing your own chance for a secure, satisfying retirement. Firstly, you can help to fund a 529 Plan. Section 529 of the Internal Revenue Code governs “qualified tuition plans.” Parents or grandparents can deposit funds earmarked for future education costs, and the funds grow tax-free.

Current tax law permits these accounts to fund expenses related to K–12 private schools, in addition to higher education. Up to $10,000 per year may be withdrawn tax-free from a 529 plan, as long as the withdrawal is for qualified expenses. If you’re already contributing your maximum to an IRA or 401K, consider setting additional funds aside in a 529 plan, perhaps with the co-participation of the student’s parents. Depending on your state of residence, contributions to the plan may even provide you with a tax break.

Light: Can you contribute or gift to a Roth IRA?

Mathis: As long as your grandchild has income equal to your contribution, you can make deposits in a Roth IRA up to the amount of the income earned. So, if your grandchild earned $4,000 last summer mowing lawns (impressive!), you can put up to $4,000 into a Roth IRA in the child’s name. Like your own IRA, the funds accumulate tax-free, and current tax law permits penalty-free withdrawals for purposes like higher education expenses or the purchase of a first home.

You can also name a grandchild as the beneficiary of your Roth account, so that upon your passing, the ownership of the account passes to the grandchild without having to be probated with the rest of your estate. This can be a valuable estate planning tool, in addition to providing a financial boost to the beneficiary. Note, however, that under the provisions of the 2019 SECURE Act, a non-spousal beneficiary must spend down the account within ten years of its receipt.

Light: Is there anything else that a grandparent can meaningfully do to help their grandkids with money?

Mathis: Teach your grandkids about investing. This is one of the most overlooked, but most valuable things any of us can do for the next generation. Especially now, with easy online tools like Greenlight, BusyKid, and GoHenry, kids can learn about saving, spending, and even investing, all under their parents’ supervision.

Some accounts even allow kids to buy fractional shares of stocks they care about, like Disney, Nintendo, and others. What better way to get kids excited about saving and investing for the future than with a fun, easy-to-use, online app that gives them real-world experience in a safe environment?