A recent AARP study of 1,904 grandparents showed that 96% of grandparents say they spend money on their grandchildren.
40% of those surveyed said they spent more than $500 on their grandchildren in a year. According to the survey, grandparents contribute to several major expenses: 53% to education costs; 37% to everyday living expenses; 23% to medical or dental bills.
About 11% of grandparents say they have grandchildren living with them; 16% say they provide day care services for their grandchildren while the parents are at work or school, this same study AARP found.
That’s a lot of help!
Since some families traditionally believe grandparents will pay for their grandchildren’s education costs, it’s helpful to understand the difference between various college savings options:
Section 529 College Savings Plan: this popular plan enables investors to choose from different mutual funds, similar to options within IRA accounts and 401(k) plans. The parent retains full control of the fund, which is revocable. There are generally high contribution limits (most plans are $300,000 and up). Anyone can contribute and there is no age restriction.
Section 529 Prepaid Plan: Some states and public colleges will offer the option to prepay part of all of an instate tuition. It’s important to note that you may only want to pursue this route if you expect the student to go to a specific school or group of schools. Only twenty states offer these plans.
UGMA/UTMA: This is the equivalent of a savings account, created by the Uniform Gift to Minors Act of 1956 and the Uniform Transfer to Minors Act of 1986. It allows donors to give or transfer assets into custodial accounts for a minor without having to create a trust. Transfers qualify for the $14,000 annual gift tax exclusion and are irrevocable.
Coverdell Education Savings Accounts: This account is a tax-advantaged educational savings account that can be established for anyone under the age of 18. The child does not need to be your dependent. These have become less popular as the annual contribution can be no more than $2,000 an there is an income eligibility requirement. With the rising cost of college, these limitations seem less realistic.
What do you think about grandparent’s spending money on their grandkids? Normal and expected or a detriment to their retirement?