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5 smart ways to give your grandkids money

Home Blog5 smart ways to give your grandkids money

Key takeaways:

  • There are various ways you can set aside money for your grandchildren to use later.  
  • Some investment options are limited to fund your grandchild’s education while others offer more flexibility in how the money is used.
  • Savings accounts and Certificates of Deposit are also methods you can utilize to save money on behalf of your grandchildren.

As you watch your children raise their own kids, it’s understandable that you’re eager to help out. Perhaps you want to start saving for your grandkids’ college education. Or maybe you want to help contribute to a first car, home down payment or wedding?

Before you jump in, consider your own wellbeing and financial situation. Taking care of your own finances and ensuring your retirement and rainy day fund are secure are crucial. After confirming you’re on solid financial footing, start to think about the most effective ways to help your grandkids in the years ahead. There are many ways to save and/or invest your money now in order to help your grandkids later. Let’s dive into a few options:

1. 529 college savings plan

This investment vehicle helps you save money specifically for your grandchild’s education. It is named after section 529 of the Internal Revenue Code, and allows you to contribute money gift-tax-free to a child’s 529 plan -- the 2019 contribution limit is $15,000. That money can be used to pay for tuition, books and supplies pertaining to the grandchild’s education at an accredited university, college or vocational school.

Benefits include tax-deferred earnings and distributions that aren’t subjected to federal income taxes. However, this plan is strictly for educational expenses, so if you’re hoping to help your grandchild out with more than his/her education, this option isn’t right for you.

2. UTMA/UGMA investment

For more flexibility in how your grandchild spends the money you gift, you can open an investment account known as a Uniform Transfer to Minors Act/Uniform Gifts to Minors Act (UTMA/UGMA). This allows you to contribute to an account that will eventually be your grandchild’s.

Similar to the 529 savings plan, adults can contribute up to $15,000 per person, gift-tax-free in 2019 and there is no limit on the number of people who can contribute to the child’s account.  An adult must oversee the account until the child reaches the age of 18 or 21 depending on the state where your grandchild lives.

3. Savings account

A tried and true method of saving money is a savings account. Opening a savings account for your grandchild can help you set aside money now to help your grandchild later. MidWestOne offers a variety of savings accounts to help empower you to save your money effectively. Most savings accounts impose a limit on the number of withdrawals you can have, which restricts you from transacting on the account. Be sure to compare interest rates and restrictions before choosing this route. 

4. Certificates of Deposit (CD)

If you’re looking to capture higher rates of interest and want to save money for a longer period of time, a CD may be the way to go. You can choose a fixed or flex CD depending on your preference. Fixed CDs require you to deposit all of the funds at account opening and prevent you from making future deposits until the term is up. Flex CDs allow you to make additional deposits over the term of the certificate. 

As long as you don’t withdraw the money during the term, a CD allows you to earn a higher interest rate on your money. However, you should consider interest rates before locking your funds into a certificate.

5. Trust

A trust is another way you can ensure your grandchild receives money. Trusts are commonly used to reduce tax burden, maintain privacy, and control assets in the event of incapacitation or death. They are a powerful tool to ensure that your funds are managed and distributed according to your wishes.

Your banker, in close partnership with your attorney or tax advisor, can help you navigate the process of establishing a trust to benefit your grandchildren.

Whichever method you decide on, it’s important to research the details to determine if it’s right for you. For more information about how you can save for your grandkids, visit your local MidWestOne branch.

MidWestOne Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.