Your grandchildren’s education and your retirement: can you finance both?

Adequately funding your retirement should be your first priority, but what if you also want to contribute to your grandchildren’s education? We asked Larry Mathis, CEO of Mathis Wealth Management in Phoenix, Arizona, 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 might seem a bit selfish at first, but when you think about all the strains and strains that are put on a family by caring for aging parents who don’t have resources of their own, it really is one of the most selfless things you can do.

Light: That said, are there any steps you can take now that can go a long way in ensuring that the next generation also gets the education they need to succeed, while continuing to contribute to your retirement fund?

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

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 Up to $10,000 per year can be withdrawn tax-free from a 529 plan, as long as the withdrawal is for qualifying expenses.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

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

mathis: As long as your grandchild has income equal to your contribution, you can make deposits into a Roth IRA up to the amount of income earned. So if your grandchild made $4,000 last summer mowing lawns (awesome!), you can invest up to $4,000 in a Roth IRA in the child’s name. Like your own IRA, funds accumulate tax-free, and current tax laws allow for penalty-free withdrawals for purposes such as college fees or the purchase of a first home.

You can also name a grandchild as the beneficiary of your Roth account, so that upon your death, ownership of the account passes to the grandchild without having to be probated with the rest of your estate. It can be a valuable estate planning tool, as well as giving the beneficiary a financial boost. Note, however, that under the provisions of the SECURE Act of 2019, a non-spouse beneficiary must spend the account within ten years of receiving it.

Light: Is there anything else a grandparent can do in a meaningful way to help their grandchildren with money?

Mathis: Teach your grandchildren to invest. It’s one of the most overlooked, but most valuable things that any of us can do for the next generation. Especially now, with simple online tools like Greenlight, BusyKidand GoHenrychildren can learn to save, spend and even invest, all under the supervision of their parents.

Some accounts even let kids buy fractional shares that matter to them, like Disney, Nintendo and others. What better way to inspire kids to save and invest for the future than with a fun, easy-to-use online app that gives them a real-world experience in a safe environment?