Grandparents: How to Best Fund College Costs

As grandparents of two beautiful and brilliant grand-girls (we know…we’re biased) who will be in college in 6 years (OMG…they grew up fast!), we often ask:

  • How can we help with fast-rising college costs?
  • Which tax advantage program is better?
  • Which state’s 529 plan is best in terms of low costs and performance/results?
  • How can we avoid adversely impacting our grandchildren’s eligibility to qualify for scholarships and financial aid?

There are too many questions and not enough really good answers. Many of the options can have huge negatives, like high costs, restrictive investments, and limited choices. More importantly, financial advisers tend to sell mostly high-cost college funding plans. What’s a grandparent to do?

The Roth IRA

If you are still working and have fully funded your own retirement, then you can use a Roth IRA to help with your grandchild’s college costs. Either continue to contribute annually to your existing Roth IRA or start a new one if you don’t have one already. Roth IRAs have the following advantages: all gains are federal and state income tax-free, there are virtually unlimited investment choices, they can be very low-cost, and your Roth IRA cannot be counted against your grandchild’s financial aid eligibility. When the time comes to help pay for college expenses, you can make your Roth IRA funds available to your grandchild. To us, it is the best of all worlds.


college students discuss college costs Use Annual Gifting to Fund Your Child’s or Grandchild’s Roth IRA

What if you are no longer working and therefore can no longer contribute to your own Roth IRA? If your child or grandchild is working and has earned income (even from a part-time job) and has not funded his own Roth IRA, you can use annual gifts ($14,000 per year per recipient) to fund his Roth IRA to use for college. There is no penalty to him for early withdrawals for college-related expenses. In fact, you can fund a Roth IRA for everyone in your family if you have the means. Be sure to check with a Certified Public Accountant (CPA) so you can observe all the IRA, estate tax, and eligibility rules.

Converting Your Traditional IRA to a Roth IRA

This option is also available to grandparents to help with college costs. However, the early income tax consequences may be too great to make it worthwhile. We strongly urge you to speak to a CPA to determine whether you should make this conversion.

What to Invest In

Whether investing a Roth IRA with annual contributions or converting a traditional IRA to a Roth, buying the stocks of companies where you and your grandchildren love to spend money, such as Disney, Netflix, and others contained in our Fun Stocks Watchlist™ and IBSS Stock Picks™, may be just the ticket.  If you start early when the children are very young, by the time they are ready for college, the Roth IRA accounts could help them tremendously.

Best of all, if your grandchildren get full scholarships and have no college costs, you can spend the Roth IRA money some other way, perhaps on a great inter-generational bonding trip with them before they go off to college. Once they start making friends and becoming involved at school, you may need an appointment to see them!

Jim & Yvonne Tso and Your IBSS Team

Please note: If you also want to take advantage of 529 plans with their inherent disadvantages, has an excellent 3-part study on 529 plans you can review in the Adviser Fund Updates section of their Resources page: (1) A Smarter Way to Save for College; (1) Which States Reward College Savers, and (3) 529 Plans of Note.

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Jim Tso wants to “give back” and share his 35+ years of successful personal money management experience to help others to achieve their financial goals. Jim created this InvestBetterSpendSmarter blog (IBSS) to provide you with free investing, planning, savings, retirement, and inspirational tips derived from his unique, innovative, and proven approaches to money management. He welcomes and appreciates your feedback.

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