In addition to spoiling them with toys and ice cream, many grandparents also want to help secure a solid financial future for their grandkids. That can mean setting up a custodial account, considering tax-advantaged savings options, and exploring other ways to start building a child’s wealth.
Below, you’ll learn about the different ways to save money for your grandkids, plus the pros and cons of each.
Why Open an Account for Grandchildren?
Sure, your grandkids might prefer a new video game or Lego set, but you’ll do them a favor, today and tomorrow, by opening a savings account for them. Here are a couple of good reasons to open a savings account for your grandchildren.
Teaching Financial Literacy Early
Money management skills are crucial, but personal finance education can be virtually nonexistent during school. It’s not typical for schools to teach kids how to balance a checkbook, how to invest in stocks, how to save for a down payment on a house, and how to file taxes.
Thus, it’s up to parents — and grandparents — to equip the next generation with financial literacy. Opening an account for your grandchildren can help teach them concepts such as interest, budgeting, and investing.
Getting a Head Start for College and Life
While teaching children how to manage money can give them a head start on the path to financial wellness, so too can providing them with a nest egg that can grow over time through various savings and investing accounts. Consider these options:
• When you open a savings account for grandchildren early on, they could wind up having a sizable chunk of cash in young adulthood to put toward their first car or even a house down payment.
• A 529 college savings plan could help them avoid taking on too much debt from student loans.
• Retirement accounts, such as a Roth IRA, can help them achieve their retirement goals, even if those are more than half a century away. Remember, the earlier someone starts investing, the more they stand to earn in the long run.
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Types of Accounts to Consider
Grandparents have many options when it comes to opening an account for their grandchildren, including:
Savings, CDs, and Bonds
Many banks and credit unions offer savings accounts designed for kids. Do a quick search for “best savings accounts for grandchildren” or you could start by seeing if your own bank offers such an account.
Having money in savings at an early age will let your grandkids benefit from compounding interest, especially if you find a high-yield savings account for kids.
You can also consider opening a certificate of deposit (CD) or purchasing savings bonds for your grandchildren. CDs are savings accounts that typically provide a higher interest rate than a standard savings account in exchange for keeping your money in the account for a fixed period of time. Savings bonds, issued by the U.S. Department of Treasury, are a very low risk, longer-term investment that provides interest in return for lending the government money.
With both of these options, the money is less liquid, but if the CD or bond matures when your grandchild is older, they stand to have a reliable source of funds they can use in future years.
Custodial Accounts (UGMA/UTMA)
Beyond savings accounts for grandchildren, you can consider helping your grandkids actually start investing with a custodial account, through the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Once your grandchild is between 18 and 25 (the exact age varies by state), they’ll take control of the account.
These accounts are taxable (meaning you will owe taxes on interest earned) and have no contribution limits. They’re an easy way to purchase stocks, mutual funds, and other securities for your grandchild — and you can even transfer your own securities into the custodial account.
529 College Savings Plans
The cost of college tuition continues to skyrocket, meaning it’s never too early to start saving. There are several benefits of a 529 college savings plan: While the contributions to this qualified tuition plan aren’t tax-deductible, your grandchild’s distributions from the account tax-free at the federal level, as long as the money is used for qualifying expenses.
A 529 college savings may have “college” in the name, but your grandchild can also use it for other higher education programs, such as a trade or vocational school. You can also roll over 529 funds into a Roth IRA if your grandkids don’t use all (or any) of the funds.
Contributions to a grandchild’s 529 account are not deductible on your federal income tax return. However, close to 30 states offer either a deduction or credit for this kind of contribution.
Another consideration: There’s an annual limit to how much you can give as a gift without triggering taxes. For 2024, for instance, the figure is $18,000 per giftee. If you were to put more than that into a 529 for a grandchild, you would have to pay a gift tax bill.
IRAs for Minors
Similar to custodial investment accounts, you can open custodial retirement accounts for your grandchildren, including a traditional IRA and a Roth IRA. While your grandkid won’t benefit from this account for decades, starting them early on the path to retirement savings means they could have considerably more money to work with when they reach retirement age.
However, it’s important to note that opening an IRA requires the child to have earned income in a given year. For teens, this can make sense. For a newborn, it is unlikely to be a viable option.
When making contributions to an IRA for a grandchild, note that the amount you deposit is subject to a gift tax exclusion before it becomes taxable. For 2024, this allows up to $18,000 per giftee. Funds given beyond that amount might mean you, the donor, are liable for taxes, though other factors will need to be considered to determine any tax burden.
Choosing the Right Account
Not sure how to choose the right savings account for your grandchildren? Here are some things to consider:
Comparing Interest Rates and Fees
If you’re opening a savings account, compare interest rates — you want an account with a high yield so that the money compounds more quickly over time. For example, currently the average interest rate for standard savings accounts is 0.45%, while the figure for high-yield savings accounts (often from online-only banks) can be several times that number.
For custodial accounts, you’ll want options with low or no fees. It can be wise to shop around and see what options you have from different banks and brokerage firms.
Recommended: How Old Do You Have to Be to Open a Bank Account?
Accessibility and Withdrawal Rules
Certain accounts allow your grandchildren to access funds sooner, while others (like IRAs) have strict rules about when they can withdraw funds and what the funds can be used for (as is the case with 529 plans). Think about the specific timeline and use case you envision for your grandchildren. Sometimes, opening more than one type of account makes sense, depending on how many goals you want to enable for your children’s kids.
Tax Implications and Benefits
Some accounts have tax-deductible contributions; others have tax-free withdrawals. For example, withdrawals from a 529 account are not usually taxable, provided they are used for qualified educational expenses. With a Roth IRA, withdrawals made after your child is older than 59 ½ (as hard as that may be to imagine) are not taxable. With a traditional IRA, taxes are paid when the money is withdrawn, usually in retirement, and are taxable.
Speaking with a financial advisor can help you understand the tax implications of each type of account you’re considering to better understand what you might pay — and what your grandchild might pay.
Setting up and Contributing to the Account
Ready to open a savings account for your grandchildren? Here’s how it works:
Opening and Funding the Account
Follow the bank’s or investment firm’s guidelines for opening the account. You will likely need some specific information from the grandchild’s parents to open the account. You’ll also need to deposit money into the account to start the nest egg. Custodial accounts may even let you transfer your own assets into the account.
Automatic Transfers and Recurring Contributions
If you’d like, you may be able to set up recurring transfers into the account. Perhaps you want a recurring transfer every holiday season or on your grandchild’s birthday. Work with the financial institution to set up these contributions — and perhaps find out how other loved ones might be able to contribute as well.
Monitoring and Managing the Account
After opening an account, it’s important to monitor it and see how the funds grow over time. Just as importantly, once your grandchild is a little older, it’s a good idea to sit down and review the account with them:
• If it’s a savings account, walk them through how compound interest works.
• If it’s a 529 plan, talk to them about college costs and how student loans work.
• If it’s a custodial account, talk to them about the basics of investing and the importance of saving for retirement.
The Takeaway
It’s never too early to start thinking about your grandchild’s future. Savings accounts, 529 plans, and custodial accounts offer several ways for you to give them money that will help them with college, general expenses, and even retirement.
While saving for grandkids is important, it’s also crucial that you take care of your own finances.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What are the contribution limits for custodial accounts?
There are no contribution limits for UGMA/UTMA custodial accounts, but you can only contribute up to a certain amount to avoid gift-tax implications (this changes each year). Contribution limits apply for custodial IRAs just as they would for regular IRAs.
Can grandparents open a 529 plan for grandchildren?
Yes, grandparents can open a 529 plan for grandchildren. If the grandchild’s parents have already set up a 529 plan, grandparents can also contribute to that plan directly. This will simplify account management and withdrawals for the recipient of the funds.
What happens to the account if the grandchild doesn’t need the funds?
If a grandchild doesn’t need funds from a 529 plan for college, they can still use them for trade or vocational schools or roll them into an IRA. Grandparents can also reassign the 529 plan to another grandchild.
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