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Investing for Your Grandchild: Best Gifts with Tax Benefits

December 10, 2020
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Sootchy Team

Investing in your grandchild's future is the best way to ensure their financial success. But which account is the best for investing? Learn more with Sootchy.

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There are lots of ways in which older adults can invest in the future of themselves and their families. One of the favorites: Gifting money to a grandchild. Although it may not be feasible for every grandparent, investing for your grandchild can help set them up for future financial, personal, and professional success, not least because it can help them cover the cost of college – or trade schools, apprenticeships, and a variety of other training programs required for employment in many industries. Best of all, investing early can turn even a modest sum into a substantial pool of funds on which your loved one can draw, though not all investments are equal. Some forms of investing have the distinction of offering tax advantages, the nature of which can vary widely from one account to another. It’s no wonder, then, why many grandparents interested in investing for their grandchild ask: What are the best gifts with tax benefits? To find out, keep reading as the education savings plan experts at Sootchy provide some answers.

How to Pick the Best Gift with Tax Benefits for Your Grandchild

Once you’ve decided to gift some investments to your grandchild, you’ll have to consider just how to approach it. It may seem like simply giving them some money or purchasing some stocks for them would suffice, but the question of who the assets technically belong to and what kind of account they’re in can make a big difference in the long run.

As you’re probably aware, certain accounts offer certain tax benefits depending on the purpose of the account; just as a Roth IRA allows for tax-free withdraws after retirement, so too do some investment accounts provide tax advantages that could benefit your grandchild. However, with a valuable, tax-free investment account at their disposal, your grandchild might end up struggling to qualify for financial aid if they have substantial assets in their name when college rolls around, so you’ll want to consider the way in which the account is set up before allocating your investment.

One solution that’s available through certain accounts, such as 529 plans, is to set yourself as the account owner and your grandchild as the beneficiary. The funds won’t be in their name, but they can be used to cover education expenses when the time comes. On the other hand, other types of investments may provide greater returns; ultimately, it’s up to you to decide on the goal of the account and choose the corresponding gift.

Top Accounts with Tax Benefits for Grandchildren

Though there are a number of investments with tax benefits that grandparents can gift to their grandchildren, some of which are more popular than others. The following are some of the top accounts for investing for your grandchild:

Coverdell Education Savings Accounts

One of the simplest options grandparents have when giving a gift with tax benefits is a Coverdell Education Savings account, which is sort of like a simplified 529 plan. The funds in the account can be invested however you want, and account owners have the ability to change their portfolio as often as they’d like. In addition, the funds in a Coverdell account can be used on a wide variety of education expenses, offering excellent flexibility. Also, any growth the account sees can be spent (on qualifying expenses) without being taxed, which is perhaps the best benefit of the account.

There are, however, drawbacks to a Coverdell account. Contributions are limited to $2,000 per year, which is far less than what other plans allow, and control of the account is automatically transferred to your grandchild when they reach adulthood – age 18, in most states – so you may not be able to dictate how the money is used.

Uniform Gifts to Minors Accounts (UGMAs)

Among the most popular methods of investing for a grandchild are UGMA and UGTA accounts, which allow assets like stocks and bonds to be given as a gift. For many grandparents, UGMA accounts are attractive because they are taxed at their grandchild’s rate, and assets transferred to these accounts can help limit a person’s estate tax liability. However, like Coverdell accounts, control is transferred to the account owner (your grandchild) when they come of age, which could be 18 or 21 depending on the state.

529 Plans

Although the aforementioned accounts offer some great ways to provide gifts with tax benefits to a grandchild, 529 plans are perhaps the most popular of them all, and for good reason. Like Coverdell accounts, earnings in the account grow free from federal income taxes, and most states exempt these earnings as well; some states even offer deductions or credits for contributions to a 529 plan. Unlike Coverdell and UGMA/UGTA accounts, however, the account owner – you – retains control over the funds.

The flip-side of 529 plans is that they can only be used for education expenses, though the list of acceptable uses of 529 plans has grown to include elementary and secondary school as well as college or vocational training. As long as the money your 529 plan is put toward one of those expenses, they offer some of the best tax benefits of any financial gift you could give your grandchild.

Open a 529 Plan for Your Grandchild Today with Sootchy

While the details of the plans are often complicated, opening a 529 plan doesn’t have to be. Visit Sootchy online or download our app today and get expert help starting a college savings plan with tax benefits for your grandchild.

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