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Invest now for your grandkids

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Invest now for your grandkids

Giving money to your grandchildren today can make a long-lasting financial difference in their lives and provide estate-tax benefits in yours.

 Here are three ways to get started:

1. Chip in for college savings by opening a 529 College Savings account for your grandchild in your name. 

A few benefits include:

Assets can be used at any eligible educational institution across the country and some schools abroad. If your grandchild gets a scholarship or doesn't attend college, any unused portion of your 529 account can be transferred to another child. There is no time limit when the funds can be used.

Funds are not counted in determining your grandchild's eligibility for federal financial aid for college. Contributions and money earned on the plan's investments — whether through interest, dividends or capital gains — are not taxed if the beneficiary uses them to help pay for higher education. Depending on where you live, you might also get a tax deduction or tax credit on your state return for the contribution you make.

If you need to take money out, you can. Just know if you withdraw money for anything other than education, you'll have to pay a 10 percent penalty and will owe income taxes on any earnings. One exception to the penalty is available if your grandchild earns a scholarship. Some qualified scholarships will allow you to withdraw account assets up to the amount of the scholarship without the additional 10 percent federal tax on earnings. The earnings portion of a distribution, though, is still subject to federal and any applicable state income tax.

You can open an account with as little as $250 and make quarterly and monthly contributions as low as $50. During the life of the account, you can contribute a maximum amount of $370,000.

Tax tip: Federal law allows you to contribute up to $13,000 annually in total gifts per grandchild to receive the exemption from the gift tax. If you're married and filing jointly, you and your spouse can double that amount to $26,000 for each child.

With contributions to 529 plans, there is an accelerated gift option that allows you to average gifts that exceed the limits over a five-year period without incurring federal gift tax. This allows you to give up to $65,000 per beneficiary in a single year ($130,000 for a married couple through gift-splitting). You can't give additional gifts to a grandchild during the five-year period without incurring the gift tax. "For grandparents, this is a unique feature that makes 529 plans so attractive and effective in reducing estates," says Caroline Tucker, product manager of the USAA 529 College Savings Plan.

2. Give shares of company stock, U.S. Series EE Savings bonds or shares in a mutual fund with a low minimum investment.

To do so, open a custodial account through the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). The account is opened in your grandchild's name, but you control the assets until the child reaches adulthood, which is age 18 to 21 depending on the state. 

Caution: If your grandchild is going to apply for college loans or assets in his or her name, like cash, stocks and bonds, it could be considered income and must be reported on the Free Application for Federal Financial Aid. This could reduce the aid offered.

3. Contribute to a Coverdell Education Savings Account.

Like 529 plans, they are a tax-deferred and potentially tax-free way to save for college or K-12 expenses.

Caution: Only $2,000 can be contributed per year for any child. Contributions from all sources are combined for purposes of this limit. If you were to put $2,000 into your grandchild's Coverdell account in the same year that his parents, other grandparents, or anyone else makes contributions to it, the annual limit can easily be exceeded. As grandparents, you don't retain control over contributed funds. Most Coverdell accounts require the child's parent or guardian to be in charge of the account.

Additionally, the provisions of the Economic Growth Tax Relief Reconciliation Act of 2011 are scheduled to expire on Dec. 31, 2012. If this happens, the Coverdell maximum annual contributions will decrease to $500 and K-12 education expenses will no longer be treated as qualified education expenses.

For more details on the gift tax credit, see IRS Publication 950 on the Internal Revenue Service's website.

Consider the investment objectives, risks, charges and expenses of a 529 plan carefully before investing. Request a Plan Description and Participation Agreement containing this and other information about the Plan. Read it carefully before investing. If you or the beneficiary are not residents of the State of Nevada, consider before investing whether your or the beneficiary's home state offers a 529 plan that provides its taxpayers with state tax and other benefits not available through other plans. Please consult your tax adviser.

Investing in securities products involves risk, including possible loss of principal.

Investments/Insurance: Not FDIC Insured • Not Bank Issued, Guaranteed or Underwritten • May Lose Value

Tax-free earnings and withdrawals are for qualified educational expenses. Other withdrawals are subject to income tax and an additional 10 percent penalty on earnings. The availability of tax or other benefits may be contingent on meeting other requirements. 

Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License #0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

USAA means United Services Automobile Association and its insurance, banking, investment and other companies. Banks Member FDIC. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.

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