Sept. 7 was Grandparents Day.
If you are a grandparent, you probably like to help out your grandchildren. But if you're thinking of making a financial gift, take your time to explore the options.
For example, suppose you want to help pay for your grandchildren's college education. You could open an investment account and designate it for college. But you will probably be better off by putting the money in a plan that is specifically designed for college.
Here are two possibilities:
* Section 529 savings plan -- In a Section 529 savings plan, you put money in specific investments, managed by an investment professional. You can give $12,000 per year, without incurring gift taxes, to every grandchild.
In fact, you can even combine five years' worth of contributions and give $60,000 (or $120,000 if it comes from you and your spouse) to a Section 529 plan in a single year. (However, if you do bunch the contributions in this manner, you won't be able to make another $12,000 gift to the same grandchild for the next five years).
All withdrawals from a Section 529 savings plan will be free from federal income taxes, as long as the money is used for the beneficiary's qualified college or graduate school expenses. (Withdrawals for expenses other than qualified education expenditures may be subject to federal, state and penalty taxes).
Also, if you participate in your own state's Section 529 savings plan, your contributions may be tax-deductible. Keep in mind, though, that a Section 529 savings plan could affect a beneficiary's ability to quality for financial aid.
A Section 529 savings plan gives you, as the account owner, significant control over the money, so if the grandchild for whom you've set up the plan decides against attending college, you can transfer the assets to a different grandchild;
* Coverdell Education Savings Account -- Depending on your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account (ESA).
Your Coverdell earnings and withdrawals will be tax-free, provided you use the money for qualified education expenses. (Any non-education withdrawals from a Coverdell ESA may be subject to a 10 percent penalty). You can place your contributions to a Coverdell ESA into virtually any investment you choose -- stocks, bonds, certificates of deposit, etc.
If you'd like to give money to a grandchild, but you're not sure you want to designate your gift exclusively for education, you might want to consider opening a custodial account, commonly referred to as an UTMA or UGMA. You can fund an UTMA/UGMA with most types of investments, and, like the Section 529 plan, you can put in up to $12,000 per year without incurring gift taxes.
But once your grandchildren reach the age of majority (usually 18 or 21, depending on the state of residency), they can do whatever they want with the money from the UTMA/UGMA.
You may want to consult with your financial and tax advisors to determine which gifting methods are most appropriate for your situation.
But no matter which route you choose, your generosity may well ensure that Grandparents Day will always have special meaning in your family.