How sweet is it when you have something to pass on to your grandchildren? It probably is one of the proud moments that will live with you for the remainder of your life. However, even if you do generously want to pass money on to your grandchildren, it still comes with a cost.
First of all, if what you’re passing on to your grandchildren is more significant than the exempted limit, a few people start to consider the tax implications. Are the implications worth the trouble? If you’re passing on an amount lower than the exempted limit, then there’s nothing to worry about.
To know exactly what these implications may continue reading this article! Understanding the implications will help you understand the best way to use your money.
Prepaid Tuition Fees
If there’s one thing you probably don’t want your grandchildren to lose out on it is a good education. That means that you have to start investing for them early. Their parents are probably tied down to their own goals and ambitions and in other cases, aren’t able to pay for your grandchildren’s tuition fees.
You, however, have had enough time to raise your children and, hopefully, have enough to see you through retirement. So, rather than letting your grandchildren struggle to pay for college or incur debt, you can save for them. There are no tax implications here as they are administered through vendors chosen by the government. In short, prepaid tuition is exempt from federal taxation.
Say you had it rough growing up, do you want your grandchildren going through the same fate? Probably not, and that’s why you can open an investment account for them. This will mean they will start their financial life with stability, unlike you. You can contribute up to $14000 tax-free as it is the exempt gift amount.
Plus, you, your spouse, and any other adult can contribute to that account. Now, tax starts coming in after the earnings. $1050 of the first earnings will come in tax-free. The next one will be levied a child tax fee, and finally, all incomes over $2100 will be charged at the parent tax rate.
529 College Savings
If your sole purpose is to fund your grandchildren’s college education, then this is where you should put your money. A good number of parents and grandparents have invested a lot in the 529 College Savings with great results in the future. The good thing about using this method is that if you have a large family, the amounts will trickle from the first one to the last – if you’re making suitable investments.
You can contribute a tax-free amount of up to $14000 per year to this fund. And other adults in the family can join in as well to ensure everyone in the family goes to college. The earnings for this fund are not subject to federal taxation. The user of the fund, however, is limited to using the money for only educational purposes. For example, it covers tuition, books, room, supplies, among other educational materials.
Making the right move for your grandchildren’s future is a smart move, and it doesn’t have to come at a costly tax rate. Realizes that there are tax implications for certain forms of investing will help you use your money is a smarter way. With this information, you can ensure your grandchildren get more of the money you want them to.