Posted on: Sunday, May 30, 2004
Boomers thinking now about grandkids
By Brian Bergstein
Associated Press
NEW YORK — Hard as it may be to believe, the baby boom generation now has its fair share of grandparents.
Once the shock of becoming a grandparent subsides, boomers often are inspired to set aside money for their pride and joys' future — especially for college, which is skyrocketing in cost at a rate well beyond inflation.
But contributing to an education fund is not easy, especially for boomers who are also planning for retirement and perhaps helping to care for elderly parents.
As director of communications for Centre College in Danville, Ky., Mike Norris, 55, is quite familiar with the cost and importance of education. That's why Norris is launching a college fund for his first grandchild, Samuel, born two months ago.
Norris says that at a minimum, he will invest $500 a year, probably in a tax-favored education fund, and expects it to reap $20,000 in 15 years. If he can manage to put away $2,400 annually, Norris expects to be able to give Samuel $94,000.
Norris' 85-year-old mother plans to chip in, too. But creating a fund for Samuel or any future grandchildren won't be painless. That's because Norris is also investing as much as he can into his own retirement fund and doesn't want to skimp on that.
So he plans to cut back on some discretionary items — perhaps buying a new car less frequently or taking simpler vacations.
"You realize when you get into your 50s that the next generation is your legacy for the future," Norris said. "My parents put me through college, with some help from my mother's mother, and it just seems like continuing the tradition."
Some financial planners suggest boomer grandparents consider funds known as Section 529 plans. These education funds, run by states but privately managed, grow tax-free, have generous contribution limits and they remain in the donor's control.
That means the money can be shifted from one recipient to another, and that if an elderly person experiences a financial crisis, the money can be withdrawn for personal use, although it becomes subject to income taxes and a 10 percent penalty.
The funds generally are allowed to receive contributions until they contain $200,000 to $300,000 — a healthy amount to cover tuition, books, fees, room and board. After that cap, the funds can't get any more donations, but still grow tax-free.
Each grandparent — or anyone else — can give an unlimited amount each year, although contributions beyond $11,000 per donor per year are subject to gift taxes. However, 529 plans can get five years' worth of tax-free contributions — $55,000 — up front, as long as no additional donations are made in the following four years.
There was about $40 billion invested in 5.7 million Section 529 accounts in 2003, according to the College Savings Plan Network.
Another tax-free option is a Coverdell Education Savings Account, but its contribution limit is just $2,000 a year per child.
Grandparents also can set up a Roth IRA, a trust or a life insurance policy with an interest-free loan for their grandchildren, as long as they can accept that the youngsters would be free to spend the money as they choose.
Younger grandparents need to begin planning for grandchildren's education now, said Joseph Hurley, who heads www.SavingForCollege.com LLC. Because by the time the little ones actually get to college, the grandparents likely will be retired on a fixed income and might find it harder to chip in.
The funds can be automatically invested more conservatively over time, to reduce the chance that a volatile year can drain college money close to when it's finally needed.
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Putting money in college plan
Before investing in any college plan, including Section 529s, do your homework. Here are some resources:
• www.savingforcollege.com
• www.morningstar.com
• www.motleyfool.com
