Creating a balance between taking care of yourself and helping to support your grown children can be difficult for families. This week we look at a retired couple trying to assist their grandchildren with financial aid for college.
The Situation
Shirley, 75, and Harold, 67, live in Denver’s Stapleton neighborhood and are enjoying retirement after leaving their careers with the federal government.
Together the couple has saved money in Roth IRAs and 401(k) plans totaling $132,522 to $52,340 in Roth IRAs and $80,182 in 401(k) accounts. They also receive $11,665 from their pensions, Shirley $7,190 per month, and Harold $4,475 per month. When it came time to retire, they each chose straight life-only distributions, meaning there are no more payments made when the owner of the pension dies. In the event something were to happen to one of them, their income would be drastically reduced as neither spouse will receive any payout from the other’s pension.
Together the couple has one son. He is married, and they have granddaughters ages 15 and 11. Unfortunately their son’s family has struggled financially, earning less than $30,000 per year between them, resulting in a heavy dependence on Shirley and Harold. The couple purchased a home for the family valued at $300,000. They owe $125,000 on the mortgage. In addition to the monthly mortgage payments, Shirley and Harold have been investing in a Coverdell account for the grandchildren’s education valued at $27,482 for the 15-year-old and $26,194 for the 11-year-old.
The couple wrote in to What’s The Plan with one important question. “How do we gift this money to our grandchildren without affecting their financial aid applications for college?” Harold and Shirley know that their son and his wife will not be able to assist their children financially when it comes to higher education, and the kids will need as many scholarships and as much financial aid as they can get.
Recommendations
The Coverdell Education Savings Accounts offer a good tax-deferred way to save for a child’s education. This account allows a person, usually a parent, to contribute money for anyone under 18. The maximum contribution per year is $2,000, and there is an income limit for contributions. The growth is tax-deferred. If the money is used for qualified educational expenses, like books or tuition, then the growth comes out tax-free. The IRS has more information in Publication 970.
We recommend that Harold and Shirley arrange to change the custodian of these accounts to their son, who is the father of their grandchildren. This will have a lower impact on their qualifications for financial aid over the long term. The funds will be counted at the lower rate of “an asset of the parent,” rather than withdrawing at the higher rate of “untaxed income” on the student aid form, the Free Application for Federal Student Aid, or FAFSA.
We recommend that the parents begin to use this money for their children’s education now if they have qualified expenses. The amount that remains will be available for their college education.
As the funds are spent down, they will have a smaller amount figured for the FAFSA, and it will increase the opportunity for student aid.
Harold and Shirley have more than enough income to take care of their children and grandchildren as long as they are both receiving pensions. However, if one of them dies, their income will not sustain the remaining spouse’s lifestyle as well as their family’s lifestyle. We recommend that they talk to their family about this now to avoid a difficult situation in the future.
Harold and Shirley have a great retirement ahead of them, and their grandchildren already are interested in going to school. There is no telling where the gift of education can take these children!
Pam Dumonceau has 21 years of experience in the financial planning industry. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
Ask Pam what you should do at whatstheplan@consistentvalues.com
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