Can ‘excess’ retirement dollars help your children
August 30, 2013
National Grandparents Day is observed on Sept. 8. And although this "Day" is not as widely known as Mother's Day or Father's Day, it does remind us of the importance of grandparents.
If you're a grandparent yourself, you may be thinking of ways to help your grandchildren on their journey through life. One of the greatest gifts you can give them may be financial support for their college education — and one way you can help provide this support could be found in the distributions you receive from your retirement accounts.
To understand how this technique might work, you'll need to be familiar with the required minimum distribution (RMD) rules governing various retirement accounts. Actually, they're pretty straightforward: Once you turn 70½, you'll generally have to start taking withdrawals from your traditional IRA and your 401(k) or other employer-sponsored retirement plan — such as a 457(b) plan, if you work for a state or local government, or a 403(b) plan, if you work for an educational institutions or nonprofit group. (If you have a Roth IRA, you are not required to take withdrawals at any age.)
Your required minimum distribution is calculated by dividing the prior Dec. 31 balance of your retirement account by a life expectancy factor published by the Internal Revenue Service. As the word "minimum" suggests, you can take out more than this amount, but not less.
You can use the money you withdraw for any purpose you choose. It may be that you need all of it to help support your retirement lifestyle. But if you have enough money coming in from other sources — such as Social Security and any investments held outside your retirement accounts — you may find that you don't really need to use every dollar from your RMDs. And if that's the situation, you might want to devote some of this money to a college fund for your grandchildren.
Or you could simply give the funds to your grandchildren's parents and let them decide how best to employ it for college. But you do have other options. For example, you could establish a 529 plan and name your grandchildren as beneficiaries.
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With a 529 plan, any potential earnings accumulate tax free, provided they are used for qualified higher education expenses. (Keep in mind, though, that 529 plan distributions not used for qualified expenses may be subject to federal and state income tax and a 10% IRS penalty.) Furthermore, your 529 plan contributions may be deductible from your state taxes if you participate in your home state's plan. However, 529 plans vary, so check with your tax advisor regarding deductibility.
In all likelihood, you'll be able to contribute as much as you want to a 529 plan, because the lifetime contribution limits are generous — although these limits vary by state. Plus, a 529 plan is flexible: If your grandchild decides against an eligible college or vocational school, you can generally transfer the unused funds to an eligible family member.
A 529 plan is not the only college savings vehicle available to help your grandchildren; for other possibilities, you may want to consult with your financial advisor.
In any case, once you start taking your RMDs from your retirement accounts, think about putting any "excess" amounts to work for your grandchildren's college education. Your generosity could provide benefits for a lifetime.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway, in Fallon.