Graduation gift ideas

Cap and gown season is right around the corner, and for grandparents hoping to do something nice for their grandkids and something sensible for their estate, there are options to explore.

Roth IRAs: Parents or grandparents may want to consider setting up and funding a Roth IRA for their children or grandchildren as soon as the children or grandchildren have earned income from part-time or summer jobs. Getting an early start will ensure that the five-year requirement is met when the individual for whom the Roth IRA is established is ready to make a withdrawal to buy a home, for example.

Also, if you have a Roth IRA, you can benefit your grandchildren by naming them as your primary beneficiaries, and when they inherit it, they will be able to make tax-free withdrawals for a home, an education or other purposes. At today’s low equity market valuations, it could be the gift that keeps on giving long into the future.

529 Plans: Another great tool for grandparents is the 529 college savings plan. Grandparents can fill out a plan enrollment form designating a grandchild as beneficiary, select the investments from the plan’s options, and make future contributions either by check or by automatic contribution. It is also fine for grandparents to make their contributions directly to a 529 account already owned by the grandchild's parents.

Since 2006, withdrawals from 529 plans have been permanently tax-free. In some states, like Iowa, contributions may also be deductible on state tax returns. It is a good idea to have your financial adviser help you sort through the details of various state plans. You can also visit websites such as www.SavingforCollege.com and www.FinAid.org to learn more about how these plans work.

Grandparents can treat their contribution as complete gifts, which means they can apply the $12,000 per year gift tax annual exclusion or an accelerated contribution of up to $60,000, with a special five-year, gift-spreading election. Check with your tax advisor first before making any gifts.

Another great benefit is that a 529 plan owned by grandparents should not affect the grandchild's eligibility to receive federal financial aid because a grandparent's assets are not reportable on the free application for federal student aid, or FAFSA, and the tax-free withdrawals from a grandparent-owned 529 plan are not counted as student income or student resources.

Make a direct gift to your grandchild's tuition: Under current tax law, you can make gifts of any amount to cover your grandchild’s tuition, as long as you make payments directly to the institution. You can also go ahead and make additional gifts per grandchild of $13,000 to help with other college expenses.