When choosing a savings account, it is crucial to have a clear objective that the account must be able to meet over a given time period. For grandchildren, this could be to accumulate sufficient funds to cover tuition fees for university, or it could simply act as regular savings the child will be able to gain access to once they reach a certain age. Let’s look at some possible savings account types that can help you achieve your savings goals.
529 College Savings Plan
A 529 college savings plan is a tax-advantaged savings plan designed to help families save for future education expenses. 529 plans can be a great way to save up for tuition expenses, as it comes with some convenient features, such as:
- Contributions made to a 529 plan grow tax-free and withdrawals made for qualified educational expenses are also tax-free
- Funds in a 529 plan can be used to pay for qualified education expenses, including tuition, fees, books, and room and board, and can include expenses associated with both graduate and undergraduate studies
- 529 plans typically offer a variety of investment options, such as age-based portfolios or individual mutual funds so that families can choose the plan that best suits their risk tolerance
- 529 plans have no annual contribution limits, with some plans allowing contributions over $300,000 per beneficiary
- The beneficiary can transfer unused funds to another family member without a penalty
Junior Self Invested Personal Pension (Junior SIPP)
For people residing in the United Kingdom, the best course of action to save up for your grandchild might be a Junior Self Invested Personal Pension, or a Junior SIPP.
The Junior SIPP program provides a tax-efficient way for guardians to save up for their underage beneficiaries primarily for educational purposes. Here’s how a Junior SIPP works:
- A parent or legal guardian can open a Junior SIPP on behalf of a child. The child must be residing in the UK and be under 18 years of age. The parent/legal guardian assumes the role of custodian and manages the account until the beneficiary turns 18
- The annual contribution limit for a Junior SIPP is GBP 3,600 and some tax advantages apply
- The Junior SIPP allows a wide range of investment options, including shares, bonds, funds, and other investments. The custodian can also choose to hire a professional account manager
- Similarly to other types of pensions, the Junior SIPP also benefits from tax relief on contributions. When the beneficiary reaches retirement age, they can take up to 25% of the account value as a tax-free lump sum and use the rest to provide a regular income in retirement
- When the beneficiary reaches the age of 18, the ownership of the account is automatically transferred to them and they can choose to manage the account individually or hire a financial professional to do so on their behalf
Children’s Savings Account (CSA)
A traditional Children’s Savings Account, or CSA, is a great way for grandparents to save up for their grandchildren’s future expenses. The general process of opening a CSA can be broken down into the following steps:
- The parent/guardian of the child goes to a bank and opens a CSA in the child’s name. The account may require an initial deposit, and there may be minimum balance requirements and monthly fees to maintain the account
- Once the account is open, the parent or guardian can make deposits into the account regularly. Parents can set up automatic transfers into the CSA
- The account starts earning interest, which could be fixed or variable
- Withdrawals from a CSA are typically limited. The parent or guardian may be able to withdraw money to pay for expenses related to the child's education or medical needs, but other withdrawals may be subject to fees or penalties
- Once the child reaches the age of 18, the ownership of the account is transferred to them and they can decide whether to keep the account or withdraw the funds and close it
UGMA/UTMA
UGMA and UTMA are two types of custodial accounts under U.S. law that allow adults to gift money or other assets to a minor.
UGMA stands for the Uniform Gift to Minors Act, while UTMA stands for the Uniform Transfer to Minors Act.
Both acts work similarly and involve an adult (parent, grandparent, legal guardian) opening an account for a minor until they reach the age of majority (18, or 21 in some states). The account serves to allow the custodian to gift assets and manage the account on behalf of the beneficiary until they reach the age of majority.
Gifts made using a UGMA or UTMA are irrevocable, meaning that the beneficiary cannot refuse the gift. The beneficiary has the freedom to use the funds at their discretion. However, it must be noted that minors who are beneficiaries of UGMA/UTMA accounts, may be eligible for less financial aid when applying for college.
Bare Trusts
Bare trusts are another convenient way for UK residents to open and fund accounts for their grandchildren. The custodian opens a trust account for the beneficiary and the trustee holds the assets on behalf of the beneficiary.
After an adult opens a bare trust, they can transfer assets to the trust account and the trustee manages them until the beneficiary turns 18. Assets may include anything from cash to property and other assets, such as stocks and bonds.
The income and capital gains generated by the trust are subject to tax benefits. Once the beneficiary reaches the age of majority, they become the legal owner of the assets and can use them at their discretion.
