written by A.T. "Al" Benelli, CFP, FIC |  

Graduation season begins soon, and for grandparents looking to do something nice for their grandkids and something sensible for their estate, there are several options to explore according to the Financial Planning Association.

Roth IRAs: The Roth option is a good one if you want to help them start a retirement fund of their own or if you want them to inherit a Roth where they can make tax-free withdrawals after your death. If the kids have earned income… as many kids working in high school do… either their parents or guardians can open the account and grandparents can make matching contributions. 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’ll be able to make tax-free withdrawals for a home, an education or any other purpose.

529 Plans: Another great tool for grandparents is the 529 college savings plan. Grandparents can contribute to an existing plan or start a new one designating a grandchild as beneficiary, select the investments from the plan’s options, and make future contributions either by check or by automatic transfer. 

As a refresher, 529 college savings plans allow a parent to open a tax-deferred college savings plan with as little as $25 in some states. Plans differ greatly, so it’s a good idea to have your financial adviser or your CERTIFIED FINANCIAL PLANNERÔ professional help you sort through the details. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan. www.FinAid.org and www.SavingforCollege.com and are leading sites to help educate you in how these plans work.

Grandparents can treat their contribution as gifts, applying the $12,000 per year gift tax exclusion or an accelerated contribution of up to $60,000, with a special five-year exclusion election. Check with your tax adviser first. Another great benefit is that a 529 plan owned by grandparents should not affect the grandchild’s eligibility to receive financial aid because a grandparent’s assets are not reportable on the FAFSA form, and tax-free withdrawals from a grandparent-owned 529 are not counted as student income or student resources.

Coverdell Education Savings Accounts: For grandchildren heading to private school who are under the age of 18, most grandparents – can contribute up to 2,000 dollars annually per grandchild to a Coverdell Account...