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Becoming a Grandparent
Congratulations! You’re a grandparent or soon to become one. Although this transition is less challenging than becoming a parent, it does have its challenges—and joys. The checklist to the left will help you make the most of your grand-parenting years.

Adjust to Your New Role

Hard to believe, but you’re a grandparent or will be soon. Get ready for some rollercoaster emotions—and the time of your life.

How can your child be a parent? Weren’t you changing diapers just a few years ago? Welcome to the wonderful world of grandparenting, where you’ll forge new relationships with your children, your grandchildren, and the world around you.

Becoming a Grandparent

You're going to be a grandparent! The announcement comes in many different ways. It may be a phone call, or an e-mail, or a surprise visit. You may hear it at home, or in the office, or during dinner in a restaurant. However the news arrives, one thing is certain: Nothing will ever be the same again.

For most of us, news of a grandchild's impending arrival couldn't be happier. The thought of a new baby in the family is enough to send us into a dizzying array of emotions, ranging from joy, anticipation, and satisfaction to anxiety, sadness, and uncertainty. Like other major events in our lives, no single emotion fits the bill. How could it? The arrival of a grandchild signals the beginning of a new generation in a family. We are growing older. Life no longer stretches endlessly ahead of us. It is the price we pay for the joy of becoming grandparents. And it's a bargain.

© 1995-2007, AARP. All rights reserved

Understand your Grandchild

Grandchildren develop so fast it’s hard to keep pace. Your challenge: to understand them—and accept them—as they grow.
You’ve probably forgotten how quickly kids change. But now that you’re a grandparent, getting reacquainted with these changes will be a big help.

Child Development

Grandparents find it easy and fun to mark the happy milestones in a grandchild's life. A baby's first words are big news in any family. A child's first step is a great reason for a party! But how do grandparents greet the other, not-so-happy, milestones?

How will you react, for example, when your loveable toddler suddenly greets you with frightened tears instead of a warm hug? You probably won't jump for joy! You won't want to throw a party to celebrate your granddaughter's first temper tantrum. You may want to lose your own temper when your preteen granddaughter spends an entire visit attached to her headphones.

Don't let these behaviors worry you or make you feel bad about yourself. All of them-the tears, the tantrums, and the headphones-are normal for grandchildren at certain ages. It's called "growing up," and it's not always pretty. Knowing what to expect will make it easier for you to accompany grandchildren on their journey through life, while keeping your self-esteem intact.

© 1995-2007, AARP. All rights reserved

Childproof your Home

When your grandchild visits your home, your little one’s safety is in your hands. Are you ready?

Imagine how you will feel if your grandchild gets hurt while visiting. Don’t let it happen. Inspect your home and eliminate all safety hazards now.

You’re proud of your home. It’s cozy and it holds many memories. You’ve spent years decorating it with the cutest knick-knacks, the most comfortable furniture and the classiest window treatments you could find. Until recently, you thought you’d done a perfect job.

Then your first grandchild was born. Before you knew it, she was taking her first wobbly steps…in the direction of your favorite crystal vase! Suddenly, your perfect house didn’t seem so perfect anymore.

It didn’t take long to realize that your knick-knacks weren’t going to last long with your grandchildren around. You cried when your first collectable broke—along with the grandson, who got that sliver of pottery stuck in his foot.

You soon discovered that your innocent-looking coffee table had sharp edges that could hurt a tumbling toddler. Your cabinets were filled with cleaners that could poison your little one – and were at just the right level to attract her attention. And those window treatments you love so much? You were shocked to learn that they could easily strangle your bundle of joy.

Every new grandparent faces the same surprises when the first grandchild arrives. Our homes aren’t usually as safe as we thought they were. Fortunately, most common home hazards can be fixed. Take a good look around. Make some simple changes. And the home you love will soon be a safe place for the people you love.

© 1995-2007, AARP. All rights reserved

Safety in the Car

Traveling with your grandchild by car is more dangerous than you think. Take special precautions to keep your little one safe.

A lot has changed since you drove your kids around. Today, buying and installing a child safety seat almost takes an engineering degree. Get help here.

Car Safety Seats: A Guide

Each year thousands of young children are killed or injured in car crashes. You can help keep this from happening to your grandchild by using car safety seats and seat belts correctly on every single trip you take. Here are some helpful tips.

Which car safety seat is the best?

No one seat is the "best" or "safest." The best seat is the one that fits your grandchild's size, is correctly installed, and is used properly every time you drive. When shopping for a car safety seat, keep the following in mind:

Don't decide by price alone. A higher price does not mean the seat is safer or easier to use. All car safety seats available for sale in the United States must meet government safety standards.

When you find a seat you like, try it out. Put your grandchild in it and adjust the harnesses and buckles. Make sure it fits properly and securely in your car.

Keep in mind that pictures or displays of car safety seats may not show them being used the right way.

Important safety rules

Always use a car safety seat. Start with your grandchild's first ride home from the hospital.

Never place a child in a rear-facing car safety seat in the front seat of a vehicle that has a passenger air bag.

All children younger than 13 years are safest in the back seat.

Be a good role model—always wear your seat belt. This will help your grandchild form a lifelong habit of buckling up.

Remember that each car safety seat is different. Read and keep the instructions that came with your seat handy, and follow them at all times.

Read your car owner's manual for information about installing your car safety seat.

If you need help installing your car safety seat, contact a certified Child Passenger Safety (CPS) Technician. To locate a child safety seat inspection station and set up an appointment, call toll-free at 866/SEATCHECK (866/732-8243) or visit

Rear-facing seats

All infants should ride rear-facing until they have reached at least 1 year of age and weigh at least 20 pounds. That means that if your grandchild reaches 20 pounds before her first birthday, she should remain rear-facing at least until she turns 1 year old. It is best for children to ride rear-facing to the highest weight or height allowed by the manufacturer.

There are 2 types of rear-facing seats: infant-only seats and convertible seats. Convertible seats can be used rear-facing for infants, and then turned forward-facing once your grandchild is old enough and big enough to do so safely.

Infant-only seats

  • Small and have carrying handles (sometimes come as part of a stroller system).
  • Have a built-in harness.
  • Are used for infants from birth up to 22 to 30 pounds, depending on model.
  • Many come with a base that can be left in the car. The seat clicks into and out of the base, so you don't have to install the base each time you use it.

Convertible seats (used rear-facing)

  • Are used rear-facing from birth until your grandchild is at least 1 year of age and at least 20 pounds. It is best for children to ride rear-facing to the highest weight or height allowed by the manufacturer, usually 30 pounds or more for all new convertible seats. Check your car safety seat instructions to find the weight and height limits for rear-facing.
  • Have higher rear-facing weight limits than infant-only seats and are good for bigger babies.
  • Have the following 3 types of harnesses:
    • 5-point harness—5 points of attachment: 2 at the shoulders, 2 at the hips, 1 at the crotch.
    • Overhead shield—A padded tray-like shield that swings down over the child.
    • T-shield—A padded t-shaped or triangle-shaped shield attached to the shoulder straps.

Features to look for in rear-facing seats

  • Harness slots. Look for a seat with more than one set of harness slots to give your grandchild room to grow. The harness should be in the slots at or below your grandchild's shoulders when your baby is rear-facing.
  • Adjustable buckles and shields. Many rear-facing seats have 2 or more buckle positions for growing babies. Many overhead shields can be adjusted as well.
  • Other helpful features. Angle indicators and built-in angle adjusters can help you get the proper recline. Head support systems can help your baby fit in the seat properly.

Forward-facing seats

Once your grandchild is at least 1 year of age and weighs at least 20 pounds, he can ride forward-facing. However, it is best for him to ride rear-facing until he reaches the highest weight or height allowed by the car safety seat. There are many types of seats that can be used forward-facing: convertible seats, built-in seats, combination forward-facing/booster seats, and travel vests.

Convertible seats (used forward-facing)
Convertible seats can be used forward-facing by children who are at least 1 year of age and weigh at least 20 pounds. To switch the seat from rear- to forward-facing, be sure to follow these steps:

  • Move the shoulder straps to the slots that are at or above your grandchild's shoulders. On many convertible seats, the top harness slots must be used when the seat is in the forward-facing position. Check the instructions to be sure.
  • Move the seat from the reclined to the upright position if required by the manufacturer of the seat.
  • Make sure the seat belt runs through the forward-facing belt path.

When making these changes, always follow the car safety seat instructions.

Built-in seats
Built-in forward-facing seats are available in some cars and vans. Weight and height limits vary. Read your vehicle owner's manual or contact the manufacturer for details about how to use these seats.

Combination forward-facing/booster seats
Some car safety seats can be used as both a forward-facing seat and a booster. These seats come with harness straps for children who weigh up to 40 to 65 pounds (depending on the model). Once your grandchild reaches the weight or height limit for the harness, you can use the seat as a booster by removing the harness and using your vehicle's lap and shoulder seat belts. Keep in mind that when using the harness straps, the seat can be secured with a lap and shoulder belt or a lap-only belt. However, once you remove the harness, you must use a lap and shoulder seat belt. Children must never ride in a booster seat using a lap belt only because serious injury can result.

Travel vests
Travel vests can be used for a child who has outgrown his seat with a harness but is not yet ready for a booster seat or cannot use a booster seat because the vehicle only has lap seat belts in the rear.

Booster seats
Booster seats are designed to raise your grandchild so that the lap and shoulder seat belts fit properly. This means the lap belt lies low across your grandchild's upper thighs and the shoulder belt crosses the middle of your grandchild's chest and shoulder. Correct belt fit helps protect the stomach, spine, and head from injury in a crash. Both high-back and backless booster seats are available. They do not come with harness straps but are used with the lap and shoulder seat belts in your vehicle, the same way an adult rides. Booster seats should be used until your grandchild can correctly fit in lap and shoulder seat belts (see "Seat belts" below).

Your grandchild should stay in a car safety seat with a harness as long as possible before switching to a booster seat. You can tell when your grandchild is ready for a booster seat when one of the following is true:

  • She reaches the top weight or height allowed for her seat with a harness. (These limits are listed on the seat and are also included in the instruction booklet.)
  • Her shoulders are above the harness slots.
  • Her ears have reached the top of the seat.

Seat belts

Remember, seat belts are made for adults. If the seat belt does not fit your grandchild correctly, he should stay in a booster seat until the adult seat belts fit him correctly. This is usually when the child reaches about 4' 9" in height and is between 8 and 12 years of age.

Your grandchild is ready to use a lap and shoulder seat belt when the belts fit properly. This means:

  • The shoulder belt lies across the middle of the chest and shoulder, not the neck or throat.
  • The lap belt is low and snug across the upper thighs, not the stomach.
  • He is tall enough to sit against the vehicle seat back with his legs bent without slouching and can stay in this position comfortably throughout the trip.

Other points to keep in mind when using seat belts:

  • Make sure your grandchild does not tuck the shoulder belt under her arm or behind her back.
  • If there's only a lap belt, make sure it's snug and low on her thighs, not across the stomach. Try to get a lap and shoulder belt installed in your car by a dealer.
  • Never allow anyone to "share" seat belts. All passengers must have their own car safety seats or seat belts.
  • The safest place for all children younger than 13 years to ride is in the back seat.

A warning about seat belt adjusters
There are products for sale that attach to the seat belt and claim to make it fit better. These products may actually interfere with proper lap and shoulder belt fit by causing the lap belt to ride too high on the stomach and making the shoulder belt too loose, and may even damage the seat belt itself. There is no federal standard for the performance of these products, and most vehicle and car safety seat manufacturers do not recommend their use. Until there are federal safety standards for these products, the American Academy of Pediatrics (AAP) recommends they not be used. As long as children are riding in the correct restraint for their size and age, they do not need to use any additional devices.

Installing a car safety seat

There are 2 main things to remember when installing a car safety seat.

  • The seat must be buckled tightly into your vehicle.
  • Your child must be buckled snugly into the seat.

Ask yourself the following questions to make sure both are done correctly. If you are not sure, check the instructions that came with your car safety seat, or contact a certified CPS Technician for help.

  • Is the car safety seat facing the right direction for your grandchild's age and size?
  • Is the seat belt routed through the correct belt path?
  • If you are using the LATCH system to attach the seat, have you attached the straps to the correct anchor points in the vehicle?
  • Are the LATCH straps or seat belt buckled tightly? If you can move the seat more than an inch side to side or front to back, it's not tight enough.
  • Is your rear-facing seat reclined enough? Your grandchild's head should not flop forward. If it does, tilt the car safety seat back a little. Your car safety seat may have a built-in recline adjuster for this purpose. If not, wedge firm padding, such as a rolled towel, under the base.
  • Do you need a locking clip? They come with all new car safety seats, and some are even built into the seat. If the seat belts in your car move freely even when buckled and there is no way to lock them, you need a locking clip. If you're not sure, check the manual that came with your car. Locking clips are not needed in most newer vehicles and in vehicles with LATCH.
  • Some lap belts (especially those found in older vehicles) need a special heavy-duty locking clip. These are only available from the vehicle manufacturer. Check the manual that came with your car for more information or visit a car safety seat inspection station.

Is the child buckled into the car safety seat correctly?

  • Are you using the correct harness slots?
  • Are the harnesses snug?
  • Have you placed the plastic harness clip (if your seat comes with one) at armpit level to hold the shoulder straps in place?
  • Do the harness straps lie flat?
  • Is your grandchild dressed in clothes that allow the straps to go between the legs? It's OK to adjust the straps to allow for thicker clothes, but make sure the harness still holds the child snugly. Also, remember to tighten the straps again after the thicker clothes are no longer needed.
  • Is anything under your grandchild? Tuck blankets around your baby after adjusting the harness straps snugly. Never place them under or behind your grandchild.
  • Is your grandchild slouching down or to the side? If so, pad the sides of the seat and between the crotch and the crotch strap with rolled up diapers or blankets.

©American Academy of Pediatrics, All Rights Reserved.

Help your Grandchild Stay Healthy

Your child has primary responsibility for your grandchild’s healthcare. But you play an important supporting role.

The more time your grandchild spends with you, the more you need to know about today’s child healthcare practices. Start learning now.

You’re a new grandparent. But you’re not new to raising children. You raised healthy kids of your own. And because of that, you feel qualified to raise healthy grandchildren, too.

You’re partly right. Many of the health practices you learned from your parents and grandparents will never go out of fashion. You should definitely pass these practices along to your children and grandchildren.

On the other hand, doctors and researchers have learned a great deal in the past few years about how to keep kids healthy. Stay up-to-date on these latest findings. This new information will come in handy when you’re caring for a grandchild—whether it’s for an evening, a week, or a lifetime.

© 1995-2007, AARP. All rights reserved

Provide Childcare

Caring for your grandchild is rewarding. But make sure to set limits.

Most grandparents enjoy caring for a grandchild while parents work. It’s a rare opportunity to build strong bonds with the next generation—and to have fun. Just make sure it works with your current lifestyle and future plans.

Getting Organized for Childcare

A plumber wouldn’t show up for work without a wrench in his toolkit. And a carpenter couldn’t do her job without a good hammer. Professionals need tools. And so do grandparents who provide childcare for grandchildren. It doesn’t matter how often or for how long you look after grandkids. You’ll do your best if you bring along some basic gear.

Some grandparents bring books or a craft project to entertain grandchildren during an evening of babysitting. Others pack favorite recipes if they’re staying for a week or more. A grandparent who provides daily childcare may rely on a comfortable pair of shoes to chase after toddlers. These tools are nice to have. But they aren’t the most important items in a grandparent’s toolkit.

Information—and lots of it—is what grandparent childcare providers need most. Having this information makes grandparents feel more confident. It helps grandchildren feel more secure. And it lets parents relax!

© 1995-2007, AARP. All rights reserved

Help Raise your Grandchild

If your child is unable to care for your grandchild, you may need to take over. Don’t worry . . . you’re not alone.

Raising a grandchild is the ultimate act of self-sacrifice. Say goodbye to retirement dreams of travel and leisure. But say hello to the rewards of love and commitment.

Finding Help to Raise a Grandchild

Are you a grandparent raising a grandchild? More than 2.4 million grandparents are doing the same thing you are. They stepped in at a moment's notice when their families needed help. They put their own plans on hold. They decided to take care of their grandchildren when the parents of those children could not.

These grandparents are probably a lot like you. The majority are younger than 60. Many feel all alone. And most don't know where to get the help they need. There are so many issues to think about when you begin to raise a grandchild.

This overview will help you find some tips on how to best address these issues and learn who can help.

© 1995-2007, AARP. All rights reserved

Provide Discipline

A lesson grandparents often learn the hard way: Love has its limits.

When your grandchild visits, it’s important to set limits—on behavior, snacks, and gifts. And don’t forget that you have your limits, too (of time, money, and energy).

Setting Limits for School-Age Kids

We all know that children need limits. Children want to know what the rules are and where parents draw the line for acceptable and unacceptable behavior. According to Ellen Galinsky, a child development expert, “Limits make children feel safe.” In addition, rules help school-age children practice decision-making and gain an understanding of natural and logical consequences.

Each family is unique and needs to determine its own rules and limits. Some limits can be negotiated; others may not be up for discussion. For instance, a non-negotiable rule might be completing homework as soon as a child arrives home from school. A negotiable rule might be weekend bedtimes.

Here are a few guidelines to follow when establishing limits:

  • Make sure the limit is necessary. Having as few rules as possible makes it clear to children what is expected of them. Too many rules make children feel overwhelmed and rebellious. Remember that you will have to impose the consequences later—if you can’t impose the consequence, consider whether the rule is necessary.
  • When possible, state limits in a positive way. Instead of saying, “No pop in the living room,” say, “Keep pop in the kitchen so it doesn’t spill.”
  • Have your grandchildren help you set the rules. Remember that some are negotiable and some are not. The children only get to help make the negotiable rules.
  • Decide consequences ahead of time. For most limits, you can have a general idea of what will happen if they are broken. If possible, involve the children in deciding consequences. Then when a consequence needs to be imposed, you can simply say to the child, “Remember, you decided what would happen if this rule was broken.”
  • Take into consideration your grandchild’s abilities and skills. A 4-year-old will not have the same rules as a 12-year-old. In addition, children with developmental delays or other special needs may need different rules from others in the home.
  • VERY IMPORTANT! Once you establish limits, be sure to enforce them consistently. Rules that are not enforced consistently are ineffective.

© University of Illinois Extension

Give Financial Gifts

It’s natural to want to help your grandchild financially. Just make sure whatever you do is consistent with your financial goals and constraints.

There are many options for gift giving and a variety of tax benefits available. Whatever you do, do what makes sense for your grandchild—and what makes sense for your current and future financial needs.

Making Financial Gifts to Grandchildren

Times have changed, and grandparents today may have more money to give their grandchildren than in days past.

For those who do, there are countless ways to help grandchildren financially, from smoothing the road in bumpy financial times to paying part of the exploding costs of schooling.

© 1995-2007, AARP. All rights reserved

Give Non-Financial Gifts

Nothings warms a grandparent’s heart more than giving grandchildren gifts. But don’t let it burn your bank account.

Giving gifts comes naturally to grandparents. Still, don’t feel you have to always give toys or spend a lot of money. Remember, it’s the thought—and the memories—that count.

Giving Gifts to Your Grandchildren

Most grandparents love to shower their grandchildren with gifts. It’s no wonder. Giving gifts can be the best thing about having little ones in the family. What can beat the warm feeling you get when a gift you bought brings a big smile to a grandchild’s face?

© 1995-2007, AARP. All rights reserved

Leave a Legacy

Giving gifts to your grandchildren while you’re alive is important. But also think about what to leave them when you’re gone.

Providing money and other financial assets can open doors for your grandchildren later in life. To do this, make sure to update your will after a grandchild is born (or have one drawn up). And consider the advantages of life insurance.

Wills -The Cornerstone of Your Estate Plan

If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn't have to be drafted by an attorney to be valid, seeking an attorney's help can ensure that your will accomplishes what you intend.

Wills avoid intestacy

Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state's distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.

Wills distribute property according to your wishes

Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.

Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other gifts.

Wills allow you to nominate a guardian for your minor children

In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

Wills allow you to nominate an executor

A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

Wills specify how to pay estate taxes and other expenses

The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

Wills can create a testamentary trust

You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

Wills can fund a living trust

A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pour over will because the will "pours over" your estate to your living trust.

Wills can help minimize taxes

Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

Assets disposed of through a will are subject to probate

Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.

Will provisions can be challenged in court

Although it doesn't happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include:

  • You lacked testamentary capacity when you signed the will
  • You were unduly influenced by another individual when you drew up the will
  • The will was forged or was otherwise improperly executed
  • The will was revoked

© 2003 Forefield, Inc.

Help with College Savings

College is an expensive proposition these days. The good news: You can help your grandchildren by contributing to their college fund or by paying their tuition.

Many grandparents gladly help their grandchildren with college finances. But be sure to consider all of your options before writing your first check.

The Best Ways to Save for College

In the college savings game, all strategies aren't created equal. Should you choose a 529 plan, a Coverdell education savings account, or an UGMA/UTMA custodial account in your child's name? Or would you rather put your money in a mutual fund in your own name? Ideally, you'll want to choose a savings vehicle that offers you the best combination of tax advantages, financial aid benefits, and flexibility while meeting your overall investment needs.

529 plans: college savings plans

There are two types of 529 plans--college savings plans and prepaid tuition plans. Though each is governed under Section 529 of the Internal Revenue Code (hence the name "529" plans), college savings plans and prepaid tuition plans are very different college savings vehicles.

A college savings plan is a tax-advantaged college savings vehicle that lets you save money for college in an individual investment account. Some plans let you enroll directly, while others require that you go through a financial professional. The details of college savings plans vary by state, but the basics are the same:

  • You fill out an application--you are called the account owner or the participant. You name a beneficiary and a successor participant (who would assume control of the account at your death). You also choose one or more of the plan's pre-established investment portfolios for your contributions. Most plans offer a range of investment portfolios that vary in risk.
  • You (or someone else) contribute money to the account as often as you wish, subject to plan limits.
  • Your contributions go into the investment portfolios you've chosen--portfolios typically consist of groups of mutual funds.
  • The financial institution that the state has designated to run its plan is solely responsible for managing the plan's investment portfolios; you have no control over how these portfolios are run.
  • Your contributions grow tax deferred, which means you don't pay income tax on the account's earnings each year. Some states (but not the federal government) may also let you deduct your contributions.
  • Money withdrawn to pay college expenses (a qualified withdrawal) is tax free at the federal level, and may also be tax free at the state level.
  • If the money isn't used for college (a nonqualified withdrawal), you'll owe income tax and a 10 percent federal penalty on the earnings portion of the withdrawal.

Anyone can open a college savings plan account--your ability to contribute doesn't depend on your income or your status as a parent. Money in the plan can be used at any college in the United States or abroad that's accredited by the U.S. Department of Education. And, if your child decides not to go to college or gets a scholarship, the account can be transferred to a sibling or other qualified family member without penalty. Plus, if you're unhappy with your plan for any reason, you can switch (rollover) your funds to a different 529 plan (college savings plan or prepaid tuition plan) once every 12 months without penalty. Your state may even offer tax breaks too, like a deduction for contributions or tax-free withdrawals.

But college savings plans have drawbacks too. You relinquish some control of your money. Returns aren't guaranteed--you roll the dice with the investment portfolios you've chosen, and your account may gain or lose money. Also, there are fees typically associated with opening and maintaining an account (e.g., an annual maintenance fee, administrative fees, and investment expenses based on a percentage of total account value).

529 plans: prepaid tuition plans

Prepaid tuition plans are distant cousins to college savings plans--their federal tax treatment is the same, but just about everything else is different. A prepaid tuition plan is a tax-advantaged college savings vehicle that lets you prepay tuition expenses now for use in the future.

Prepaid tuition plans can be run either by states or colleges. For state-run plans, you prepay tuition at one or more state colleges; for college-run plans, you prepay tuition at the participating college(s). Although the details of prepaid tuition plans vary by state, the basics are the same:

  • You fill out an application--you are called the account owner or the participant. You name a beneficiary and a successor participant (who would assume control of the account at your death).
  • You (or someone else) purchase an amount of tuition credits or units in a lump sum or periodically, subject to plan rules and limits. Typically, the tuition credits or units are guaranteed to be worth a certain amount of tuition in the future, no matter how much college costs may increase.
  • Your contributions are pooled together with those of other participants into a general fund, and the money is invested. At a minimum, the plan hopes to earn an annual return equal to the annual rate of college inflation for participating colleges.
  • Your contributions grow tax deferred, which means you don't pay income tax on the account's earnings each year. Some states (but not the federal government) also let you deduct your contributions.
  • Money you withdraw to pay college expenses (a qualified withdrawal) is tax free at the federal level, and may also be tax free at the state level.
  • If the money isn't used for college (a nonqualified withdrawal), you'll owe income tax and a 10 percent federal penalty on the earnings portion of the withdrawal.

But prepaid tuition plans have drawbacks too. One major disadvantage is that your child is limited to the participating colleges--if your child attends a different college, plans differ on how much money you'll get back. Also, if the plan earns more than the relevant college inflation rate, you're not necessarily entitled to the difference. Keep in mind, too, that there are fees typically associated with opening and maintaining the account (e.g., an enrollment fee and administrative fees). Finally, some prepaid plans have been forced to reduce plan benefits after enrollment due to investment returns that have not kept pace with the plan's offered benefits.

Coverdell education savings accounts

A Coverdell education savings account (Coverdell ESA) is a tax-advantaged education savings vehicle that lets you save money for college, as well as for elementary and secondary school (K-12) at public, private, or religious schools. Here's how it works:

  • You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account. Keep in mind that the beneficiary of a Coverdell ESA must be under age 18 when the account is established (unless the beneficiary is a child with special needs).
  • You (or someone else) make contributions to the account, subject to the maximum annual limit of $2,000. This means that the total amount contributed for a particular beneficiary in a given year can't exceed $2,000, even if the money comes from different people.
  • You invest your contributions as you wish (e.g., stocks, bonds, mutual funds, certificates of deposit)--you have sole control over your investments.
  • Contributions to your account grow tax deferred, which means you don't pay income taxes on the account's earnings each year.
  • Money withdrawn to pay college or K-12 expenses (a qualified withdrawal) is tax free at the federal level, and typically at the state level too.
  • If the money isn't used for college or K-12 expenses (a nonqualified withdrawal), you'll owe income tax (at the beneficiary's tax rate) and a 10 percent federal penalty on the earnings portion of the withdrawal.
  • Any funds remaining in a Coverdell ESA must be distributed to the beneficiary when he or she reaches age 30 (unless the beneficiary is a person with special needs).

Unfortunately, not everyone can open a Coverdell ESA--your ability to contribute depends on your income. To make a full contribution, single filers must have a modified adjusted gross income (MAGI) of $95,000 or less, and joint filers must have a MAGI of $190,000 or less.

Custodial accounts

Before 529 plans and Coverdell ESAs, there were custodial accounts. A custodial account allows your child to hold assets that he or she ordinarily wouldn't be allowed to hold in his or her own name. The assets can then be used to pay for college or anything else that benefits your child (e.g., summer camp, braces, hockey lessons, a computer). Here's how a custodial account works:

  • You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account.
  • You also designate a custodian to manage and invest the account's assets. The custodian can be you, a friend, a relative, or a financial institution. Keep in mind, though, that if a parent serves as custodian, the entire value of the account will be included in the parent's gross estate if the parent dies while serving as custodian.
  • You (or someone else) contribute assets to the account. Whether your state has enacted the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) will determine the type of assets you are allowed to contribute (the UTMA allows more types of property than the UGMA, and most states have enacted the UTMA).
  • The account earnings are taxed every year at your child's tax rate. Assuming your child is in a lower tax bracket than you, you'll reap greater tax savings than if you had held the assets in your name. This opportunity for tax savings is extremely limited for children under the age of 18, however, because of the kiddie tax rules. Under the kiddie tax rules, any income over $1,700 is taxed at your rate, not your child's rate.

Despite the potential tax savings, custodial accounts have a serious drawback: all gifts to a custodial account are irrevocable. When your child reaches the age of majority (as defined by state law, typically 18 or 21), the account terminates and the child receives the money free and clear of parental influence. Some children may not be able to handle this responsibility, or might decide not to spend the money for college.

© 2003 Forefield, Inc.