You have a grandchild—congratulations! Whether you’re a new grandparent or been one for years, you probably think about their future. Sure, your children are probably taking care of that, but they also have other expenses to take into consideration. Between bank fees, insurance, mortgages, etc. your children are knee deep in financial responsibilities on top of the expenses of having their kids. Many grandparents decide to help their grandchildren avoid the burden of student loans by paying for college, whether it’s all or some of the tuition.

There are several options to save or pay for your grandchild’s education. You can use bonds, interest incurring savings account, or a 529 plan.

Benefits

There are many perks to this plan. The most compelling is the tax breaks. While the contributions are not federally tax-deductible, many states offer tax deductions for 529 plan contributions. Even better, qualified distributions, such as tuition, books, school supplies, are tax-free! This can be much more economically wise because many traditional savings vehicles such as CDs and bonds incur taxes, even if used for education.

Investment growth is great! But the taxes aren’t so nice. With the 529 plan, growth is completely tax-free! More money for education means less stress and more focus on studying. The best part of this plan? You don’t have to report it on your federal taxes until you withdrawal! If the withdrawal is less than $15,000 per person ($30,000 for married couples filing jointly), it will qualify for the gift tax exclusion.

Aside from the many tax breaks this plan offers, it’s also low maintenance because of the ‘set it and forget it’ option to auto-invest by linking to your paycheck or bank account. The management of the account is controlled by an outside investment company, meaning you won’t have to worry about maintaining your account. Want to change your investment options? You can do that twice per calendar year under this plan.

Gifting Cash

If a 529 plan isn’t your style, you can gift cash. The current gift-tax exclusion is $15,000 per grandparent, so grandparents can give combined $30,000 per year to their grandchild without paying tax. There is an exception that allows grandparents to gift 5 years’ worth of gifts at once. You’ll have to skip gifting for the next 5 years, but this could be an alternative to a 529 if you have the funds.

Disadvantages

Gifting cash is taxable if over $15,000. However, depending on where you pull the cash from, it may not qualify. If this comes from a tax-deferred retirement account, then the $15,000 may not count towards your RMD. If you want it to satisfy this requirement, you’ll have to pay taxes on the distribution. The cash may not be as low maintenance as a 529 plan. The growth on your tax, if it accumulates any, may not be tax-free like the 529 plan.

Another perk of the 529 that cash gifting doesn’t have is tuition lock. Some plans offer a prepaid tuition path that averages the current cost of four-year in-state public colleges. The beneficiary is guaranteed this rate even if it goes up drastically by the time they’re in college. While we won’t know what college pricing will look like in the future, based on history and inflation, it most likely will rise. Finally, if the student isn’t going to college for a few years, are you sure you’ll always have this cash to gift? With the uncertainty of the future, you may not have the funds available. A 529 plan guarantees the money because it is held in an account meant for college costs. You could incur hefty fees and taxes for early, non-college related withdrawals, which could make you think twice before spending it, unlike cash.