How Grandparents Can Build A Lasting Financial Legacy

For many retirees, that support extends beyond spending time with children and grandchildren. It can also include helping with college education costs and making thoughtful decisions about the assets and wealth they hope to pass down.

How assets are managed, gifted, and passed down can have important implications for taxes, financial aid, and the financial well-being of future generations. Here are some considerations grandparents may want to keep in mind.

What Happens To Retirement Accounts When You Leave Them To Heirs?

As a grandparent, you may have decided to add a child or grandchild as a beneficiary on your taxable 401(k) or IRA or similar retirement account without understanding the additional tax implications that occurred due to the SECURE Act which became law in 2020.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the tax treatment of inherited retirement accounts by non-spouse beneficiaries, eliminating the more favorable so-called “stretch IRA” used prior to its enactment.

Now, due to a new 10-year rule, a retirement account inherited by a non-spouse generally must be fully distributed by December 31 of the 10th year after the year of the original owner’s death and the inherited account closed. (Certain eligible beneficiaries, including surviving spouses, the account owner’s minor children, disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the account owner, may be subject to different rules.)

Not only that, but depending on the circumstances, heirs may also be required to take annual distributions, called RMDs or required minimum distributions, during that 10-year period. For example:

• If the account owner dies before age 73, when they were required to start taking RMDs: The heir may have more flexibility about when to take distributions during the 10-year period.
• If the account owner dies after they were already required to take RMDs: The heir may have to take certain annual distributions during the 10-year period, in addition to ultimately emptying the account by the end of year 10.

RMDs and distributions from traditional IRAs and 401(k)s are taxed as ordinary income rather than at capital gains rates, and in most cases, these required withdrawals will increase an heir’s taxable income and result in a larger tax bill, leaving them with less of an inheritance from you. (NOTE: Inherited Roth IRAs and Roth 401(k)s are also generally subject to the 10-year distribution rule for many non-spouse beneficiaries, but qualified distributions are generally tax-free.)

As you can see, it’s not just about how much you leave your heirs. It’s about how much of that inheritance they can ultimately keep after taxes. For grandparents creating a financial legacy, understanding these rules can be an important part of deciding how different assets may support the next generation. Consider taking action now on your retirement accounts.

Does A Grandparent-Owned 529 Plan Affect FAFSA?

Many grandparents have the goal of helping their grandchildren with college costs. A type of account called a 529 plan, sponsored by a state or state agency, is designed for saving for education expenses. Following implementation of the FAFSA Simplification Act — enacted in December 2020 and first effective for the 2024–25 award year — rules surrounding 529 college savings plans became more favorable for grandparents wanting to help their grandchildren with college expenses.

FAFSA, or the Free Application for Federal Student Aid, is the online form students in the United States fill out to get financial help for college in the form of grants or loans. Unlike previous FAFSA rules, now grandparent-owned 529 plans are no longer reported as student assets or student income on the FAFSA. That means grandparents who want to open and contribute to their own 529 plans can now do so knowing that the savings they accumulate and spend on behalf of their grandchild won’t affect financial aid eligibility.

529 plans also offer tax-free investment growth and tax-free withdrawals when the money is used for qualified education expenses. This allows grandparents to build a college fund for a grandchild while providing potential tax benefits along the way.

However, keep in mind that while 529 plans are no longer considered on the FAFSA, some colleges and universities also use the CSS Profile to determine eligibility for institutional financial aid. These accounts may be treated differently under the CSS Profile.

You should also be aware that if 529 plan funds are not used for qualified education expenses, taxes and penalties may apply. Additionally, if the named beneficiary does not use the funds for education, you can change the beneficiary only to eligible family members, including siblings, parents, first cousins, children, certain in-laws or yourself, for qualified education expenses. Depending on the educational goals of your family members, you may want to choose a more flexible type of investment.

How Can Grandparents Plan For Multiple Generations?

Grandparents often think about what they can leave behind for their children and grandchildren. But creating a meaningful legacy involves more than simply giving money away. Consider creating a multigenerational financial and estate plan which can help you:

• Contribute toward a child or grandchild’s education while considering how those assets may affect financial aid.
• Determine which assets to pass on, who should receive them and when they should receive them.
• Consider how gifts, inherited assets, retirement accounts and other investments may be taxed when wealth moves between generations.
• Establish structures that can help preserve assets and provide greater control over how inherited wealth is used.
• Use gifting and other strategies to help children and grandchildren build financial security.

A Legacy Is More Than What You Leave Behind

The founder of Grandparents Day was Marian McQuade, a West Virginia homemaker who wanted to encourage young people to “tap into the wisdom and heritage their grandparents could provide.”

That wisdom and heritage are part of what makes a family legacy meaningful. Passing down wealth can be another way to carry that legacy forward, and it means more than simply giving money away. Grandparents are living bridges between generations, carrying forward a family’s true wealth: the wisdom, values, priorities, and traditions that help shape its future, along with the financial resources that can support generations to come.