Grandparents' Guide to Teaching Financial Literacy

The role of grandparents has long been to comfort, support, and even spoil their grandchildren. But in a time of rising costs, particularly for education and housing, many grandparents are finding new ways to help—whether through direct financial aid, estate planning, or simply by passing on their hard-earned lessons of financial literacy.

"The role grandparents play hasn't really changed over the years, but we're seeing new ways to engage," says Chris Kawashima, CFP^®, a senior research analyst at the Schwab Center for Financial Research.

For example, a 2019 survey by AARP found 94% of grandparents offer some form of financial aid to their grandkids—up from roughly two-thirds of grandparents in 2009—with cash being the most common means of support. (The IRS allows you to give up to $16,000 in 2022, $32,000 for couples, to an unlimited number of individuals without incurring a gift tax.)

"Of course, there are a variety of ways beyond cash gifts to provide financial support, depending on what you're looking to achieve," says Susan Hirshman, director of wealth management at Schwab Wealth Advisory, Inc. Generally speaking, assistance falls into four categories.

With average college costs now topping $35,000 per year,¹ paying for part of a grandchild's education may be one of the best ways to support them. "The average federal student loan balance is $30,000," Chris says, "so that's an area where grandparents could make a real difference."

The IRS allows you to frontload a tax-advantaged 529 college savings plan with up to five years' worth of annual gifts—or $80,000 ($160,000 for married couples)—with no gift-tax consequences, provided you treat the gift as occurring over five years on your taxes. "The benefit of frontloading is you have a larger amount of money that can potentially grow—tax-free—for longer," Susan says.

Not only that, but 529 plans can also provide tax-free withdrawals for qualified education expenses. Many states offer residents a full or partial tax credit or deduction for contributions to their state's plan, and some states allow you to deduct contributions to any plan.

Currently, assets in a 529 owned by anyone other than a beneficiary child's parent can receive less-favorable treatment when it comes to federal financial aid eligibility. However, planned changes to the Free Application for Federal Student Aid (FAFSA) starting with the 2024–2025 school year would eliminate this rule.

If your grandchild attends a private elementary or secondary school, funds in a 529 plan can also be used to cover up to $10,000 in K–12 tuition per year. That said, doing so will come at a cost to college savings, and not all states permit 529 plan spending on K–12 tuition expenses. Be sure to check your plan's rules, lest you be subject to state income tax, plus penalties.

For noneducation expenses, a custodial brokerage account can let you take advantage of the annual gift-tax exclusion while the child is still a minor. Once a child reaches the "age of termination"—typically 18 or 21, depending on the state—the money becomes theirs as an irrevocable, no-strings-attached gift that they can use for any purpose. (Eleven states allow you to delay the transfer to age 25, or up to age 30 in Wyoming.)

Unlike 529s, asset appreciation in custodial accounts isn't tax-advantaged—and investment gains may be subject to the "kiddie tax": If any of the investments generate dividends or interest, or are sold for a gain while the child is a minor, the first $1,150 of that income is exempt from tax; the next $1,150 is taxed at the child's single-filer rate; and anything beyond $2,300 is taxed at the parents' rate. Furthermore, note that income from a custodial account, in addition to the account value, can potentially reduce federal student aid. 

To support older grandchildren embarking on a career or looking to buy a new home, intrafamily loans are another option. "If you go this route, just make sure it's a bona fide loan and not a gift," Susan says. "There has to be a promissory note, a repayment schedule, and a stated interest rate."

Direct financial gifts represent only part of the legacy grandparents can leave to younger generations. You can also give the gift of financial literacy by enlisting your grandchildren in preparing a budget, for example, or simply by talking about managing money in everyday situations. "Even getting paid for doing errands can be a good lesson in earning, saving, and spending," Chris says.

For younger grandchildren, Susan suggests setting up three jars in which to place allowance and small cash gifts—one for savings, a second for giving, and a third for spending—to instill an early awareness of how to manage money. "Sometimes the old-fashioned traditions still make the most sense," she says. "However you do it, the important thing is to engage with your grandchildren in creative ways about money."

For grandchildren in their teens, financial gifts can dovetail with lessons on the market. "Why not gift shares in a few stocks you've chosen together and see how they do over time?" Chris says. "You can teach the value of investing while also making it fun."

For adult grandchildren, you might incentivize savings by matching their contributions to a retirement or other account. And discussing your own charitable activities can encourage them to get interested in giving.

Starting these conversations at a young age can help ensure your grandchildren grow up to become responsible money managers—not only of their own finances but also of any inheritance they might receive. "By teaching them the value of money early on, you can position it not as a gift to be splurged away but as part of a legacy they can potentially build on," Chris says.

Whatever a grandchild's age, make sure you talk openly with their parents to coordinate any gifts and to avoid misunderstandings. "It's important that you're all on the same page," Susan says.

Many retired grandparents relocate to be closer to their children and grandchildren—in part to help reduce costs on both sides, be it child care for their children or travel for themselves. But the benefits of being closer to family are not just financial: Many studies, including one from Oxford University, have found that grandchildren who have strong relationships with their grandparents are often happier and more secure as adults.

If you're considering such a move, ask yourself how it will affect your overall retirement plans. "How far will your income go in a new location? Will you have adequate access to health care? What about taxes?" Chris says. "These factors matter a lot more when you're living off your savings."

For instance, 12 states collect state income tax on certain recipients' Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. "Taxes alone aren't likely to be decisive, but such incremental costs, when taken together, can negatively affect your income plan," Chris says.

Of course, relocating to a less-expensive city or state could save you money in the long run. Just be sure you're carefully considering all aspects of a move—not just the emotional ones.

Creating a rapport about money with your grandchildren is beneficial for them—but could serve you well, too. "As we age, we often need more help, whether with day-to-day tasks or managing our finances," Susan says. "Grandchildren can become wonderful, trusted advisors as adults, especially as it relates to cybersecurity and new technologies that might perplex their elders."

Indeed, building a close relationship with your grandkids, not only about money matters but also about life in general, allows you to pass on important wisdom—and even learn something from them in the process.