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WHAT SHOULD I DO with the required minimum distributions from my rollover IRAs?
I’m age 65, which means that—under last year’s tax law—I must begin taking taxable distributions in 2030, the year I turn 73. I’ve been looking at my retirement cash flow, and it appears that my wife and I won’t need the money for our living expenses.
I’m investigating using the money to help fund my grandkids’ college education. I built a spreadsheet that maps my age against the age of each grandchild and determined the years they’re expected to attend college. Using an online calculator, I estimated my required withdrawals and dropped those amounts in.
Currently, the six grandkids range in age from two-year-old twins to 11. My thought is to pay substantially all the cost of their junior and senior years. The kids are evenly spaced. Other than the twins, no two will have upper-class standing in the same year.
I have 529 college-savings accounts for each child. Based on my current contribution levels, those accounts could be exhausted in their freshman years.
Fidelity Investments’ college planning tool suggests that the average public university might cost $28,000 a year by 2031, which is when our oldest grandchild would be a freshman. The average private school might cost $64,000 by then. These costs inflate to $35,000 and $80,000, respectively, by 2038, when the twins are projected to begin college.
Of course, these costs are only averages and could vary sharply depending on the specific school the grandchildren attend. On top of that, Fidelity is inflating current college costs by just 2.5% a year, which may be too conservative.
For comparison, I’ve looked at the current cost of attending the private colleges my two children attended, as well as public universities in the states where the grandchildren live. After inflating these costs and comparing them to Fidelity’s results, I decided to increase my 2031 college cost estimates to $42,000 a year for a public school and $81,000 for a private school.
I plan to use my 2030 required minimum distributions to open an investment account to pay future college costs. By investing in money market funds, certificates of deposit or Treasury bills, I could earn some interest before making college payments.
Based on my projections, I estimate that I could provide up to $80,000 toward college in 2031. This will fund roughly a year of private college tuition, room and board. I inflated this amount by 2.5% a year to estimate the future college costs for the younger grandchildren.
Eleven years of after-tax required minimum withdrawals will generate enough to cover two years of college for each grandchild. After that, my withdrawals can be used to support my needs in late retirement.
If the grandchildren attend public schools, any extra money in their last two years of college could be used to repay student loans generated in their first two years. Some of the grandchildren might also earn scholarships that reduce their need for my money. If so, I have no problem giving them the planned money to jumpstart graduate school or their post-graduate life.
There’s always a chance that some of the grandchildren won’t attend college or won’t make it to their junior year. My wife and I are flexible. Funding trade school, an apprenticeship or starting a business are all acceptable uses. Our goal is to help launch each grandchild into the adult world with minimal student loans or other debt.
We’ll also have to consider disqualifying circumstances. We don’t like thinking about it, but our grandchildren might make choices that would make it unwise to turn over the money as planned. I could see holding it for them to see if they turn things around.
We’ve not shared these thoughts with our children. I’m honestly not sure providing $160,000 per grandchild is a good idea. I would welcome thoughts from HumbleDollar readers. But it is a comfort to know the money is available to help them.
No plan is perfect, of course. Here are three uncertainties that might affect my strategy:
These risks don’t mean we must abandon the plan entirely, but they could change the amount we can pay toward college.
Once we commit to the first grandchild, we’ll have to be prepared to fund the other five. With the spreadsheet built, I can monitor growth in my IRA balances, changes in college costs and changes in the tax law. All this will allow us to zero in on a specific plan when the oldest hits high school. Then we can share it with the whole family. Watch this space for an update around 2027.
Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. In retirement, he enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, Howard was featured—along with five others—on the cover of Kiplinger’s Personal Finance for an article titled “Secrets of My Investment Success.” Check out his previous articles.
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Could you explain why you decided to open separate investment accounts for your grandkids instead of simply putting more into their 529 accounts. The money in 529 accounts grows tax-free and is not taxed when you withdraw. With regular Invesment account(s) opened in your name, any gains would be taxed. Perhaps I am misunderstanding or missing something, so please enlighten me. Thank you!
Jonathan is correct… the retirement accounts are the topic of the article. I do have six 529 accounts that I am funding monthly… they will fall far short of the actual cost of college at my current funding level
Howard funded the retirement accounts to pay for his retirement — but found he had enough, which is why he’s now using the money to pay for his grandkids’ college.
My general philosophy about this sort of thing is to defray the costs, but not eliminate them entirely. If the parents were going to pay full amount, reduce their share to 10%, 20%, or 25%. Same if the kids were going to need to get loans or work part-time. One commenter below mentioned skin in the game, which is apropos. Make it cheap, but at the same time make them appreciate what’s being bought.
Thank you… I like this philosophy as concisely captured with your last sentence.
What a great approach to ask readers for the feedback – and engage with them like this. Thanks for doing this.
And, by the way, is there really no chance your kids read your blog posts? :).
Thanks….I have learned from reader comments before and this exchange has helped me solidify my thinking. And, I’m pretty sure the kids don’t read my posts…. it won’t be the end of the world if they do read this… they are both realistic and level headed.
I have a 529 plan for my Granddaughter (I am the owner) and would like to point out one important thing to watch for. She is in the 10th grade now. What I have read over the years is that if a Grandparent owns the 529 plan, ownership should be TRANSFERRED to a Parent at least by the 10th grade. The reason for this is that the Federal financial application Fafsa that is filled out to apply for college assistance, scholarships and loans is based on the parent’s income in the 11th and 12th grades and assistance from Grandparents. If the 529 money is owned by a Grandparent, it counts AGAINST the child on the Fafsa, but if it is owned by the parent, it does not count against what the child can get. Something to consider if college assistance is needed.
Excellent point Jim. I would add that some universities also require the CSS application in addition to the FAFSA. Such was the case for my youngest when he applied to university about two decades ago. At that point the CSS also required additional financial disclosure regarding the value of my home and retirement accounts in addition to the items on the FAFSA. Likely other factors in the CSS that did not apply to me.
The FAFSA determines eligibility for federal financial aid programs. The most significant difference between the FAFSA and CSS profile is that the CSS profile asks for more information about you and your family’s financial situation, which can be both good and bad.
My good experience was that my youngest son’s university had a large endowment and when they completed their evaluation with the CSS the amount of education costs above the FAFSA expected family contribution (EFC) was a grant whereas with the state university my daughter attended the amount above the EFC just determined the amount of federal student loans she was eligible for.
I expect the nuts and bolts of the process have changed in the twenty years since they were applying for school.
Thanks… one more thing for me to watch out for. I will seek out tax and financial aid advice as I approach my final decision. It sounds like when the oldest hits grade 9-10 I should start my final investigations and decision making.
The short answer is yes. Do it.
Launching young family into the adult world with a college degree or other meaningful training or certification with minimal student loans or other debt is priviledge that should be heartily embraced.
Thank you for taking the student perspective in this comment and your comment to Greg Geisler about “skin in the game.” My wife and I graduated from a small private liberal arts college as did my daughter and son in law. My son and daughter in law graduated from a private east coast “institute of technology.” Only my daughter in law had student loans to repay. All six of us finished 4 year degrees in 4 years; 3 went on to get advanced degrees. My point is that our family has a multi-generational commitment to funding a college education, starting with our parents. There is much controversy in the threads below about the value of a college degree in today’s world. I contend that there is still substantial value to a 4 year traditional on campus degree for the right student… the student who is prepared and focused and ready to put in the work. I believe you are also making that point. Further, there is no better path to an advanced degree, if that is what is desired. I’m trying to make that possible for the next generation.
Howard,
Consider making your grandchildren have some “skin in the game.”
An 18 year old might choose the expensive private college, despite the incentives you’ve given them, if they don’t see any direct, immediate, cash outflow from their own pocket.
If the expensive private college is $80,000, and they have to earn $8,000 (i.e., 10% is their “skin in the game”) each year during summer and working during college… whereas if the quality public college is $35,000, and they have to earn $3,500 (i.e., 10% again) each year during summer and (if necessary, working during college), they might be much more likely to opt for the latter!…
and, if they choose the quality public college they’ll have a much brighter financial future when they are done college since they WON’T have a lot of student loans from freshman and sophomore year that need to be repaid when they start working (like they would if they chose the expensive private college).
Hope this helps.
I appreciate how generous you’re going to be to help your grandchildren!
Best,
Greg
I constantly hear skin-in-the-game arguments.
Would I have been more serious about getting the most out of a top tier private college if my parents didn’t simply write the check each semester?
Would my wife had been less serious about college if she didn’t have to work full time to get through a state school?
We can’t do controlled experiments to check, but I think I would have focused more on making money than school (and would have attended a state school) and she would have gotten a lot more out of college because she would have put all that effort at making money into education.
Because of our attitudes towards work, not because of skin in the game.
Thank you for this suggestion… it is something to consider. Part of the reason for waiting until the junior/senior year for this funding is to provide an incentive to not only start college but also to finish. Having been involved with organizations that grant scholarships, I’ve seen many students get scholarships to start college but they never finish. I hesitate to say the money was “wasted,” but it did not achieve the goal. Also, between parents and the grandkids, they have to come up with the money for the first 2 years, which keeps skin in the game. Academically, they have to do well enough to make it to the junior year. But, your suggestion of making it a dollar percentage basis is also a worthwhile consideration!
We also want to help fund college cost for our grandchildren. However, our grandchildren were born after we retired. I originally considered paying into a 529 program (or two). However, after exploring multiple options, we decided to allocate a portion of our Roth account to fund this potential expense. I chose the Roth account to minimize tax issues for us. What I did was to get current cost estimates for four years of college expenses. I then set aside (in a separate Roth account) the full amount and invested that full amount in a S&P 500 index fund. Since the start of the account (six years ago now), I estimate that we will have from 18 to 20 years for this account to grow. I’m working on the assumption that the account growth will match the educational inflation growth (whether it is true or not). When our second grandchild was born, I transferred another four years worth of (updated) expenses to that Roth account. Our grandchildren are too young to understand what we’ve done and we still have full flexibility to do something else since the funds are in our own Roth accounts. I have told my children that I had done this “set aside.” However, I also made it clear that the funds would be used to pay off college loans starting late in their junior year. This allows them to get as much financial aid as possible before such funds are used (minimally impacting FAFSA) and hopefully encourages them to finish school. We also have discussed (with our children) other options (no college, trade schools, adverse situations that prevent completion, etc.) where we could also provide some assistance. As further incentive, I’ve also told my children that if some savings were made (relative to the “budget” I set aside), for example, by using community college as the first two years of a four year plan, then any remaining balance (of this educational Roth account) would be available to split between the grandchildren and parents. At the same time, I also made it clear that this is primarily to support education. If the grandchildren decide on other courses of action (trade school, etc.), we will help but the amount “left over” in the account will not be available to them (just in case someone tries to “game the system”).
To ensure that our wishes are carried out as stated above (in the event we are no longer alive), all the terms are spelled out (in much more detail) in our revocable trust as well.
Thank you for suggesting this alternative to achieving a similar end point. I was looking at the RMDs because they had to be withdrawn anyway and the timing of my required withdrawal matched up with when the grandkids start college. I will investigate your Roth idea with our tax advisor to understand the pros and cons in our situation.
Your proposed college plan is very generous, helping out your family’s new generation with college funding is commendable. It is strange to think that in the late 1970’s I was able to pay 1/3 of a “high” private school tuition and board with summer factory jobs and part-time college jobs, moving pianos and ant colonies were highlights. Grandparents chipped in 1/3 on two of the years and this allowed my parents to (barely) handle the rest. Funding for my son’s college supports your approach—multiple parts really reduce the strain: a $20,000 a year grandmother fund went directly to tuition, I had $500 a month that I never missed diverted from my paycheck for 10 years towards a brokerage fund (I used “Magic Formula” investing to double that), my employer has an incredibly generous benefit of paying 1/2 of an Ivy level tuition, these pieces let me pay the rest with ongoing salary. A dirty secret at many schools is that checking the application box of not requesting financial aid can break admission selection ties.
Keep your n mind the gift tax. My reading of it is that your spouse and you may contribute (and avoid additional gift taxes) $150K anytime in each of five years per grandchild using the five year averaging rule. ($15k/yr x 5 each). This is true whether contributing to a 529 or diectly.
Yes, I will need to seek some tax advice when the time is near. While it is interesting to know the current law, we all know that can change before this plan will be implemented. To Jonathan’s point about financial aid, that will also need to be considered. Part of the reason for waiting until the junior/senior year, is that this plan should not impact their eligibility for their first 2-3 years.
The gift-tax exclusion is now $17,000, thanks to inflation adjustments:
https://humbledollar.com/money-guide/gift-tax-exclusion/
Note that payments directly to educational institutions to pay someone’s education costs aren’t subject to the gift tax, but they can have a dire effect on aid eligibility.
Avoiding the gift tax and not affecting aid is easy. Have the grandkids get the aid or loans needed for their last two years, then pay it off for them during their last semester.
One problem with college today is the cost. It’s your money, so do this if you like. It isn’t clear to me if you’re going to pay the same to each grandchild-that may be smart to avoid family issues. For other readers young people should consider the Federal Service Academies, my son attended the U.S. Naval Academy and he received a pay check vs. paying-the Academy is not good for all young adults-but for those that its a fit the cost to attend is paid by the taxpayers. Yes, you must “Serve” for five years after graduating. Some Navy grads stay in the service and make it a career. One interesting statistic: of those that leave the Naval Service, in mid-career (industry) they are in the top quartile of income earners. Watch Navy beat Army in football this year. Regards, Rick
You’ve acknowledged 3 uncertainties that might affect your plan. But have you considered the uncertainty that your plan creates for your kids and grandkids (once you’ve disclosed the plan to them)?
You are not making a firm commitment to pay for 2 years of college costs, and so you are making it hard for your children to decide whether to count on getting funds from you. As a result, they’ll probably have to continue to save regularly for the next 10 years (for fear that grandpa will back out on the pledge). Or worse – your kids decide to count on you to pay for 1/2 of college for each grandchild, and then they find out at the last minute that your pledge will not be honored.
Also, your plan relies in part upon you living until the last grandchild is in his senior year of college. You’ll be into your 80s by the time some of these kids are entering college. What happens if you pass away while some grandchildren are not yet in college? Will the parties who inherit your IRA be bound to honor the payments to your grandchildren? Are you going to adjust your estate plan to ensure that if you die before those 2 year olds get out of college that their college costs will be paid by your estate (just as you paid for their older cousins during your lifetime via the after-tax funds from the RMDs)?
Your heart is in the right place here, but it would be much simpler just to start taking some IRA distributions now and then you can use that money to add to the existing 529 accounts.
You’re not avoiding taxes via this plan; you are deferring them. Is that deferral worth the complexity that may result?
Once I make the announcement (around 2027), it will be firm for all six grandkids. Short of a collapse of the economic system of the United States, I will not renege. And, yes, I will build it into our estate plans through our trusts to protect the youngest. Right now, the monthly payments we make into the six 529 accounts are protected in our trust so that ultimately each gets the same amount if we die before the youngest reaches age 18.
Waiting to make the announcement rather than funding the 529 now is prudent to make sure that I do not over commit monies that my wife and I need to fund our retirement. Again, this is a strategy to make sure that once we commit, we can keep the commitment.
Yes, from now until I make this announcement, our children may worry and save for college, but they will need to fund the freshman and sophomore years. I know that neither family is on track to fund four full years for all of their children. If they over save, it can benefit their retirement.
Uncertainty should help keep everyone focused on the goal, so best wishes for a positive result.
I completely misunderstood what you said, so I am deleting this comment…
Thank you to everyone who has posted about alternatives to the traditional 4 year college route. I have written in the past on Humble Dollar in articles and comments about how many students are not ready for college and may never be and should be pursuing a “Plan B.” I am remaining open minded about all of those, but also recognize that those decisions will be made by the grandchildren and their parents. I fully expect that post high school options will look very different in 2029 when the first grandchild graduates from high school, let alone in 2038 when the twins graduate. That said, my planning is based on the assumption that traditional 4 year college is the most costly option and I want to be prepared for that, if that is what makes sense at the time. “Plan for the worst case and hope for the best case.”
I find joy in thinking about my grandson every month when I contribute a small amount to his 529 account. I hope the same is true for you.
I am 72 and my young grandson is age 1 so I was concerned about my future mental capabilities or even being alive when he is ready for college. My wife and I decided to approach our son-in-law to be the owner of a 529 for our grandson and he accepted. We also hope that our gifts will encourage our kids to also contribute to the 529 plan for their son as they are able. I know we are taking a small financial risk in the event our daughter’s marriage fails but that is a risk we are willing to take. Both our son-in-law and daughter value their own higher education and I believe it is unlikely the funds would ever be used in an inappropriate manner. I would also note since my initial gift to fund the 529 was legally an unrestricted gift to my son-in-law he is eligible for a modest state tax credit for his contribution to that 529 plan that I would not eligible for if I were the owner of the 529 plan.
I would also note that your first initial RMD for the year you turn age 73 under existing tax law is April 1 of the year following the your age 73 year (2031) but then you would have to take both your 2030 & 2031 RMD in 2031. I just did this for my 2022 and 2023 RMDs and because of the way my other 2022 income was received this worked out better for me overall tax wise to take both in 2023.
I hope our decisions to be transparent in creating and funding the 529 will help create an expectation in our grandson of the value of obtaining knowledge through education when he becomes old enough to understand the financial commitments his grandparents and parents made for him. In a perfect world I hope eventually my grandson will be able to pay forward a love of learning to any children he may have. My understanding is the 529 plans rules currently do allow the owner to change the beneficiary in the event there are unused funds, think potential siblings or great grand children potentially long after I am gone. There is an article on Kitces that I found informative – https://www.kitces.com/blog/using-a-family-dynasty-529-plan-for-multigenerational-college-planning/ on this topic.
Best wishes for success to your grand children and their future. You and your wife are giving them an great opportunity.
Yes. The 529 plans for our older 3 grandchildren have already passed ownership from my mother to me. She set the stage for this thinking about funding education for her grandchildren and started the process for my grandchildren…. just as she and my father set the tone for me when I was growing up that college was an expectation. This would not have been the norm in the working class community where I grew up.
Thank you also for the RMD thoughts. I will monitor whether it makes sense to start drawing down from the IRAs as if the RMD kicks in at age 71 (old law) or wait to 73 (new law). It is nice to have the option, but I’m realizing that if I wait longer, it will just make the RMD larger. Tax wise I might be better starting earlier. I’ll also need to consider the asset allocation as I near that date. If I am counting on a certain amount of money to be spent on the grandchildren, I need to dial down the risk as I approach the time it will be needed.
Thanks for another thoughtful comment. I’ve come to look forward to the insights you offer on almost every HD article!
Another option is accredited web based programs offered by state university systems. One of my sons just finished a web based 3 year graduate program in mental health counseling from a fully CACREP accredited system at a Colorado university that’s part of that state university system. Total tuition and fees included was $30K ($10K a year). He’s now a licensed intern making a good wage while working to full licensure. Similarly (for discussion purposes) a Nevada state institution currently has an accredited online program for 2 year RN’s to get their BSN for $8900 total (not yearly) program cost. My daughter had a 2 year RN and completed her BSN and MS (FNP) programs online. She’s now making $160K in a southwest (fairly low living cost) state and has never found her online education to be a hinderance. Generally speaking, the wide acceptance of web based programs, especially when coupled with disciplines both requiring accreditation and in short supply, allows students to shop for some very affordable yet accredited high-quality options for higher education.
The best value approach by far is attending a community college to knock out basic requirements in two years with an associates degree, then transfer to a four year school. Students save $$$$$ this way and look no different to grad schools or employers than their colleagues who spent more money. And if the student isn’t really yet fully ready for the rigor of college classes — just look at the wash-out rate of most universities, they’ll waste a lot less money learning those skills and habits before moving forward.
We discuss how spending money can make us happy. One aspect of college is dorm living. Living in a freshman dorm is a unique experience. Getting out of the family living space, getting to live just about anywhere else, may be desired or necessary. Whereas for someone else, living at home and commuting to local community college may be wonderul.
Going to community college to knockout basic requirements and then transfer does make sense on paper. I think in many cases it does work, but we need to be careful.
When I was considering it for my kid, a professor talked me out of it.
His argument was that a student pursuing this route would need to be very focused. Being that we are the average of the people around us, the student could be negatively influenced by less motivated students around him. The critical factor, according to him, is that students in 4 year institutions are more likely to be driven, and on average, of a much higher academic crop.
My youngest son finished 12 credit-hours in high school via dual credit arrangement with the local community college. At the end of his freshman year, he already almost finished all core requirements for the local university. I created a 529 for him years earlier and he barely touches that fund.
I like that you’re willing to be flexible with how the money is spent. College is just one (narrow) path to success. Higher education is a state of disruption right now. Students and parents are not only questioning the high price of tuition but also the value of a degree.
There are so many options now that weren’t available just a decade ago. Who knows what will be available when your youngest grandchild reaches adulthood.
Want to be a pilot? Get your high school diploma (or GED) and apply to the American Airlines school.
Want to work in the medical field? Many pharmacy schools no longer require their applicants to have an undergraduate degree.
Love working with computers? Bootcamps will get you trained and working in less than a year.
As for those young adults who choose the traditional college route? I always thought allowing them to struggle a bit during their college years was a good thing. Would it be possible to allow them to pay their own way through college (with loans, grants, scholarships, etc.) and then–upon graduation–pay off part (or all) of their loans as a reward for a job well done?
We need more of these options here. Germany does this far better than we do.
Not sure I agree fully with your last paragraph, but the rest of your comment is spot on target. We need to think the entire college process. I laugh when I view graduation rates and then see they use a six, not four year measure. Something is wrong.
What’s wrong is located in public K-12. 60 years ago, my college offered remedial math and English to get those freshmen who needed certain skills they missed in K-12 up to speed. I hate to think what the current situation is now, since US education performance level is allegedly down to 29th in the world.
Great suggestions to consider. Thank you!
My daughter is currently applying to colleges in the Netherlands and Ireland. With her EU passport, fees for the degree course in the Netherlands are 1157 Euros for 2023-24. The degree is a three-year program, taught in English. Even with a high-end estimate of 1500 Euros a month in living expenses (she will work part time), the total over three years will be less than two years at Rutgers. An additional two years will get her a master’s. She will graduate with no student loan debt, and we can maintain our current 30% savings rate.
David, great idea to look for college education in the Netherlands. Most definitely lower costs than state side. I would suggest that she find a place to stay around the city where the school is located first. Getting in a college program in the Netherlands is one step but finding a suitable place to live while in school there is another issue. The universities in the Netherlands don’t have the housing or dorms like the U.S. Universities have here. It might prove to be a heavier lift to find a place to live while in school there than getting into a university. But great idea.The Netherlands education system is superb.
Yes, we’ve been keeping an eye on housing. Understandably, the shortage is more on the low end of the market. I see a lot of Eastern European students looking to pay a maximum of 500-600 euros/month. We can afford more, so if she can’t find a place through SSH or The Social Hub, we’ll find something on Kamernet, or just use an agent.
I can’t comment on your math, but I commend your efforts to help your grandchildren. I think using RMDs is a good idea.
My wife and I have been contributing to 529 plans for each of eleven grandchildren since they were born. The oldest is now 17. The accounts may pay for one year in a public school, but barely.
The school three of my children attended and graduated from is now over $80,000 a year in total.
Sad to say I think the cost of college in many cases has outpaced its value
“I think the cost of college in many cases has outpaced its value”
The challenge is that college is like any other investment – we make our decisions and spend our money without knowing the outcome. Fair enough. So what to do? We build spreadsheets, run analyses, and do all sorts of other things to try to assess the likelihood of a reasonable financial return on other “investments” and we should do the same with college. Spending those wonderfully generous 529 dollars from grampa and grandma, and mom and dad on XYZ degree from ABC college or university, may – or may not – make financial sense.
Thank you for your perspective and for sharing your experience.