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Grandpa’s Scholarship

Howard Rohleder

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:

  • My projections are based on earning 5% a year on my rollover IRAs. Actual returns could affect the amounts available.
  • Changes in the tax law could change my required withdrawal amounts.
  • Our living expenses could increase to the point that implementing this plan would compromise our standard of living.

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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