Carrie Schwab Pomerantz
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I'm not a grandparent yet, but I've seen how my parents and in-laws have doted on my children. There is a noticeable joy in grandparenting, and it's equally obvious that many grandparents are eager to provide some financial assistance to their children's children.

Here are some ideas for how to do that most effectively.

INVESTING FOR COLLEGE

Ask virtually any parent, and they'll tell you the number one financial goal is to start saving and investing for the skyrocketing cost of a college education. This is an ideal opportunity for grandparents, especially since the tax code and guidelines for college financial aid can work in your favor.

As with any financial plan, the best approach starts with a goal. And when it comes to saving for college, 529s are a really good option. Most parents are familiar with the basics of 529 plans. Sponsored by states and administered by many major mutual-fund companies and broker-dealers, they offer tax-deferred growth potential on investments earmarked for higher education.

You open the plan, choose an investment and start saving. All investment income has an opportunity to grow tax-free, and as long as the proceeds are used for qualified college expenses, no income tax on the assets is ever due. Note that as with any investment, it is possible to lose money in a 529 plan. Also, by opening a 529 plan outside of your state, you may lose tax benefits offered by your own state's plan.

Here's the good news for grandparents or other relatives: Anyone can open a 529 account on behalf of a child - a relative or even a good friend. And here's the better news: When a third party, not a parent, opens a 529 account, its assets are not used in calculating financial aid eligibility. Only 529 accounts owned by the parents or the student are taken into consideration on the Free Application for Federal Student Aid; the other major financial aid application - the College Scholarship Service Profile - does include third-party 529 assets in its calculations.

For this reason, if you're a grandparent, other relative or a generous family friend, it may make more sense to open the 529 yourself instead of just giving the money to the child or the parents. Moreover, you can sock away quite a lot of money in the 529 plan without triggering a gift tax - up to $12,000 per grandparent, or $24,000 for a couple each year. Or you can make up to a $60,000 ($120,000 for a couple) contribution at one time, in lieu of additional gifts for five years. Timing-wise, it's best to open 529 plans when your grandchildren are relatively young, so that the accounts can benefit from the potential for long-term growth.

PAYING TUITION DIRECTLY

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Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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