Banking Tips for Grandparents: Smart Ways to Help Grandchildren Financially

Article summary

• Grandparents have several ways to support their grandchildren financially, including savings accounts, 529 plans and life insurance policies, with the right choice depending on flexibility, long-term goals and how soon the money is needed.
• A custodial savings account is simple to set up and easy to access, while a 529 plan offers tax-free growth for education costs and can even roll unused funds into a Roth IRA under certain conditions.
• Whole life insurance offers lower premiums when purchased younger and cash value options later, so starting early and consulting a financial advisor can help families build long-term security.

Many grandparents want to help give their grandchildren a strong financial foundation, whether that means contributing toward college tuition, helping them build savings habits or creating a nest egg for the future. While birthday checks and holiday cash gifts are always appreciated, there are also longer-term financial tools that can help money grow over time and potentially offer tax advantages along the way.

From high-yield savings accounts to 529 plans, CDs, savings bonds, fractional shares of stocks and life insurance policies, there are several ways grandparents can support their grandchildren financially. The best option depends on factors such as flexibility, long-term goals and how soon the money may be needed. Understanding the pros and cons of each approach can help grandparents choose a strategy that fits both their budget and their family's plans. 

Start simple with a savings account

Setting up a savings account for grandchildren is an easy way to get started setting aside money to support their financial future. Birthday and holiday gifts can be directed into this account, and regular monthly deposits can be set up. Even $25 monthly contributions can add up significantly over time.

Grandparents will typically open what's referred to as a "custodial savings account." This type of account is legally owned by the child but controlled by the adult custodian until the child reaches the age of majority. Typically, there are no minimum contribution requirements. Withdrawals must directly benefit the child, including expenses such as educational costs and the purchase of their first car. Once the child becomes a legal adult, ownership of the account passes to them, and they have full control over how the money is used.

The benefits of a savings account are that it is much easier to set up than a trust, and the money is easily accessible. While it might not be as lucrative as other financial products, choosing a high-yield savings account is one way to increase your return. Keep in mind that these types of accounts are considered student assets when applying for college financial aid. 

Consider a 529 plan for educational savings

For grandparents hoping to help cover future education costs, a 529 plan for grandchildren can be one of the most tax-friendly options available. These investment accounts are designed specifically for education expenses, allowing contributions to grow tax-free.

Grandparents can contribute to a plan opened by a parent or open their own account and name a grandchild as beneficiary. The purchaser of the plan controls where the fund goes. The funds may be used for qualified costs, such as college tuition, books, housing and some trade school or K-12 expenses. As reported by Fidelity, recent changes have allowed unused portions of 529 plan accounts to be rolled into a Roth IRA for the benefit of the grandchild beneficiary under certain conditions.

Grandparents should consider the potential gift tax consequences before making contributions to a 529 plan. Speaking with a financial professional can help families decide on the best approach. 

Life insurance for grandchildren: What to know

Some grandparents choose to purchase life insurance for grandchildren as part of a long-term financial strategy. These policies are typically whole life insurance plans that build cash value over time, and approval from parents is usually required.

Being able to lock in coverage early can be a huge benefit, should health issues arise later in life. In addition, healthy children usually receive the lowest possible premium rates. Permanent life insurance can offer a unique financial safety net with the dual advantage of cash value potential and income protection for children well into later life.

Life insurance for grandchildren may not be the best fit for every family. Premiums can be costly, and growth may be slower than other investment options. For grandparents primarily focused on supporting future education or financial goals, traditional savings vehicles may offer greater flexibility.

Next steps for grandparents

There's no single best option for supporting your grandchildren's financial future. Whether you're opening a simple savings account or exploring longer-term options like a 529 plan or life insurance policy, starting early can make a meaningful difference over time. Even modest, consistent contributions can help grandchildren build financial security and reduce future financial stress.

Depending on your goals and your grandchild's plans, you may want to consider a more flexible option rather than one that specifically covers educational expenses. Consulting a financial advisor and exploring available banking tools can help families create a strategy that supports both current needs and long-term goals.