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How to gift college aid to your grandkids

As you wrap up your holiday purchases, consider the gift of college savings for any grandkids on your shopping list.

More than half of grandparents are currently contributing to a grandchild's college education, or are planning to do so, according to a report from Fidelity.

Even small college contributions can add up over time, especially in a 529 account where the invested funds can grow tax-free and be withdrawn tax-free for qualified education expenses, said certified financial planner Erin Durkin, director of financial planning for EP Wealth Advisors in Torrance, Calif. That's a more valuable gift than another inexpensive toy.

"Unfortunately, that toy is not going to appreciate in value," she said.

Before you commit to making a big college savings gift, assess how it fits into your own financial plan, Durkin said. You may be better off shoring up your own retirement first, with an eye to helping with tuition payments or loan balances later if your budget allows.

In lieu of writing a check to your child or grandchild, make a gift directly into a 529 college savings plan set up with your grandchild as the beneficiary. Most plans make it easy to arrange such a gift. You could also purchase a gift card like GiftofCollege.com (also available at Toys R Us and Babies R Us stores) or LeafSavings.com, which can be redeemed directly into a qualified college savings plan.

Check state rules to see if you can get a tax break for gifts made to your grandchild's 529 plan. More than half of states offer such a break, but most restrict it to residents who are contributing to an in-state plan. (Only a few — including Arizona, Kansas and Pennsylvania — allow their residents to receive a tax break for contributions made to any state's plan.)

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If you live in one state and your grandkids are in another, you could open up new 529 plans for them in your home state, if that tax break is an important part of your gift strategy, Durkin said. One beneficiary can have multiple accounts in multiple states.

Keep your kids in the loop about any college savings you stash away. Grandparent-owned 529s can have a bigger impact on financial aid eligibility than those owned by a parent or student if you don't plan properly for withdrawals.