Raising Grandchildren Gives Rise to Financial Challenges
For a variety of reasons, increasing numbers of grandparents are raising their grandchildren. This new role as primary caregiver to their children's children may be temporary or permanent, welcome or obligatory, but it is almost always financially challenging.
In an informal online survey conducted at RaisingYourGrandchildren.com, 63.8% of respondents cited finances as their top concern regarding raising their grandchildren. Even those grandparents who would describe their financial situation as secure are likely to feel the pinch when they have to buy car seats and school clothes again. Understanding what assistance may be available to your grandfamily will help you make ends meet and avoid completely derailing your retirement plan.
Grandparents' income, expenses may change
When Karen Best Wright, the woman behind RaisingYourGrandchildren.com, says that becoming a custodial grandparent can wreak havoc with your finances, she speaks from experience. Over the course of nearly seven years parenting her three young grandchildren, her husband took an early withdrawal from his retirement plan to pay for legal fees, she dropped from full-time to part-time work and stopped contributing to her own retirement plan, and the couple took on debt to create more living space for the kids. Wright says there are some things she'd advise others to do differently.
First, she says, try to stay within your means as much as possible. For example, before remodeling or moving, try to use existing space in your home to accommodate the kids, particularly if you're not sure how long they'll be living with you.
That's a good goal, but may not always be possible, says Madelyn Gordon, executive director of Grandparents as Parents, a Los Angeles-based service and support organization for grandparents and other relative caregivers. You'll have more leeway to improvise in an informal situation, where the state is not involved. Government programs, such as foster care, may insist on separate bedrooms for boys and girls, specific furnishings, or other conditions.
If your situation is likely to generate legal fees, Wright says you can curb costs by using free or low-cost legal aid services. "If you're not fighting [your kids or the government], you may be able to get legal custody without using a lawyer at all, or just hiring one to review the forms you fill out." To find out if you qualify for free or low-cost legal help, contact the legal aid program in your area.
Curbing legal fees is worth the extra effort since these costs alone can decimate your retirement plan, or worse. Wright recalls one grandmother who spent close to $30,000 from her retirement plan to pay for an attorney, and another who lost her home over debt for legal fees.
Curb legal fees by using free or low-cost legal aid services.
Child care is another expense that can be overwhelming. Wright's circumstances qualified her for state-paid child care—it would have cost her $1,200 a month if she'd had to pay out of her own pocket—but she hears from a lot of grandparents who have had to quit working because they couldn't afford daycare. Unemployment affects not only current income, but retirement income as well, since contributions to Social Security and a company retirement plan cease. If you need child care but can't afford it, make applying for free or subsidized services your top priority. Your local Child Care Resource and Referral service is a good place to start.
The bottom line for caregiver grandparents:
Financial aid for grandfamilies
"Certainly, there are some grandparents whose financial situation is such that they would not have to alter their plans or practices if their grandchild or grandchildren came to live with them," says Wright. But for most grandparents, she says, raising grandchildren is a major financial event that can impoverish those who don't seek help.
Assistance can come in many forms. Grants, child care, food stamps, and tax breaks are a few of the ways government and private programs help custodial grandparents make ends meet. Exactly what you will qualify for depends mainly on the form of your custody arrangement, your income and assets, and the state where you live.
Here are some benefits available to eligible grandparents or grandchildren:
Reduce tax liability
Taking in your grandchildren carries with it financial and tax consequences, points out Margaret Atkins Munro, a Vermont-based enrolled agent and author of "Taxes 2009 for Dummies" and "529 & Other College Savings Plans for Dummies."
"Of course, you don't make decisions based solely on the tax consequences," she adds. "But you should know what they are...knowledge is so empowering."
Don't willingly sacrifice your retirement savings plan.
To claim these tax benefits, you will have to qualify under Internal Revenue Service (IRS) rules. That generally means that you and the children meet the definitions of a primary caregiver and a dependent, neither your income nor the children's exceeds the limits, and no one else claims the child as a dependent.
Whatever you do, don't derail your retirement plan to pay for a child's education.
"If resources are limited, fund your retirement first," advises Munro. Kids can get financial aid, student loans, scholarships, and part-time work—retirees don't have those options.
Avoid taking on new, large debts in your 50s or later.
Keeping sight of your own long-term financial needs is good advice for anyone whose path may suddenly change. It's especially crucial for those with limited working years left to pay off debt and accumulate an adequate nest egg, or retirees who aren't in a position to replace assets they tap. And taking steps to reduce money-related stress will allow you to savor your new role as caregiver, even if raising a second family was never part of your original retirement plan.
Home & Family Finance® Resource Center