Many grandparents revel in their unique role. They get all the enjoyment young children bring (trips to the zoo, birthday parties) without any of the messy responsibilities (changing diapers, staying up all night). No problem there. Anyone who has achieved the rank of grandparent has earned their privileged status.

However, free from the financial responsibilities of raising their own kids and prompted by the joy of giving, some grandparents can overdo it in this “all-the-fun, little-of-the-work” phase of life, especially when it comes to giving gifts. That point was brought home in a recent discussion with other parents of young kids. When talking about the importance of putting limits on what we buy for our kids, one couple lamented that despite their best efforts, they’re having a difficult time reigning in their parents, who delight in spoiling their grandkids. According to the parents, their kids want for nothing, except perhaps a bit more gratitude and the discipline to save for things they want to buy.

With Christmas fast approaching, what’s a well-meaning grandparent to do? If you’re considering more than a small gift that fits under the tree this year, here are two suggestions.

Give the gift of experiences

Many studies have examined the link between money and happiness, and one consistent finding is that experiences make people happier than things.

Every summer, our family has developed a tradition of taking a one-week vacation with extended family, including my wife’s parents. We typically rent a lake house together. Knowing we have countless financial commitments in this expensive child-rearing phase of life, my in-laws generously subsidize these vacations.

During the week, we might take some nearby excursions, but our time is spent mostly just hanging out, swimming, or playing games. We make most meals together. It’s usually a very simple and deeply satisfying week.

These trips have already provided countless good memories for our kids, and for us. They will always be associated with enjoyable time spent with Grandpa Ken and Grandma Barb.

Give the gift of education

Anyone with college-bound kids or grandkids is likely familiar with the high cost of college. What a gift it would be for your grandkids to go to school without debt. Here are a couple of ways to help pay for their education.

  • Contribute to a 529 plan.

    Every state offers a 529 college-savings plan. Earnings generated within such a plan are tax free as long as they are used for qualifying college costs.

    You can open an account in any state, and your grandchild can use the funds to go to school in any state. Some states offer residents a tax deduction or credit for contributions made to the in-state plan, which makes checking your own state’s plan first a good idea. Savingforcollege.com also has comparative information on all the other states' 529 plans.

    If you live in a state that doesn’t offer a deduction or credit but your grandchild lives in one that does, consider giving the cash to their parents, who could open an account and receive the benefit.

    One more important reason to consider giving the money to your grandchild’s parents or depositing the money in an account they’ve established has to do with financial aid. Distributions from an account owned by a parent carry no negative consequences for the child’s financial aid. However, distributions from an account owned by a grandparent are treated as the student’s income, which can negatively impact financial aid.
     
  • Contribute to a Coverdell Education Savings Account.

    As with a 529 plan, Coverdell earnings are tax free if used to pay qualifying education expenses. One difference is this money can also be used for K-12 education costs as well, including private school tuition and even the beneficiary’s school supplies, including a computer.

    One significant advantage of Coverdell accounts is you have much more control over the investment choices, much as you would with an IRA. The major downsides are that annual contributions from all sources are capped at $2,000 per child per year, and there are no tax deductions or credits for the contributions.

    As for a Coverdell’s impact on financial aid, the story is the same as with a 529 plan. Distributions from a grandparent’s account are considered student income, and may have a negative impact on the student’s financial aid. For that reason, it may be best to contribute to an account already established by your grandkids’ parents.

It’s hard to put a bow on these gifts

Of course, there’s nothing wrong with also buying a gift for your grandchild to put under the tree this Christmas. It will certainly create at least some short-term happiness. However, it’s a virtual certainty that while store-bought gifts will be soon forgotten, the gifts of experiences or education will be long remembered and deeply appreciated.