Sure, a sweater is an OK present for a birthday or holiday. But if you really want to make an impact on a child’s future, consider one of these gift ideas:
1. Fund a 529 college savings account. Your contributions to a 529 plan grow tax-free, and withdrawals are not taxed if you use them for qualified college expenses. In most states, you can also withdraw up to $10,000 a year tax-free to pay school tuition for kindergarten through 12th grade.
Nearly all states sponsor at least one 529 plan. If your state offers a tax deduction or credit to residents who invest in its plan, using your state’s 529 may be the best bet. If your state has no tax break or provides a break no matter which state’s plan you pick, explore your options from other states, too. Find information on 529 plans nationwide at www.savingforcollege.com.
2. Help pay student loans. Payments and interest on federal student loans have been suspended for 2020. If your child or grandchild has federal student loans, now may be an especially good time to give him or her cash to put toward loan payments because the full payment will go toward principal during the period that interest is waived. That will allow the borrower to repay the loan faster.
Even if the borrower has private student loans, an extra $1,000 can make a dent. If a borrower is two years into repaying a loan with an original five-year term, a $10,000 balance and a 6% interest rate, a one-time, $1,000 payment would decrease total interest paid by about $176 and shortens the repayment timeline by six months.
3. Start a Roth IRA for your child. If your kid or grandkid is still in high school, saving for retirement probably isn’t on his or her priority list. But stashing money for retirement while you’re young pays off. If you sock away $1,000 in a retirement account when you’re 16, make no more contributions and get an 8% annual return on your investment, you’ll have about $50,650 when you’re 67. Making a $100 contribution each month drastically increases total savings by age 67, to nearly $800,000.
To be eligible to contribute to a Roth IRA, your child must earn income — from a summer job, for example. You can open a custodial Roth IRA for a child younger than 18 or 21, depending on the state, and put in money on his or her behalf, as long as total contributions to the account don’t exceed the amount the child earns. For 2020, the annual IRA contribution limit is $6,000 for those younger than 50.
A nice perk is that although a Roth IRA is designed for retirement savings, you can withdraw contributions (but not investment earnings) anytime without paying taxes or penalties. That could be useful if your child eventually needs cash to cover an emergency expense or make a down payment on a home.
After age 59 1/2, withdrawals of both earnings and contributions are free of taxes and penalties.
(For more on this and similar money topics, visit Kiplinger.com.)
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