GIVE TO FAMILY
FUND A 529 COLLEGE SAVINGS ACCOUNT Over the course of a few years, the cost of higher education typically tops six figures. Funding a 529 college-savings account is a smart strategy to set aside money for your child’s future college expenses. Your contributions grow tax-free, and withdrawals are not taxed if you use them for qualified college expenses, including tuition, room and board, books, and computers. In most states, you can also take out up to $10,000 a year tax-free to pay school tuition for kindergarten through 12th grade. If you withdraw from a 529 for nonqualified expenses, you’ll owe income tax and a 10% penalty on investment earnings (but not contributions).
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. You may find a plan with lower fees or more desirable investment choices. Usually, direct-sold plans come with lower fees than those from brokers. At www.savingforcollege.com, you can find information about your state’s plans, compare plans side by side and see listings of the site’s top-rated 529s from around the country.
HELP PAY STUDENT LOANS
Earlier this year, the stimulus package Congress passed in response to the coronavirus crisis automatically suspended payments and interest accrual on most federal student loans for about six months, ending on September 30. Then, in August, President Trump issued an executive order that extends the payment and-interest suspension through the end of 2020. (Note that any further congressional action could override the executive order.)
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 reduces the overall time line to retire the loan.
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 shorten the time line to repay the loan by six months.
$10,000 CONTRIBUTE TO A MORTGAGE DOWN PAYMENT
With mortgage rates hovering at historic lows, now is an opportune time to buy a home for those who can swing the financing. If your child or grandchild has a strong enough income to qualify for a mortgage but is low on savings, consider kicking in all or a portion of the down payment. With a conventional mortgage backed by Fannie Mae or Freddie Mac, qualifying borrowers may put down as little as 3% of the purchase price. With $10,000, you could fund the full down payment for a home selling for as much as about $333,300. For those with a credit score of at least 580, Federal Housing Administration loans allow a down payment as low as 3.5% of the purchase price; $10,000 would cover the full down payment with a sale price of up to about $285,700.
Keep in mind that you’ll usually need a down payment of at least 20% of the purchase price to avoid private mortgage insurance on a conventional loan. If the borrower already has some savings, a $10,000 contribution from you could push the down payment to the 20% threshold. PMI may cost about 0.5% to 2% of the loan amount per year. After the borrower pays off enough of the loan to gain 20% equity in the home, PMI is no longer required.
You’ll have to write the mortgage lender a letter stating that the money is a gift and that you expect no repayment from the borrower. The lender will also want to confirm the gift’s source, so you may have to provide a couple of recent statements for the bank account from which you withdraw the funds and document the source of any deposits during that period.
START A ROTH IRA FOR YOUR CHILD OR GRANDCHILD
If your kid or grandkid is still in high school, saving for retirement probably isn’t on his or her priority list just yet. 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 purchase. After age 59½, withdrawals of both earnings and contributions are free of taxes and penalties.
GIVE A HOUSEWARMING GIFT
If your kids or grandkids are taking the plunge into homeownership, they may be prepared for the major up-front expenses, such as funding a down payment and covering closing costs. But once they move in, they’ll appreciate help buying other necessities.
If they’re moving from a rental to a single-family house, they will probably need some equipment for yard work. At Home Depot, for example, you could recently buy a Honda self-propelled, gas-powered push lawn mower for $409 and a DeWalt trimmer and leaf blower combo set for $299. That leaves a few hundred dollars more for garden tools, a hose, and other odds and ends. Or, for those in colder climates, invest in a snowblower. A Cub Cadet two-stage gas snowblower recently sold for $999 at Home Depot.
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