Money-smart holiday gifts for children

Sure, a sweater is anOKpresent for a birthday or holiday. But if you reallywant 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 529plangrowtax-free, andwithdrawals are not taxed if you use them for qualified college expenses. In most states, you can also withdrawup 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 529may be the best bet. If your state has no tax break or provides a break nomatter which state’s plan you pick, explore your options fromother states, too. Find information on 529 plans nationwide atwww.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, nowmay 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 iswaived. That will allowthe 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 sixmonths.

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 nomore contributions and get an 8% annual return on your investment, you’ll have about $50,650when you’re 67. Making a $100 contribution eachmonth 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— froma 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 IRAcontribution limit is $6,000 for those younger than 50.

Anice 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.