Gifts With a Big Payout for Children

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By Lisa Gerstner From Kiplinger’s Personal Finance

For the children on your gift list this holiday season, you can buy the latest gadgets or fashions—items they may not even recall a year later.

Or with $1,000, you can invest in the younger generation’s future with these three ideas that can have a much longer lasting impact.

Consider:

Fund a 529 College-Savings Plan

With a 529, you can invest for your child’s future educational expenses. Contributions to the account grow tax-deferred, and withdrawals to pay for qualifying higher-education expenses—including college tuition, room and board, computers, and books—are tax-free. You can also take up to $10,000 per year in tax-free distributions to cover school tuition for grades kindergarten through 12.

Nearly all states offer a 529 plan. You don’t have to use your own state’s plan, but you may get a tax deduction or credit on contributions by investing in the plan your state of residence offers. At www.savingforcollege.com, you can compare 529s and see the site’s ratings of plans based on flexibility, investment options and other criteria.

Offer a Head Start on Saving for Retirement

If your child is earning money from work, you can open a custodial Roth IRA and contribute to it on his or her behalf. Contributions are subject to the standard limit—for 2022, the cap is $6,000—and can’t exceed the child’s income. So if your kid earns $1,000 this year, for example, you can’t put more than $1,000 in the Roth for 2022.

Your child can withdraw contributions tax- and penalty-free anytime. Withdrawals of investment earnings before age 59½ are generally subject to income tax and a 10 percent penalty, with some exceptions.

After your child has had the Roth IRA for at least five years, for example, he or she may withdraw up to $10,000 of earnings tax- and penalty-free for a first-time home purchase.

Help Your Adult Children

Your kids may have flown from the nest, but you can still give them a financial lift. If their rainy-day fund—which should cover at least three to six months’ worth of living expenses—is falling short, an extra $1,000 could help them cover an unexpected expense.

Or consider offering cash that your child can put toward the down payment on a home purchase. Be prepared to provide the mortgage lender a letter stating that the money is a gift rather than a loan (although $1,000 may not be large enough to trigger the gift-letter requirement). You won’t have to worry about gift tax with a $1,000 gift; in 2022, you can give up to $16,000 per recipient without filing a gift tax return.

(Lisa Gerstner is a contributing editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)

©2022 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.

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