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Dollars & Sense: Gifts That Keep Giving

By Roberta L. Nestor

We all love to give our children and grandchildren the “special gifts” or the “must have” items that appear on their list.  However, the price tag on some of the popular tech items have sky-rocketed over the past years.  And, perhaps your young person has all of the tech they could possibly want.

Try something different this holiday season!  Chances are your child or grandchild already has a 529 College Savings Plan.  These plans allow anyone to contribute on behalf of the child.  The attraction of 529 plans is that they grow completely tax free* as long as the funds are used for higher education expenses; room and board, tuition, books, even trade or technical schools.  The Tax Cuts & Jobs Act that went into effect this year actually expanded access to 529 plans for private K-12 schools (up to $10,000 a year can be withdrawn for private tuition).

If you are a parent who hasn’t established a 529 plan, maybe you have hesitated thinking it would be unaffordable or that you need a large sum to get it going.  Not true!  The CT CHET plan will let you start with as little as $50 and an on-going commitment to $50 a month.  There is also the question, “what if my child doesn’t go to college”?  You can change the beneficiary on a 529 and pass funds down to a sibling, cousin, niece or any relative – anyone can be the beneficiary regardless of age.

While it is unlikely that parents will be able to save enough to cover all college costs, whatever you can save helps enormously – especially when it comes to all the “extras”.  Remember, a 529 plan can be established by anyone, for anyone.  Meaning, if your grandchild doesn’t have one yet – you can open the account on their behalf.

Another idea, think ROTH!  If the special young people in your life are grown and just starting out in their careers, or even just working part time for extra savings – you can open a ROTH IRA for them.  You have to be careful not to over contribute as the contribution maximum is 100% of wages (W-2 earnings) up to a maximum of $5,500 for a 2018 contribution and $6,000 for 2019 contributions.  You have until April 15, 2019 to make a contribution for 2018.

The greatest attraction of ROTH IRAs is that the accumulation and use of funds (in accordance with IRS rules) is completely tax free.  Sometimes it’s not how much you invest, it is how long you have to invest.  Consider an annual $500 contribution that grows at a hypothetical rate of 4% for 40 years – that would mean saving $1.76 a day; over 40 years it could be worth over $50,000, and all tax free if withdrawn in accordance with IRS rules.

What financial gifts might not work anymore?  Savings bonds or bank savings accounts.  While in the past, US Savings Bonds may have been attractive, today’s low interest rate environment should make you think twice.  Series I Bonds issued from November 1, 2018 through April 30, 2019 will earn a rate of 2.83%.  Interest on savings bonds compounds semi-annually and will continue to accrue for 30 years.  You can redeem savings bonds after 12 months, however, if you redeem the bond before it is five years old, you will lose the last three months of interest.  As for traditional bank savings accounts, the interest is virtually non-existent.

Happy shopping and best wishes to all for a joyous holiday season!

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services.  She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser.  Fixed insurance products offered through Nestor Financial Network is separate and unrelated to Commonwealth.  Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice.  You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

*The fees, expenses and features of 529 plans can vary from state to state.  529 plans involve investment risk, including the possible loss of funds.  There is no guarantee that a college funding goal will be met.  In order to be federally tax-free, earnings must be used to pay for qualified education expenses.  The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty.  By investing in a plan outside of your state residence, you may lose any state tax benefits.  529 plans are subject to enrollment, maintenance and administration/management fees and expenses.

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