By Unless you’re one of those “wrapped and done by December one” people, you probably have some names left uncrossed on this year’s Christmas list. If that’s the case, I want to take a minute to suggest that you give the most boring gift of all.
Sound fun?
Didn’t think so!
But it could make a life-changing difference for your son, daughter, niece, nephew, or any other child in your circle.
As you probably know, student loan debt is at an all-time high, and it’s crippling the investment opportunities for so many young people who start their adult lives already deep in the red. They’re delaying having children, buying homes, and funding retirement accounts until they can pay off those loans.
If we can gift someone we love the ability to pay for some or all of their postsecondary education, they will have such a leg up on their peers.
Enter the 529 plan.
A 529 plan is essentially a college fund that grows tax-free until it’s withdrawn for education expenses like tuition, books, housing, meal plans, etc.
When my nephew was born, I opened a 529 for him with $500 to get it started. Every birthday or Christmas we throw $100 in there. My parents, aunts, and uncles do, as well. Over his 18 years before college, we will have contributed around $6,000 worth of contributions.
Let’s plug some of these numbers into an investment calculator.
With an initial $500 deposit and $300 per year added into the account, by the time he’s 18, assuming a 10% return, he’ll have just over $18,000. That’s almost two years of tuition and fees at the average public four-year college.
But there’s more.
Let’s say he’s super-smart or super-athletic, and he gets a full ride to his school of choice. New rules that take effect in 2024 allow for up to $35,000 of unused 529 funds to be rolled over into a Roth IRA (accounts must have been open for at least 15 years).
Using the investment calculator again (still assuming 10% interest), if he rolls that $18,000 into a Roth IRA and never adds another penny, that retirement account would hit one million dollars by the time he’s 59. It’s absurd what compound interest can do.
I know how much fun it is to buy toys and clothes for kids, but if we’re being honest, they’re never going to remember most of that stuff. Setting them up for a successful financial future is the gift that will keep on giving for their entire lives.
If you have questions about 529 plans or want to set one up, contact me or anyone else on our team today.
Article by Kyrk Davis, Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.