The holiday season is the perfect time to share the gift of financial knowledge and investment opportunities with the children in your life. Whether you’re a parent, grandparent, aunt, uncle, or family friend, providing financial gifts can be a meaningful way to contribute to a child’s future while teaching valuable lessons about money management, saving, and investing.
Financial gifts for kids come in many forms, from opening a savings account or contributing to a 529 college savings plan to gifting shares of stock or setting up a custodial Roth IRA. These gifts can help instill financial literacy from an early age and provide a head start on building long-term wealth.
The Benefits of Financial Gifts for Kids
Giving financial gifts to children offers numerous benefits, both tangible and intangible:
Encouraging Early Financial Education: Financial gifts provide an opportunity to teach children about money management, budgeting, saving, and investing. By involving them in the process, you can help them develop healthy financial habits that will serve them well throughout their lives.
Head Start on Building Wealth: Financial gifts can give children a significant advantage in building wealth over time. The earlier they start saving and investing, the more their money can grow through the power of compound interest.
Tax Advantages: Many financial gifts, such as contributions to a 529 college savings plan or a Roth IRA, offer tax benefits that can maximize the growth of the gift over time.
Fostering Responsibility: When children have a financial stake in their future, they may be more motivated to work hard, make responsible choices, and plan for their long-term goals.
Creating Lasting Memories: Financial gifts can be a meaningful way to show your love and support for a child’s future, creating lasting memories and strengthening family bonds.
READ ALSO: Proven Real Estate Flipping Tips for Maximum Profits in 2024
Popular Financial Gift Ideas for Kids
There are numerous financial gift options to consider for the children in your life. Here are some popular choices:
1. Contribute to a 529 College Savings Plan
A 529 college savings plan is a tax-advantaged investment account designed to help families save for future education expenses. Contributions to a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses, such as tuition, room and board, books, and more.
Many states offer tax deductions or credits for contributions to their state’s 529 plan, making it an even more attractive option. Additionally, 529 plans offer estate planning benefits and allow for generous contribution limits.
To contribute to a 529 plan, you’ll need to know the account number and beneficiary details. Many plans also participate in the Ugift program, which makes it easy for family and friends to contribute online.
2. Gift Shares of Stock
Gifting shares of stock can be an excellent way to introduce children to the world of investing and help them develop an interest in the stock market from an early age. Services like Stockpile make it easy to gift fractional shares of popular companies, starting from as little as $5.
You can choose stocks in companies that your child is familiar with, or let them pick their own stocks based on their interests and research. As they watch their investments grow (or sometimes decline), they’ll learn valuable lessons about risk, diversification, and the long-term benefits of investing.
To gift shares of stock, you’ll typically need to open a custodial brokerage account for the child, with an adult (usually a parent or grandparent) serving as the custodian until the child reaches the age of majority.
3. Open or Contribute to a Custodial Roth IRA
A Roth IRA is a powerful retirement savings tool that can provide significant tax advantages for children who have earned income from part-time jobs, freelance work, or other employment. Contributions to a Roth IRA are made with after-tax dollars, but the money can grow tax-free, and qualified withdrawals in retirement are tax-free as well.
Children can contribute up to the lesser of their earned income or the annual contribution limit (currently $6,500 for 2023). While they may not be thinking about retirement just yet, a Roth IRA can provide a valuable head start on building long-term wealth.
To open a custodial Roth IRA for a child, you’ll need to work with a brokerage firm or financial institution that offers this type of account. The custodian (usually a parent or grandparent) will manage the account until the child reaches the age of majority.
4. Start a Savings or Investment Account
Opening a savings or investment account for a child can be a great way to teach them the importance of setting aside money for the future. A traditional savings account can help children learn the basics of saving, while an investment account can introduce them to the concepts of risk, return, and diversification.
Many banks and brokerage firms offer custodial accounts specifically designed for minors, where an adult serves as the custodian until the child reaches the age of majority. You can start small and let the child contribute to the account over time, or make an initial deposit as a financial gift.
As the child’s interest and knowledge grow, you can explore different investment options, such as index funds, mutual funds, or even individual stocks, if appropriate for their age and risk tolerance.
READ ALSO: A Guide to Budget & Eco-Friendly Travel Clothing
5. Financial Literacy Resources
In addition to tangible financial gifts, consider giving resources that can help children develop their financial literacy skills. This could include books, educational apps, or even a subscription to a financial magazine or website geared towards kids or young adults.
Some popular financial literacy resources for kids include:
Money Life: An online platform that teaches kids about money management through interactive games and activities.
The Mint: A non-profit organization that provides free financial literacy resources for kids, including games, apps, and educational materials.
Kiplinger’s Personal Finance: A trusted magazine and website that offers age-appropriate financial advice and educational content for kids and teens.
Jump$tart Clearinghouse: A comprehensive resource for financial education materials, including lesson plans, games, and activities for various age groups.
Conclusion: Sowing the Seeds of Financial Success
Financial gifts for kids can be a powerful way to sow the seeds of financial success and security from an early age. By introducing children to concepts like saving, investing, and long-term planning, you’re equipping them with knowledge and tools that can serve them well throughout their lives.
Whether you choose to contribute to a 529 college savings plan, gift shares of stock, open a custodial Roth IRA, or provide financial literacy resources, the act of giving a financial gift can be a meaningful and lasting way to support a child’s future.
As with any financial decision, it’s important to do your research, understand the rules and tax implications, and involve the child in the process as much as possible. With careful planning and a commitment to financial education, your financial gift can be the gift that keeps on giving, helping to shape a child’s relationship with money and setting them on a path towards financial security and independence.
FAQs About Financial Gifts for Kids
1. What’s the best age to start giving financial gifts to kids?
It’s never too early to start teaching children about money and finances. Even young children can benefit from simple lessons about saving, spending, and the value of money. As they get older, you can introduce more complex concepts and financial gift options.
Many financial experts recommend starting with basic savings accounts or piggy banks for young children, and then progressing to investment accounts, 529 plans, or Roth IRAs as they reach their teens and start earning income.
2. Are there any tax implications for financial gifts to kids?
There can be tax implications for certain financial gifts, depending on the type of gift and the amount involved. Here are a few key points to keep in mind:
Gift Tax: In 2023, you can gift up to $17,000 per recipient without triggering the federal gift tax (this amount increases to $18,000 in 2024). If your gift exceeds this annual exclusion amount, you may need to file a gift tax return and potentially pay gift tax, depending on your lifetime gift tax exemption.
529 Plans: Contributions to 529 college savings plans are considered completed gifts for federal gift tax purposes, but they are exempt from the gift tax as long as the total contributions from all sources don’t exceed the annual exclusion amount ($17,000 for 2023, $18,000 for 2024).
Custodial Accounts: Money gifted to a custodial brokerage or savings account is considered an irrevocable gift to the child. Any earnings or gains on the account are taxable to the child, but are generally subject to the “kiddie tax” rules until the child reaches a certain age.
Roth IRAs: Contributions to a custodial Roth IRA are not considered gifts for tax purposes if the child has earned income equal to or greater than the contribution amount.
It’s always a good idea to consult with a qualified tax professional to understand the potential tax implications of any financial gifts you plan to give.
3. How can I involve kids in the process of financial gifts?
Involving children in the process of receiving and managing financial gifts can be a valuable learning experience. Here are some ideas:
Let them research and choose investments: For gifts like stocks or investment accounts, have the child research different companies or funds and present their recommendations to you. This can teach them valuable research and decision-making skills.
Set goals and track progress: Help the child set financial goals, such as saving for a big purchase or contributing to their college fund, and then track their progress together. This can teach them the importance of setting and working towards goals.
Explain the benefits and rules: Take the time to explain the tax benefits, contribution limits, and withdrawal rules for accounts like 529 plans or Roth IRAs. This can help them understand the long-term value of these financial gifts.
Encourage them to contribute: If the child has earned income, encourage them to contribute a portion of it to their own Roth IRA or investment account. This can help them develop a habit of saving and investing from an early age.
4. What if the child doesn’t use the money for its intended purpose?
When giving financial gifts, it’s important to understand the rules and potential consequences if the money isn’t used for its intended purpose. Here are a few scenarios:
529 College Savings Plans: If the funds in a 529 plan are not used for qualified education expenses, the earnings portion of the withdrawal will be subject to income tax and a 10% penalty. However, you can change the beneficiary to another eligible family member, or even withdraw the funds (with taxes and penalties) if necessary.
Custodial Accounts: Money gifted to a custodial account legally belongs to the child once they reach the age of majority (typically 18 or 21, depending on the state). At that point, they can use the funds for any purpose, regardless of the original intent.
Roth IRAs: Roth IRA contributions can be withdrawn penalty-free at any time, but the earnings portion may be subject to taxes and penalties if withdrawn before age 59½, unless certain exceptions apply (like using the funds for qualified education expenses or a first-time home purchase).
While you can’t control how a child ultimately uses the money, involving them in the process and explaining the intended purpose can help instill a sense of responsibility and appreciation for the financial gift.
In another related article, 10 Negotiation Tips for Real Estate Purchase Contracts
