Finding meaningful gifts for loved ones can be a challenge. Here are three ways to give financial gifts to a child, grandchild or loved one to help save and invest for their future.
UGMA/UMTA custodial accounts allow an adult to transfer cash and other assets to a minor
529 Plans and Coverdell ESAs are two ways to save for education expenses
Minor IRAs and Minor Roth IRAs can get retirement saving started early for a child or grandchild
Some people always seem to be able to effortlessly come up with incredible gift ideas around the holidays. I, on the other hand, rack my brain every year trying to come up with the perfect gifts for the loved ones in my life. Thankfully my brother gave me the rundown on Paw Patrol characters last year to make sure I knew Marshall, not Rocky or Ryder, was the favored toy for my nephew, as I doubt I would’ve learned that on my own.
While Marshall was certainly the showstopper in terms of my nephew’s Christmas, behind the scenes I’ve been giving him something that I hope will be a far more meaningful gift in the future: stocks.
With many gifts only staying in favor long enough to make it to the next holiday, it’s tough to find ones that will last and have a potentially positive impact on the lives of the people you care about. So, in the spirit of giving a gift that’ll hopefully last through the years, here are different ways to start investing for a child, grandchild, or other loved one.
Opening a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) custodial account allows an adult (custodian) to gift cash and certain assets to a minor (beneficiary) with no contribution limits and no minimum required to open the account.
These accounts were designed to make it simple to transfer property to a minor without having to create a formal trust. Any adult can be the custodian, even if they’re not the minor’s parent or guardian.
UGMA/UTMA accounts are widely used to save for education expenses, but they do offer a little more flexibility around withdrawals than other education savings accounts. The withdrawals need to be “for the use and benefit of the minor.” That is open to interpretation and there are still rules, so be mindful when making withdrawals. When in doubt, double check with a qualified professional such as a financial advisor.
To make sure this type of account can accomplish what you want, some additional things to consider include:
Get started opening a UGMA/UTMA account today.
For the 2017-2018 school year, the average cost of tuition and fees was $9,970 for state residents at a public college, according to the College Board. That average jumps to $25,620 for out-of-state residents at a public university and $34,740 at a private college.
Naturally, helping build education savings is high up on the list for many people when it comes to financial gifts. “Even if you start small and save just a little bit on a regular basis, that’s still more that the child will have to go to college with,” Dara Luber, Senior Manager of Retirement Products at TD Ameritrade points out.
Two common ways to save for education are through a 529 college savings plan, commonly referred to as a 529 plan, and a Coverdell Education Savings Account (ESA).
529 plans can be used for college education and some states allow them to be used for primary and secondary education, up to $10,000 per student per year. 529 plans used to only be eligible for college expenses, but recent changes to Federal laws made it so that 529s plans could be used for primary and secondary education expenses as well. Not all states have implemented the same changes though. Coverdell ESAs, on the other hand, can be used for primary and secondary education as well as college.
The chart below provides a side-by-side comparison of the main features of a 529 plan and a Coverdell ESA.
Learn more about the different accounts that can help you start investing for college for a loved one.
It’s never too early to get a jumpstart on saving for your child or grandchild’s retirement. The more time their investments have to grow, the more they can potentially benefit from compounding.
To do that, a Minor IRA or Minor Roth IRA can be set up in the minor and custodian’s name. With the long investing timeframes kids have before retirement, Minor Roth IRAs are often favored due to the prospect of long-term growth combined with tax-free withdrawals.
To be eligible to contribute, the minor needs to have earned income in the tax year, which cannot include gifts or inheritances. Parents and grandparents can contribute as well as the minor. However, contribution limits are capped at the minor’s earned income or the IRA contribution limit for that year, whichever is less.
Outside of those differences, the accounts carry the same rules as traditional IRAs and Roth IRAs.
Once you’ve set up the account, figure out how you want to maintain it going forward. Why you opened the account and the age of the person you’re saving and investing for will play a big part in what that looks like.
For my nephew, I buy a small amount of individual stocks and ETFs on his birthday and other major holidays throughout the year. As he gets older, I’m hoping I’ll be able to teach him what I know about investing and that his portfolio will be filled with lessons we can examine together.
I don’t have a particular goal for the money I’m saving and investing on my nephew’s behalf. Whether he ends up needing it for education or to take a trip he otherwise wouldn’t have been able to afford doesn’t matter to me. I just hope that it will be a gift that helps him have a better future.
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