Many people have a different perspective on holiday gifts this year, after the challenges of 2020. Rather than spending a lot of money on stuff that can break or quickly lose a child’s interest, families are also searching for gift ideas with lasting value. The following gifts can make a difference long into the future for your child, grandchild, other relative or friend — giving them a head start on growing their finances, and also helping to teach them about money.
— Roth IRA for working kids.
— Contribute to a 529 college savings plan.
— Buy some stock.
— Give money from a donor-advised fund.
— Contribute to an ABLE account for children with special needs.
— Give a few hours with a financial planner.
— Gift a wallet.
— Give an experience.
— Financial gifts for babies.
[Read: Ways to Teach Kids About Money.]
Roth IRA for Working Kids
Children of any age who earned income from working — whether from a summer job or just some hours of babysitting or tutoring — can contribute to a Roth IRA and build tax-free savings for the future. They can contribute up to the amount they earned from working for the year, with a $6,000 maximum for 2020. They can withdraw the earnings tax-free after age 59½, and they can take out the contributions without penalties or taxes at any time — which can help them make a down payment on a house or serve as a back-up emergency fund in the future.
“As soon as a client tells me their kids are working — no matter how small the job — I tell them to fund a Roth IRA,” says Jennifer Baick, a certified financial planner with Mercer Advisors in Bellevue, Washington. “Later in life, the kids are going to be ridiculously lucky that someone started one of these for them.”
The money can grow significantly without the drag of taxes over decades — giving them a huge head start on their financial future. It can also give them their first experience with investing for long-term goals before they have a job with a 401(k). “Contributing to a Roth IRA on behalf of a kid who has earned income is one of my favorite ways to gift to kids,” says Laura Cuber, a certified financial planner with Mercer Advisors in the Chicago area. “Helping a child start a Roth IRA opens up the world of investing to them and lays a great foundation for when they are in the workforce full time and want to start saving for retirement on their own.” Some parents match the child’s contributions, too.
If the child is a minor, you need to open a custodial Roth IRA for them, but the procedure is usually simple. “It’s pretty straightforward to set up a Roth IRA for a child,” says Cuber. “Anyone can be named custodian, so the child’s parent can be in control of the account (if that’s desirable) even if they aren’t the donor.”
Many brokerage firms now offer Roth IRAs with no investing minimum, so you can start out small when your child is just starting to work. Charles Schwab, for example, has a $0 minimum deposit and $0 online equity trade commissions.
Contribute to a 529 College Savings Plan
One of the best gifts for kids (and their families) is to help them save for future college costs by contributing to a 529 account. The money grows tax-deferred through the years and can be used tax-free for college tuition and fees, room and board, a computer and other expenses. (They can also withdraw up to $10,000 per year for elementary or secondary school tuition.)
It’s easy for family and friends to contribute. You can either give money to an account that is already set up for the child, or you can open a new account and make the child the beneficiary — there’s no limit to the number of 529 accounts that can have the child as the beneficiary. You may get a state income-tax break for your contributions, depending on the state (See Savingforcollege.com for more information about each state’s rules.)
Many 529 plans participate in the Ugift program, which makes it easy for anyone to contribute. Parents get a gift code they can give to family members of friends and they can contribute online at Ugift529.com and can print out a gift certificate showing that they made the contribution. You can contribute as little as $15 with some plans. Other 529 plans that don’t participate in the Ugift program have their own gifting programs.
“With the exorbitant rates of inflation for education, it is essential to get an early start on saving,” says Baick. “A lot of parents and grandparents worry that they are saving before they know if their child will go to college or not, but if there is even a remote chance that they will go, I recommend it.”
If the child doesn’t go to college, you can change the beneficiary to another eligible relative — or you can keep the child as the beneficiary to use for eligible expenses anytime in the future, including many trade and vocational programs. If you take withdrawals that aren’t for eligible educational expenses, the earnings portion is generally subject to taxes and a 10% penalty.
Buy Some Stock
Following a stock through the years is a great way for a kid to start learning about investing. In the past, it was much more expensive and complicated to buy shares of stock for kids. But it’s now much easier to open a custodial account at a brokerage firm, and many brokerage firms have little or no minimum investing requirements and charge low fees. Schwab’s custodial accounts, for example, have a $0 investing minimum and $0 online equity trade commissions. You can buy stock, exchange-traded funds, mutual funds and other investments.
If the child already has a custodial account, any relative or friend can write them a check and have them use it to buy stock in the company you choose. Or you can ask older kids to do some research into the investments and have them make a case for a particular company — which can be a great way for the child to start learning about investing and to spend some time with you.
Some brokerage firms are making it easier to buy shares of stock for kids. Charles Schwab introduced Schwab Stock Slices in June, which make it easier to gift stock in whole dollar amounts (rather than having to give a certain number of shares). It also makes some of the higher-priced stocks that kids know and use more accessible, says Mike Cianfrocca of Schwab. For example, Apple cost more than $122 per share and Nike cost more than $135 in early December, but you can buy a single slice for as little as $5, or buy multiple slices at a time. For example, you can create a portfolio that includes partial shares of 10 companies for just $50. You can buy slices of any stock in the S&P 500.
Other services make it easy to give shares of stock to kids who don’t have a custodial account. Stockpile makes it easy to buy stock in many popular companies online. You can buy an eGift card or printable gift card at Stockpile.com and can choose from more than 1,000 stocks (such as Apple, Disney, Tesla and Nike) or can give a dollar amount and have the recipient choose the stock. You can give from $1 to $2,000, and the child can track the performance on a kid-friendly app.
Give Money From a Donor-Advised Fund
Donor-advised funds, which are offered by many brokerage firms, banks and community foundations, make it easy to get the whole family involved in charitable giving. With these funds, you can contribute money at any time (and take a tax deduction if you itemize), and then you have an unlimited amount of time to choose the charities to support. You usually have several investing pools to choose from, where the money grows until you’re ready to make grants to the charities. Many donor-advised funds have a minimum contribution requirement of $5,000 to $25,000 to open an account, but Fidelity and Schwab just eliminated their minimum entirely, making these accounts accessible to people of all income levels.
Many families use these funds to teach their children and grandchildren about philanthropy, and some make it easy to give them a share of the money to designate to the charity. Fidelity’s donor-advised funds have a Gift4Giving program, for example, where you can send an online notification that you’ve given the child some money within the fund (say a few hundred dollars), that they can grant to the charity of their choice. They get a link so they can make the grant to the charity themselves, and they can access research materials to narrow down their search. “I’ve done this for my own children,” says Amy Pirozzolo, head of donor engagement for Fidelity Charitable. “It encourages them to be evaluating and thinking about the charities they want to support.”
Contribute to an ABLE Account for Children With Special Needs
Giving money to children with special needs can be tricky because having assets above a certain level can jeopardize their eligibility for government benefits, such as Supplemental Security Income. But money in an ABLE account generally doesn’t count toward these limits. ABLE account money can be withdrawn tax-free at any time for a wide variety of expenses for the benefit of the person with the disability.
To be eligible for an ABLE, the person can be any age now but must have developed a qualifying disability before age 26. Most states offer ABLE plans, but you can generally open an account in any state (only a few states limit their ABLE accounts to their own state residents). See the ABLE National Resource Center for more information about ABLE accounts and each state’s plans.
Each person can only have one ABLE account, so friends and relatives should check with the parent to see if they already have an account set up for the child, says John Nadworny, a certified financial planner with Affinia Financial Group in Burlington, Massachusetts. His son, James, was born with Down syndrome and family members contribute to his account with the Massachusetts ABLE plan, which is administered by Fidelity. Contributions to ABLE accounts are limited to $15,000 per beneficiary in 2020, so it’s important to find out if other relatives have already made contributions during the year. (There are special limits for contributions from the person’s own earnings — for example, James also contributes some of his own earnings from managing recycling at local offices.)
Another gift that can help families who have children with special needs: your time. “Money or tangible gifts are nice, but providing support to the parents can be the best gift,” says Nadworny. When James was a baby, he was in the hospital for several months with seizures, and one of the most memorable gifts that John and his wife, Susan, received was when their friends offered to stay in James’ hospital room for a few hours while they had some time together. “At the time, James was 11 months old and having seizures, and one of us was always at his bedside,” says Nadworny. “Because of our friends being in his room, we were able to go out of the hospital for a pizza at a local restaurant. We had not spent a moment together outside of the hospital for months. That was almost 30 years ago, and I still remember it — it was priceless.”
Give a Few Hours With a Financial Planner
This gift can be especially valuable for young adults who are graduating from high school or college or just starting out in their first job.
“I had one client give my time as a gift to their young adult daughters,” says Baick. “I was able to sit down with them, teach them some basic concepts, have them create budgets, discuss managing credit and start thinking about financial to-dos that are not on their radar.” A meeting with a financial advisor can help a young adult set their financial priorities for years in the future.
Give a Wallet
Jennifer Baick’s daughters received wallets in a print they loved (tokidoki) when they were in 3 rd grade, which helped them start learning about their own money. “We emphasized how special it was to be kept in a safe place,” she says. “We made it a point to organize their gift cards they got as presents, the cash, the coin pockets. It taught them a lot about maintaining a very tidy organization around valuable money.”
They added their money through the years, and now that they’re 8 and 11, they regularly shift the money from their wallets to their bank accounts. “I marched the kids down to the bank branch and we opened up their wallets, spilled all the money out, counted it up, and got them an ATM card,” says Baick. “This gift is time-consuming, but is memorable.”
Give an Experience
“Several of my clients have given the gift of an “experience” such as a family vacation destination — a cruise, a Disney vacation, or even somewhere exotic to enjoy together,” says Nadworny. “This provides a multi-generational gift where everyone can enjoy and spend time together.”
While the family may not be able to enjoy a trip like this now because of COVID, it’s a good time to start saving money for the experience — and can be something to look forward to in the future. You can tell your child or grandchild that you’re setting aside a certain amount of money every month for the future trip in a special account and show them how it grows through time, which can also be a good way to start to teach them about saving.
[See: 25 Practical Gift Ideas.]
Financial Gifts for Babies
Financial gifts for babies can be especially valuable because the money can grow for decades. Writing a check can help the parents now, but other gifts can help the kids with their financial futures. Even a small gift now can make a significant difference by the time they go to college, buy their first car, or even help with a house down payment.
One of the easiest gifts for a baby is to contribute to a 529 college savings plan. “A lot of parents start 529 accounts for their children when they’re born, so I would definitely recommend checking with the child’s parents to see if they already have one set up,” says Cuber. “Many 529 plans make it very easy for non-account owners to deposit a gift in a 529 plan and will even allow you to make an electronic transfer.”
If the baby already has a 529 account, you can send the parents a check and ask them to deposit it into the 529 or you can contribute directly to the account (you’ll need the account number or gifting code).
Many 529 plans participate in the Ugift program, which makes it easy for friends and family members to contribute to the account. You’ll get a gift code, and they can contribute online. The parents can include the gift code with birth announcements or along with any information about a baby-item registry to make it even easier for people to contribute.
Or you can set up a 529 account yourself with the baby as the beneficiary — a child can have an unlimited number of 529 accounts. You may get a tax break for your contributions, depending on the state — see Savingforcollege.com for details of each state’s rules.
Or you can buy some shares of stock that can grow over the long term. “Assuming the gift won’t be used immediately, babies have the benefit of having a long investment timeline — whether it is for college or later — so they can afford the risk associated with the stock market and benefit from the long-term returns,” says Cuber. You can buy shares easily at Stockpile.com and other services, or find out if the parents have opened a brokerage account for the child.
The downside of giving shares of stock in one company is the risk that the company may not do well over the long term. “The con of buying just one stock is that the growth is dependent on that one company, which can be great or terrible,” says Baick. “Now, I find that it’s easier and more popular to open a brokerage account and to buy low-cost (exchange-traded funds) or mutual funds.” Keep in mind that money in a custodial account becomes the child’s when they reach the age of majority (generally from 18 to 21, depending on the state).
Another gift idea for babies and young kids that can also be their first way to learn about saving: a piggy bank. “As babies, my girls loved stuffing them with coins, watching then jingle and comparing them,” says Baick. “They knew their quarters and dimes at a very early age. I like the clear ones you can see into.” As her girls got older, they then transitioned to keeping their money in a wallet and now shift the money to their bank accounts.
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Update 12/04/20: This story was published at an earlier date and has been updated with new information.