Your [ young children or] grandkids will probably say they’d like a toy or bicycle this holiday season, but their adult selves might prefer a financial gift with a long-term payoff. What’s the best way to do that?…
This post by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) version an excellent article by David Rodeck of kiplinger.com for the sake of clarity and brevity to provide a fast and easy read.
Hard cold cash is always an option but hardly one that pays off long term, particularly when interest rates are too meager to keep pace with inflation [and] because of the temptation to spend it, cash also makes it difficult to teach the next generation good financial habits…
Taking into account usefulness, potential returns and taxes, here are five better financial gifts to give.
1. College Savings Plans
The average cost to attend an in-state public university was $26,820 last year while private universities averaged $54,880, according to The College Board.
Any contributions -to such a major expense] will certainly be appreciated like:
- the 529 college savings plan, in which investments in the account grow tax-free, and all the money stays tax-free if it’s spent for college. You can contribute up to $15,000 per year per grandchild or even prepay five years — $75,000 — at once. The gift amounts double for married couples… [or]
- the Coverdell ESA [which] lets you spend the money on primary and secondary schools, too. The catch? The gift can only be $2,000 per year per child/grandchild, and to contribute, your adjusted gross income can’t exceed $110,000 per year if you’re single or $220,000 if you’re married.
The above accounts are meant for educational spending. If your child/grandchild doesn’t go to college, the balance can be transferred to another family member. Otherwise, withdrawals of investment gains not used for education are taxed as income and hit with a 10% penalty.
2. Roth IRA
…A Roth IRA is a great gift for a [young child or] grandchild with earned income from a job, such as a paper route or babysitting. You can give up to the amount the child earns per year, subject to the annual IRA limit ($6,000 for 2021).
3. Custodial Investment Account
These accounts are a good way to teach a newcomer to invest. Although the investment is in your child’s/grandchild’s name, you control the custodial account until your child/grandchild turns 18 or 21, depending on your state. In 2021, the first $1,100 of the child’s investment gains are free of tax and don’t need to be reported. The next $1,100 of gains are taxed at the child’s marginal tax rate and require filing a return. As the account custodian, you are responsible for taxes on any gains over $2,200 at your marginal income tax rate, not the lower rate for capital gains.
4. Municipal Bonds
…Municipal bonds pay higher interest rates than the classic financial gift of EE savings bonds and payments are free of federal income tax and, in some cases, state and local taxes, too. Be sure to look for creditworthy bond issuers. Investment-grade bonds should be at least BBB, with AAA the safest rating.
5. Gold
Collectibles like gold coins might catch your /child’s/grandchild’s eye, but…the capital gains tax rate on collectibles is 28%; the highest rate for long-term gains on other investments is 20%. A better option [would be to] buy your child/grandchildren gold exchange-traded funds or stocks in gold-mining companies to avoid the higher taxes of physical collectibles.
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Let’s take a look at some companies whose shares would make a great gift for your kids to not only help them learn about investing, but also get them excited about money and business in general.
2. These 6 Financial Gifts Will Help Your Children Learn About, Respect & Appreciate Money
With the holidays right around the corner, now is the perfect time to set your sights on one or more of these 6 financial gifts that will help your kids learn about, respect, and appreciate money.
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