When giving gifts to our children or grandchildren, or others close to our heart, we often default to the latest toys or gadgets. However, the value of these items tends to diminish over time in terms of both interest to the child and monetary value.
A different approach to gifting can focus on investing in a child's future. This perspective offers more than instant gratification; it provides lasting benefits that may help provide an independent future for your loved ones.
Savings account
A savings account is a traditional way to invest in a child's future. Opening an account in their name provides them with a financial safety net and can familiarize them with saving from an early age. It encourages them to think about finances and manage money responsibly, setting a foundation they can build upon into adulthood.
529 Plan
Another worthwhile investment is education. A 529 or education savings plan is an investment account that offers tax-free withdrawals on the accumulation when used to pay for qualified education expenses. 529 plans can pay for college, K-12 tuition, apprenticeship programs, and education loan repayments.
Leftover 529 plan monies can be used to fund a Roth IRA over five years at the allowable contribution amount. Visit with financial or tax professionals to understand how this works.
Securities
For longer-term investing, consider investing in securities for the child. Explaining to them how these investment strategies work can provide invaluable lessons in economics, patience, risk-reward, and performance analysis. Over time, these investments will continue to accumulate value, providing additional returns.
Because taxation on securities gifted to children can be complex, it's essential to consult financial and tax professionals. The 'kiddie tax' can affect a child's tax liability on an investment return or receiving financial aid. Therefore, you must understand how this gift will impact the receiver.
Trust Fund
A trust fund is a legal structure that allows you to set aside assets for another person's benefit—your child's or grandchild's. You can transfer cash or investment strategies into the trust, which protects the assets from legal claims. Trusts must be formed with help from legal and tax professionals since they're considered legal entities with tax IDs. Therefore, fully understanding the pros and cons of a trust fund and its taxation is essential before determining if this strategy is appropriate.
Individual Retirement Account (IRA)
Contributing to an IRA for a child may seem premature. Still, the IRA’s accumulation over time may make a compelling argument for early investing. Although a child might not fully appreciate this gift in their youth, they can thank you when they are older and financially independent.
In conclusion, while toys and gadgets may bring joy in the moment, they eventually become obsolete. By considering gifts that invest in a child's future, you provide them with tools and resources that have a lasting impact, setting them up for an independent future while instilling valuable financial education.