The holiday season is upon us and with it the eternal struggle of what to buy for the special kids on our list. Many already have more knick-knacks than they need and any new toys or games they receive will no doubt be gathering dust in a matter of months.
This year, instead, try balancing your purchases at the mall with a financial gift that keeps on giving.
A few suggestions:
- A contribution to their 529 college account
- A charitable donation in their name
- For teens and young adults, a one-hour planning session with a financial advisor
- Stocks (or fractions of stocks)
- An IRA contribution
Each of these gifts could offer different types of returns and lessons for the youngster involved.
Cash gifts are all too easily squandered, especially by kids, but a contribution towards their future college tuition can help to minimize the debt they one day incur.
If he or she already has a 529 college savings account , help fund it with a cash infusion. Depending on their age, even a small amount contributed annually can amount to a sizeable sum by the time they graduate from high school.
Assuming a hypothetical 8 percent average return, for example, a $500 annual investment in a 529 college savings plan would be worth more than $20,000 by the time a newborn today reaches age 18.
Peter Creedon, a financial advisor with Crystal Brook Advisors in New York City, said many of his clients make 529 contributions during the holidays — even to their adult children or grandchildren.
“Some funds were used for adult children to go back to school and retrain for another profession or upgrade of skills,” he said. “The best part is that the grandkids were thankful to Grandma for the funds well after she had passed. It’s a good remembrance and legacy.”
Affluent family members with a relative who has already been accepted to a specific college might instead consider writing a check directly to that school to cover their tuition, which serves two purposes. It removes that money from the donor’s taxable estate and is not counted towards their lifetime gift and estate tax limit ($11.18 million in 2018 or $22.36 million for married couples who each gift).1 Take note that the special gift tax exclusion only permits donors to pay for college tuition, not the cost of books, supplies, or room and board.2
Those who wish to cover all of the student’s academic expenses can separately give up to $15,000 in 2018, the annual gift tax exclusion limit, to each college-bound recipient. That limit is $30,000 if you are married and your spouse contributes too.
Be aware, however, that if you pay tuition directly to your loved one’s school, and you don’t cover the full fare, it may negatively impact their ability to obtain financial aid. (Learn more: Possible college gifting moves for your grandchildren .)
Rather than giving only presents wrapped in bows, consider giving the kids in your family a (homemade) gift certificate that allows them to donate the equivalent value of one gift to a charity of their choice. This is a great opportunity to teach empathy through acts of mutuality and expose kids of all ages to the importance of giving back.
It also opens the door to meaningful dialogue about your family’s values. And, it encourages valuable quality time as you research together the many worthy causes that exist — including the fight to end poverty, animal welfare, or research organizations working to cure life threatening illnesses.
Charitable donations can also become a meaningful holiday tradition, involving everyone in the house. Amid the holiday season hustle and bustle, designate one night at the dinner table to decide which fundraiser or nonprofit your household would like to support that year. Invite each family member to suggest one cause and take a vote.
“Charitable giving tends to be a skill learned from parents, relatives, and is an important life goal,” said Creedon. “Including the next generation in giving is not only a good gift for the holidays, it is a life lesson on helping others. It is timely and can be tied to religious or other beliefs that are highlighted during the holidays.”
Young adults have many goals — and lots of demands on their limited income. Many, too, struggle with student loans or credit card debt beginning in their late teens.
By paying for a private planning session with a financial advisor, you can help your loved one create a road map for financial success.
Indeed, a third party professional creates a judgment-free zone in which young people can speak freely about their financial goals and challenges. ( Learn more: Preparing for your first advisor meeting )
The advisor can then suggest strategies to pay down debt, while simultaneously saving for short- and long-term financial goals. And, he or she can explain the importance of having an emergency fund set aside (when the time comes) so life’s inevitable setbacks (job loss or illness) don’t derail their future.
By encouraging the young people you love to establish a savings discipline early on and exposing them to the principles of long-term financial planning, you can potentially give them the gift of financial security for life.
The gift of a company stock can be more fun than it sounds.
Minors can’t buy stocks, but you can open a custodial account in their name, which you control. Gains are taxed at the child’s tax rate, and once he or she becomes an adult, the assets are transferred to him or her.
For younger kids, Michael Kelley, a financial advisor and founder of Kelley Financial Planner in Cleveland, Ohio, suggests starting with shares of a company that the child already knows, such a movie studio, video game manufacturer, or cell phone maker.
“I did this with my dad growing up and we’d look at the paper and the ticker symbol to see how the stock was performing,” he said. “It got me involved in the markets at a young age. It was cool seeing the stock price go up and down and very educational.”
As the markets rise and fall, continue the dialogue about performance and risk.
If individual stocks are too pricey (some cost more than $1,000 apiece) you can also consider buying partial shares, also known as fractional share investing. Some online brokerages allow you to buy as little as $5 or $10 worth of a single stock. Some allow you to purchase a gift card worth $50 or $100, for example, and present it as a gift, which allows the recipient to redeem it for whatever stocks they choose.
“If you get $20 in a Christmas card you might spend it on something very frivolous and it’ll be gone in three months, but shares of stock are something you’ll have 30 or 40 years down the road,” said Kelley. “It’s a good long-term investment that will pay dividends both literally and figuratively.”
On the other end of the spectrum, those looking to gift or transfer a significant number of stocks to a child might instead consider a Uniform Gifts to Minors Act (UGMA) or a Uniform Transfers to Minors Act (UTMA) account, which allow minors to own assets such as securities under a custodian’s name.
Finally, if the teen or 20-something in your life is now earning income, perhaps from a paper route or a part-time job, he or she can start funding an Individual Retirement Account (IRA) — and you can match those contributions, or fund an account on his or her behalf.
For minors, you must open a custodial IRA account, over which you retain control until the beneficiary turns 18 (or 21 depending on the state in which they live). You can contribute up to the amount that your child, grandchild, or relative earned for the year, up to a maximum of $5,500 in 2018 ($6,000 in 2019). If he or she made $2,000 mowing lawns, you may contribute that amount to his or her IRA.3
While retirement may feel far away for young people, the gift of an IRA contribution can be an excellent education in the benefits of delayed gratification and compounded growth.
A 20-year old who makes annual contributions of $5,500 to a Roth IRA, for example, will have amassed a balance of $1.4 million by the time he or she retires at age 67, assuming a hypothetical 7 percent annual return, thanks to the benefits of tax-sheltered earnings, according to Nerdwallet’s Roth IRA calculator .
As you ponder the perfect holiday gift for the little ones (and young adults) in your life, don’t forget to consider a charitable donation or a monetary gift that could set them up for a lifetime of financial success. Whether you couple it with a smaller gift they can enjoy today, or not, your thoughtfulness is sure to be appreciated for years to come.
Learn more from MassMutual…
1 Internal Revenue Service, “What’s New —Estate and Gift Tax,” November 2, 2018.
2 Internal Revenue Service, “Frequently Asked Questions on Gift Taxes, “August 20, 2018.
3 Internal Revenue Service, “Retirement Topics – IRA Contribution Limits,” November 2, 2018.