4 Smart Financial Gifts for Kids and Grandkids
By Marjorie L. Rand, CPA, CFP®, RICP®
Have you already started your holiday shopping? Rather than spending a substantial amount on gifts that are likely to break or quickly lose a child’s attention, many families are looking for gifts that have lasting value. They’re looking for gifts that could help their child, grandchild, or friend learn about money management and give them a head start on building their finances.
To help, I put together a list of what I think are the most effective financial gifts to give the younger generation.
1. Set Up a Roth IRA
The first gift that comes to mind is a Roth IRA. Children of any age who have worked and received a form W-2 can fund a Roth IRA and build tax-free savings for their future.
By opening a Roth IRA for them, you can help them build a strong financial foundation early in life. Contributions grow tax-deferred meaning that there could potentially be substantial long-term financial gains.
To open a custodial Roth IRA for minors, you must specify a custodian who can oversee the account until the beneficiary reaches the age of maturity. Select a custodian who shares your investment philosophy because that person provides guidance and support to the beneficiary.
Opening a Roth IRA at a young age can help them form a strong savings habit and be positioned for a solid financial future.
2. Buy Stock in a Kid-Friendly Company
Another smart financial gift for kids is buying stock in a kid-friendly company.
A fun and instructive way to introduce kids to investing is to buy stock in a publicly traded company that caters to their interests, such as McDonald’s or Mattel. Owning a portion of a well-known business allows children to gain knowledge about the stock market, corporate profits, and dividends.
Interest in their investment usually rises and falls in tandem with the company’s stock performance. It’s crucial to keep in mind that stock investing entails risk and the investment’s value can fluctuate.
Giving them equity in a business that interests them sparks their interest in finance and business. Children can also learn the value of patience and long-term planning by watching how their investment performs.
3. Contribute to a 529 Savings Plan
A 529 savings plan is a tax-advantaged plan designed to promote saving for future education expenses. By making contributions to a 529 plan, you can help your child or grandchild save for graduate school, college, or other eligible educational costs. The profit in the account grows tax-deferred, and debits for qualified expenses are most often tax-free.
Opening a 529 account is a fairly straightforward process. Many states provide their own 529 programs with a variety of investment options. You have the choice of setting up automatic monthly contributions or making a one-time payment. Gifting a 529 plan provides the opportunity to lessen the financial burden of higher education and help your loved ones reach their educational goals.
4. Open and Contribute to a Custodial Investment Account
Introducing a child to the concept of long-term compound growth and the virtue of investing patience is a valuable and enduring gift. If a Roth IRA or 529 account doesn’t suit your needs due to their specific rules, consider setting up a taxable custodial account in their name and making regular contributions. Investing in broad market indices like the S&P 500 or Nasdaq 100 can provide a practical learning tool, offering insights into market fluctuations and the power of compound growth over time. Additionally, contributions to the account aren’t limited to just you—others can contribute as well, with no annual contribution caps.
It’s important to stay mindful of the tax implications for custodial accounts. For 2024, the first $1,250 in earnings is generally tax-exempt at the federal level, while the next $1,250 may be taxed at the child’s rate. Any earnings beyond $2,500 are taxed at the parent’s rate. Also, keep in mind that assets in custodial accounts are considered the child’s assets in financial aid calculations.
Partner With a Professional
Investing in a child’s future through meaningful, financially focused gifts is a decision that can yield lifelong benefits. By introducing young family members to financial concepts like investing, compound growth, and savings, you’re not just giving a gift; you’re providing them with tools for financial success. At Rand Financial Planning, we believe in building legacies through personalized guidance and long-term relationships that span generations. We work closely with our clients to make thoughtful financial decisions that align with their family’s goals, helping instill financial confidence for years to come.
If you’re considering financial gifts that go beyond the season and want to explore the options with an experienced advisor, I invite you to schedule a 20-minute introductory call. Feel free to reach out at 908-895-2406 or marge@randfinancialplanning.com. Let’s discuss how we can create a plan to give your loved ones a head start on their financial journey.