Parents and grandparents once thought it was cute to gift a child a single share of Disney or a savings bond. It was practical, and besides introducing a new generation to stocks, the pictures on the stock certificate made it a good gift for children.
Today, few people actually take ownership of stock certificates. Instead, stocks are generally held in brokerage accounts or in mutual funds.
“It’s a digital world now,” says Greg Hammer, president of Hammer Financial Group in Schererville, Indiana. “You can’t even buy a physical savings bond anymore. There’s no more paper, no more certificates. When you buy a stock today it’s bought through a brokerage.
But that doesn’t mean a financial gift is no longer a great idea for a holiday gift. Consider it something that will have an impact on their lives for years to come.
A 529 plan is an investment account used to save for college. They are usually offered by states and offer good tax benefits. The accounts operate much like a Roth. The money will grow is tax free if the funds are used for qualified educational expenses. Qualified expenses include tuition for colleges, universities and vocational and trade schools. They also cover room and board, equipment, books and supplies, and their use has been expanded to include tuition for grades K-12.
“The gift of funding education for down the road — you’re arming your grandchildren with an intangible that they can utilize for the rest of their life.”
“I think it’s one of the best gifts you could give,” says Brooke May, managing partner at Evans May Wealth in Indianapolis, Indiana. “Kids receive so many material possessions, some of which they never open and play with. The gift of funding education for down the road — you’re arming your grandchildren with an intangible that they can utilize for the rest of their life.”
“If you look at what it takes to fully fund four years of in state school, you probably need to save about $300 a month for 18 years to get to a point where you’re able to fully fund four years of undergrad in a state, and, that’s assuming a 6% rate of return,” she says. “And that’s a big burden for a lot of parents, especially if you’ve got several children.
“For a grandparent to be able to step in and help with those contributions, especially early – you’ve got the power of compounding and a greater likelihood that there will be enough there to fund four years of undergrad education.”
Hammer adds that in states like Indiana you also get a tax credit. “And it’s a true credit, so you could up to a 20% credit,” or up to a maximum of $1,000 a year,” he says.
The drawback: if you make a withdrawal, and it is not used for college expenses, the gains are taxable and there is a penalty.
UGMA or UTMA Accounts
The Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UMTA) are simple ways to make gifts to a minor by hiring an attorney to prepare trust documents. They are managed by an adult custodian, and earnings are not tax-deferred or tax free but are taxed at the minor’s lower rate. Up to $15,000 (single) or $30,000 (couple) can be contributed free of the gift tax. The donor does not receive a tax benefit. The UTMA allows for more classes of assets than the UGMA.
While the UGMA may provide a little more flexibility, “At the end of the day, custodianship transfers over at 18 to the minor,” says Hammer. The drawback is that these accounts are owned by the minor, even if they don’t have access until a certain age and may count against their college financial aid.
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Rodney A. Brooks writes about retirement and personal finance issues. His column currently runs in U.S. News & World Report. He has written columns on retirement for The Washington Post and USA TODAY. He has also written for National Geographic, Next Avenue and Black Enterprise magazine. He retired as Deputy Managing Editor/Personal Finance and retirement columnist for USA TODAY in 2015.
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