October 15, 2019
These methods will let you help pay for their college and retirement
Dec. 14, 2016—My husband and I don’t have kids or grandkids, but we do have five nieces and seven nephews. Over the years, we’ve given them books, music, jewelry and gift certificates. But the gift that has always brought them a smile? Money!
Even when they were little they seemed to get it, especially, my nephew, Michael, the first to turn us on to this holiday gift tip.
Michael couldn’t have been more than six when he persuaded me that money was the perfect gift. “Spending money on something I don’t want, or need, is stupid,” he said when hearing me ask his mom what to get him for Xmas.
My husband and I generally give the kids a check or cold cash in a special envelope (Michael, now 24, will use our gift to help set up his new apartment in New York City). But I’d like to suggest three other ways to make a munificent money gesture this holiday season: buying U.S. savings bonds, funding a 529 college plan account and putting money into a child’s Roth IRA.
U.S. Savings Bonds
Yes, savings bonds may sound fuddy-duddy and have an old-timey feel. As MarketWatch columnist Henry Hebeler recently wrote: “Savings bonds supported the costs of World War II. Buying these bonds was considered patriotic back then.”
And it’s harder to give them than in the past, since as of Jan. 1, 2012, you can no longer just stop by a bank and buy savings bonds. These days, you need to go to the TreasuryDirect site and then print out a customizable gift certificate. Plus, you need to wait five days for the funds to clear from your bank account.
All that said, I still like giving kids U.S. savings bonds (sold in amounts from $25 to $10,000) and so do some financial advisers.
“Savings bonds are generally given with the idea they will help come college time,” Kimberly Foss, founder and president of Empyrion Wealth Management in Roseville, Calif. told me.
Three benefits of this gift:
- Interest is free of state and local income taxes and the child can defer paying federal income taxes on it until he or she redeems the bonds. Interest is earned for as long as the bond matures, which is up to 30 years.
- I bonds, more popular as gifts than EE bonds, are guaranteed to keep up with inflation. Their interest is a combination of a fixed rate of return and a semiannual inflation rate adjustment. The current I bonds rate: 2.76 percent; EE bonds now pay just 0.10 percent.
- By giving young kids savings bonds, you can teach them money lessons. They’ll learn about the basics of saving and the importance of the self-discipline that comes from the delayed gratification of waiting for the bonds to mature. Make sure they know the importance of holding onto the bonds; if EE or I bonds are redeemed within the first five years, the owner loses the last three months of interest.
To purchase savings bonds as a gift, you’ll need to set up a TreasuryDirect account and know the child’s Social Security number. The child will need a TreasuryDirect account, too; the parents can open a minor-linked one if he or she is under 18. Put the child’s Treasury Direct account number on the Delivery Request page and the bonds will be transferred to his or her account.
Register the bonds in the child’s name, so when they’re redeemed, they’ll be taxed at his or her tax rate — which will probably be lower than yours.
If you want to do this as a Christmas gift and complete the transfer before then, you need to do it pronto. Need more time? Then just print out the certificate and give it to the child who’ll get the official transfer email from TreasuryDirect once your funds clear.
Open a 529 College Savings Account
You can open a tax-sheltered 529 account with a child as beneficiary for as little as $25 in many states. As with savings bonds, you will need his or her Social Security number.
The 529 cash can be used tax-free for college costs and you may be able to get a state tax deduction for putting money in the account, depending on where you live. The state-sponsored accounts let you invest in stocks, bonds or money-market securities, offering the potential for sizable appreciation over the years. In fact, you just might want to get into a habit of making a 529 gift every year until the child finishes college.
“I tend to encourage family members to start or add to a 529 plan. Focus on something that can really grow,” says Lisa A.K. Kirchenbauer, a certified financial planner and president of Omega Wealth Management in Arlington, Virginia.
Incidentally, if you’ll be making the gift to your grandchild, the 529 money won’t affect the amount of financial aid that he or she will qualify for. A 529 held by a grandparent isn’t included as a student’s asset in the federal government’s Expected Family Contribution calculation.
Put Money Into a Roth IRA for a Child
Want to help a child avoid having a retirement crisis one day or cut the cost of future college bills or a home purchase? Put some money into a Roth Individual Retirement Account (IRA) for him or her.
Withdrawals from a Roth IRA are tax-free and penalty-free after age 59 ½ as long as the person has had the account for at least five years (which’ll clearly be the case for this gift). But the child can also tap the Roth in the future to pay for college tuition and related expenses without owing the 10 percent early withdrawal penalty on any earnings taken out. Also, first-time home buyers who’ve owned a Roth IRA for up to five years can withdraw up to $10,000 in earnings for the purchase of the home without owing taxes or a penalty on the money.
By law, you’re allowed to invest up to $5,500 a year in a Roth IRA (most banks, brokerages and mutual funds will help you set up a custodial or guardian Roth IRA for a minor). As the custodian, you control the assets in the account until the child reaches the age of majority in his or her state; then the assets are turned over to him or her.
One huge caveat: The child must have earned income at least equal to the total amount you’ll put into the account. So this type of gift is often most suitable for older children who’ve raked in cash from summer or part-time jobs.
The Roth IRA is opened in the child’s name and you’ll need to supply the youngster’s Social Security number when you open the account.