If you’re looking to round out your child’s holiday gift list, you might not love the idea of buying them more stuff. According to a recent survey, about 60 percent of parents in the U.S. feel their kids have too many toys as it is. For many families, toy clutter only got worse during the pandemic. Giving experiential holiday gifts may be a step in the right direction. That could include everything from a zoo membership to a charitable donation made in a child’s name.
But financial gifts for kids can also give back in a big way — and set future generations up for financial security. You don’t have to ignore your kiddos’ wish lists. But you can encourage grandparents, family and friends to give financial gifts that could benefit your child for years to come. Here are five ideas to help get you started.
5 Ways to Give Financial Gifts to Kids
1. Contribute to their education
You don’t need us to tell you that college is expensive. A moderate budget for an in-state student at a four-year public college for the 2022-23 academic year is about $27,940, according to the College Board. Loved ones can help lessen the load by contributing to the following types of accounts this holiday season:
- 529 plan: This is a tax-advantaged savings plan that’s designed to make saving for college a little easier. Earnings grow on a tax-deferred basis — and withdrawals that are used for qualified education expenses are tax-free. That includes tuition, fees, books and room and board.
- Coverdell education savings account (ESA): It works like a 529 but tends to offer a wider range of investment choices. One downside is that annual contributions are limited to $2,000 per beneficiary. To contribute the full amount, your income must be below $95,000 for single filers ($190,000 for married couples filing jointly). One other thing: The beneficiary must use their funds by age 30 to avoid tax consequences.
- Uniform Gift to Minors Act (UTMA) or Uniform Transfers to Minors Act UGMA account: These custodial accounts can be used for college expenses. They function in a similar way, but UTMA accounts provide more flexibility in terms of investments. Unlike an UGMA account, UTMAs can hold physical assets like cars, fine art, real estate and jewelry. Life insurance, intellectual property and annuities might also be included. This allows friends and family members to make cash contributions or give physical assets.
2. Shore up their life insurance
Getting life insurance for your kids or grandchildren is a great way to protect their financial future. Most kids’ policies provide whole life insurance. As long as the premiums are paid, the policy never expires. Getting life insurance while young and healthy helps protect insurability. If children develop health issues as they age, they may have trouble getting insurance. But a policy that already exists will continue to cover them — and if their policy has an additional purchase benefit, they will be able to buy more insurance at set times in the future (even if they develop a health issue later in life).
What’s more, whole life insurance accumulates a cash value over time. When your child is grown, they could tap those funds for any reason.1
3. Pad their savings accounts
Everyone likes cash. But putting any funds received into a savings account can help supercharge a gift. If your child doesn’t have a savings account, you can use the gift to establish one. Or you could open a custodial account: The child will technically own the assets, with an adult managing it on their behalf. They’ll have full access to the account once they reach their state’s age of majority.
Both UGMA and UTMA accounts can also hold cash. Anyone who contributes to an UGMA or UTMA account can kick in up to $17,000 in 2023 without tax consequences. Anything beyond that will count toward your lifetime gift-tax exclusion, which is $12.92 million in 2023.
To put a fun spin on it, you could earmark the account for a specific purpose — such as a down payment on a car or a college semester abroad. Another idea is to invite the child to participate in saving. For example, a grandparent might agree to match every dollar the child contributes. You can also use an app (there are several on the market) to gamify the experience and incentivize your child to work toward a meaningful financial goal. Friends and family members can also participate by gifting goal cards instead of cash or gift cards.
4. Invest in stocks on their behalf
Stock investing is usually a key part of building long-term wealth. The earlier you begin, the more time you have to potentially benefit from compound interest or compound growth. This puts kids at a big advantage because time is on their side. If you’ve got a child who’s curious about the stock market, use it as an opportunity to teach them what it’s all about. Inviting them into the process can instill a lifelong interest in investing.
UGMA and UTMA accounts can serve as custodial investment accounts. You manage contributions and make investment choices on behalf of the child, and they’ll gain full access when they come of age. These accounts can hold all types of assets, including stocks, mutual funds and exchange-traded funds (ETFs).
5. Buy savings bonds
Issued through the U.S. Treasury (TreasuryDirect.gov), savings bonds have long been a go-to financial gift for kids. They’re insured by the federal government and can accumulate interest for decades. If you go this route, you may want to encourage the recipient to wait until their bonds have fully matured before redeeming them. Savings bonds are available as:
- Series EE bonds: The value of a series EE bond is guaranteed to at least double after 20 years.
- Series I bonds: While series EE bonds have fixed interest rates, series I bonds use a mix of two different rates — one that’s fixed and one that’s indexed to inflation. The inflation rate resets every six months.Financial products like these and the tax laws surrounding them can be complicated. It’s a good idea to work with your financial advisor and a qualified tax professional who can help you give strategically. You might even want to invite older children to tag along for the conversation as they might benefit from meeting with your financial advisor, too.
This article is for informational and educational purposes only and should not be interpreted as financial or investment advice. Northwestern Mutual Financial Representatives cannot sell or recommend the purchase of I bonds.
All investments carry some level of risk including the potential loss of all money invested. You should carefully consider risks with fixed income securities such as bonds, these include: Interest rate, Duration, Credit, Default, Liquidity and Inflation.