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3 Strategies for Financial Gift Giving

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3 Strategies for Financial Gift Giving

Some people can come up with incredible gift ideas effortlessly, while others rack their brains trying to come up with the perfect gift for loved ones. If you’re ever strapped for a meaningful gift idea, consider stocks or another investment.

Giving someone shares of a company can have a positive impact on their financial life. It’s a gift that offers an opportunity for growth that simple cash or gift certificates cannot. So, in the spirit of giving something that’ll hopefully last through the years, here are several ways to start investing as a gift for someone else.

Start a Child in Investing

Starting a portfolio for a child allows their assets to start growing earlier in their lives, which can provide more gains than if they opened an account as an adult. Opening a Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) custodial account allows an adult (custodian) to gift cash and certain assets to a minor (beneficiary) with no contribution limits and no minimum required to open the account.

These accounts were designed to make it simple to transfer property to minors without having to create a formal trust. Any adult can be the custodian, even if they’re not the minor’s parent or guardian.

UGMA/UTMA accounts are widely used to save for education expenses, but they do offer a little more flexibility around withdrawals than other education savings accounts (ESAs). The withdrawals need to be for the use and benefit of the minor. There are some rules, so be mindful when making withdrawals. When in doubt, double-check with a qualified professional such as a financial advisor.

To make sure this type of account can accomplish what you want, here are some additional things to consider:

  • These accounts are not tax deferred and taxation of dividends, interest, and capital gains will depend on the minor’s age and tax rate. If the account earnings are above certain thresholds and the child is still under 18, they could be subject to the parent’s tax rate.
  • All assets transfer to the minor at the age of termination (18 to 25, depending on the state). At that time, the minor can use the funds however they desire.
  • Because the assets in the account belong to the minor, the account can have a greater impact on financial aid for college compared to parents’ assets and savings in education-specific savings accounts such as Coverdells and 529s.

Interested? Open a UGMA/UTMA account.

Saving for Education

Naturally, helping build education savings is high on the list for many people when it comes to financial gifts. For the 2017–2018 school year, the average cost of tuition and fees was $9,970 for state residents at a public college, according to the College Board. That average jumps to $25,620 for out-of-state residents at a public university and $34,740 at a private college. Even if you start small and save just a little on a regular basis, it all adds up to help the child go to college.

Two common ways to save for education are through a 529 college savings plan, commonly referred to as a 529 plan, and a Coverdell ESA.

529 plans can be used for college education to pay as much as $10,000 per student per year. 529 plans were previously only eligible for college expenses, but some (not all) states now allow 529 plans to be used for primary and secondary education expenses as well. Coverdell ESAs, on the other hand, can be used for primary and secondary education as well as college.

The table below provides a side-by-side comparison of the main features of a 529 plan and a Coverdell ESA.

529 Plans

Coverdell ESAs

Is there a contribution limit? Yes (varies by state) Yes ($2,000 per year)
What’s included in “qualified expenses”? Tuition, fees, books, school equipment, school supplies, and room and board for college; some states allow up to $10,000 per year per student for primary and secondary education* Tuition, fees, books, school equipment, school supplies, and room and board for all levels of education
Are qualified expenses taxed? No (federal tax free; state taxes may apply) No (federal tax free; state taxes may apply)
Can you change the beneficiary? Yes Yes
Are there any income limit restrictions? No Yes (ineligible if your adjusted gross income is $95,000 to $110,000 for single filers; $190,000 to $220,000 for joint filers)
How is the account treated for estate tax purposes? The value of the account is removed from the account owner’s taxable estate Contributions are treated as completed gifts from the contributor to the beneficiary

*Recent changes to federal laws allow 529 plans to be used for primary and secondary education expenses. However, not all states have passed similar legislation.

Learn more about the different accounts that can help you start investing for college for a loved one. 

Jump-Start Their Retirement

It’s never too early to get a jump-start on saving for your child or grandchild’s retirement if they are earning money, such as through a part-time job after school. The more time their investments have to grow, the more they can potentially benefit from compounding.

Work toward a degree—and some potential tax savings.

To do that for a child with income, a minor Individual Retirement Account (IRA) or minor Roth IRA can be set up in the minor’s and custodian’s name. With the long investing time frames kids have before retirement, minor Roth IRAs are often favored for their prospect of long-term growth combined with tax-free withdrawals.

To be eligible to contribute, the minor needs to have earned income in the tax year, which cannot include gifts or inheritances. Parents and grandparents can contribute as well as the minor. However, contribution limits are capped at the minor’s earned income or the IRA contribution limit for that year, whichever is less.

Outside of those differences, minor IRA accounts carry the same rules as traditional IRAs and Roth IRAs.

Don’t Set It and Forget It

Once you’ve set up an account, plan to maintain it going forward by adjusting your investments according to market conditions, your goals, and your risk tolerance. The plan should reflect the reasons you opened the account and the age of the person for whom you’re saving and investing.

For example, you might buy a small amount of individual stocks and ETFs on your loved one’s birthday and other major holidays throughout the year. As they get older, you can teach them about investing using examples from their portfolio.

No matter what your particular goal for the money you invest on another’s behalf, aim to ensure the gift provides them with a better future by keeping an eye on the investment’s performance.


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