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3 Financial Gifts to Give Your Kids This Holiday Season

By Maurie Backman - Dec 25, 2020 at 8:02AM

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Forget game consoles and gadgets -- these gifts will go a lot further.

Many children are busy unwrapping gifts and reveling in their new toys and games. While your kids may be enjoying their action figures or new electronics, those aren't the only gifts to consider dishing out this year. Here are a few important gifts you can give that could set your children up for a solid future.

1. Open a 529 plan

College isn't getting any cheaper. A good way to pay for it is to sock money away in a 529 plan. Though 529 plan contributions aren't tax-free, once funded, those accounts get to grow tax-free. Withdrawals are also tax-free provided they're used for qualified education expenses (which aren't limited to college; you can remove funds from a 529 to pay for private school as well). Furthermore, some states offer their own financial incentives to open a 529. See what perks are available where you live.

A family wearing Santa hats sitting in front of a Christmas tree holding gifts.

Image source: Getty Images.

2. Open a custodial brokerage account

Teaching your kids how to invest early on is one of the greatest gifts you can give them. If you open a custodial account in their names (as opposed to buying stocks for them in your own account), they're apt to be even more excited. Once you have an account in place, explain to your children how the stock market works and help them identify companies that are a good fit for their individual portfolios. Your kids will likely favor brands they know and love, like Disney ( DIS -0.12% ), and there's nothing wrong with that.

3. Open a Roth IRA

Most of us recognize a Roth IRA as a retirement savings vehicle -- not exactly the sort of thing a teenager is apt to appreciate. But there are plenty of good reasons to open a Roth IRA for your children this year.

The benefit of saving in one of these accounts is that you can technically withdraw your principal contributions at any time without penalty, so your children can use their accounts as a backup income source as needed. Roth IRAs can also double as a college savings tool. If your children have expensive hopes for higher education, it pays to consider one. There are no age-related restrictions for contributing to a Roth IRA, but your children must have earned income to fund one. That income can come from a part-time job or even gig work that's reported as taxable earnings.

Let's be real: Your children may be far more excited to unwrap a video game or a new cellphone than to glance at a pile of paperwork showing their names on one of these accounts. But opening a 529, brokerage account, or Roth IRA on their behalf ultimately gives them even greater gifts: future financial security and the option to meet the various goals they set for themselves over time. They may not recognize the importance of that gift right away, especially if they're on the younger side, but in time, they're apt to appreciate it immensely.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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