It's that time of year: time to dust off the Christmas tree, light the menorah, or put the Elf on the Shelf. Ready or not, the holidays are upon us.
If you have kids, you're well aware of this fact, given that they probably have dozens of gift ideas by now, from Nerf guns to Barbie dolls to Xboxes. Does Santa have a finite budget? Not in a kid's mind.
Well, this year I say forget those toys that end up on the floor everywhere (OK, maybe not entirely, but hear me out). Give those kids something with more meaning, something that can really help them, something they deserve, and something you crave. Give them financial independence!
True, it may not have the same sizzle as more tangible stocking stuffers, but with a little explaining and a little showmanship, you can help your children (or nieces and nephews) develop money habits that will serve them well for the rest of their lives. Now that's a gift that can keep on giving.
So, without further ado, here are my top three financial-planning gift ideas.
1. Fund a 529 college savings plan
A college savings plan is a no-brainer, because it can help the child and help you. The earlier the better when it comes to saving for college, as investments need time to grow and accumulate.
A 529 college savings plan -- so named for a section in the IRS code -- is a way to save for college in a tax-advantaged way. Most plans are administered by states. Some states' 529 plans offer in-state residents a break on their state income tax. For example Connecticut residents who use their state plan can deduct up to $5,000 in contributions per beneficiary or per child (or up to $10,000 if married filing jointly) per year from their taxable income, helping to lower their state income tax.
You are not required to use your state's plan, however. In fact, you can use any state's plan, just as your child can to go any college in the US. Parents who contribute to a 529 plan can usually choose from a suite of mutual funds, as they would in a 401(k). Earnings on investments within the account are tax-free, allowing for greater wealth accumulation. Finally, qualified withdraws for college tuition, books, and even room and board up to a certain amount are tax-free as well.
Further sweetening the deal, recent legislation now allows for tax-free withdraws for private elementary and high schools. Talk about a win-win gift idea.
There are several limitations of 529 plans -- after all, there's no such thing as a free lunch, right? Fees are high in some plans, so it's best to shop around ('tis the season!). Also, mutual fund selection is limited, and though most plans give you plenty of funds to pick from, you generally can't buy individual stocks. Some plans offer exchange-traded funds, which is a nice feature. Also, 529 plans are not for day trading, and Congress made sure of this: 529s only allow for two allocation or investment changes per year.
Given how expensive college is now, it may even make sense to encourage your friends and family to contribute to your child's 529. (Future college costs may be so high that we all have to crowd-fund tuition payments.) All in all, using some of that holiday money to fund your child's 529 is a gift you both will come to appreciate.
2. Give stock in a company they know
I remember when my uncle gave me a share of Disney stock. We used to look up the ticker in the newspaper and get excited when the share price went higher. That's the purpose of this gift idea: to get a child interested in money and investing, something you can participate in together. Some direct investment sites like GiveAshare.com provide a framed stock certificate, which is fun for kids to hang on their wall.
Of course, single-stock investment involves risk, but that's another life lesson (gee, Dad, thanks for the Enron stock!).
3. Give cash -- with a caveat
If children have earnings from part-time work, they can fund a Roth IRA with the lesser of $5,500 or the amount of their earned income each year. Roth IRA contributions are made after tax -- meaning there's no tax deduction on the way in -- but investments grow tax-free and are withdrawn tax-free in retirement. This is huge for young savers. Imagine years of tax-free growth and tax-free withdrawals in retirement.
Further, there are no required minimum distributions with a Roth IRA, unlike a traditional IRA. This means your child isn't forced to take money out of their IRA at age 70 1/2. A Roth IRA also has more flexibility if your child needs the money early on, before the minimum age of 59 1/2. One can always access their Roth contributions -- not the earnings, which are still penalized if taken early -- at any time. Ordinarily you wouldn't want to do that, but if an emergency pops up, or your child needs to access the money for something else, that tax-free access to funds could come in handy.
You can't contribute directly to your child's Roth IRA, but you could give them cash on the condition that it goes straight into the account. Once the account is open, they can start contributing to it from their part-time earnings. You could even match their contributions to encourage them to save.
As you see, when it comes to holiday gift ideas, it can literally pay to think outside the box. True, financial gifts may get overlooked in the excitement of unwrapping presents, but over time -- when toys get lost, broken or neglected -- a little seed planted in your child's mind (and investing account) today may grow into something special that benefits your child for years to come. Happy holidays.