There is such a thing as a gift that keeps on giving.
While unwrapping a monetary present may not be as thrilling as getting this year’s hottest toy, it is not as unexciting as it sounds, according to Jill Fopiano, the CEO of O’Brien Wealth Partners in Boston.
In fact, it’s what Americans hope to receive most.
Start a savings account
For starters, recipients can stash that cash in a savings account and watch it grow, thanks to the magic of compound interest.
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Savings rates — the annual percentage yield banks pay consumers on their money — are now as high as 2% at online banks. Or, you can snag a slightly higher rate with a one-, three- or five-year certificate of deposit.
“Giving the gift of CD or savings account via a custodial bank account is a way to teach younger kids and teens about money responsibility and time value of savings,” Fopiano said.
“You’re teaching them a lesson that’s valuable for them for the rest of their lives,” she added.
When serious money is involved, the giver should make sure the gift won’t trigger a tax bill. For 2019, cash given as a gift is not considered taxable up to the annual exclusion, which is $15,000. As long as your gift is under this amount, your recipient won’t be responsible for paying taxes on it.
College savings plan contributions
You can also put money toward education or other expenses, setting your loved one up for future success.
In lieu of writing a check, grandparents can make a gift directly into a 529 college savings plan with your grandchild as the beneficiary.
For families, there is an added benefit, Fopiano said. “Money can be very emotional in nature, so any gift of money can usually be used to facilitate conversations around money and its meaning,” she said. “That can be a healthy thing in the world where money is often a taboo topic.”
Grandparents with their grandchildren.
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Further, even small college contributions can add up over time, especially in a 529 plan where the invested funds can grow tax-free and be withdrawn tax-free for qualified education expenses.
Depending on where you live, you may even get a tax benefit for gifts made to your grandchild’s 529 plan. More than half of states offer such a break, but most restrict it to residents who are contributing to an in-state plan.
If the college years have started, or are about to, you can make payments directly to a school free of gift tax.
(The same rule applies to medical expenses paid directly to the provider if you have someone in your life struggling with large medical bills rather than college costs. However, you may want to work with an accountant or financial advisor to ensure your generosity is considered an excluded gift.)
Investing in the market
Rather than financing near-term expenses, giving the gift of an investment has the potential to reap the greatest returns in the long run.
For example, a 10-year old who stashed $1,000 in a high-yield savings account earning 2% and made no more deposits would have close to $3,000 by retirement age thanks to interest paid alone. Alternatively, if they earned 7% a year by investing that money over the same time period, that deposit would grow to more than $41,000 by age 65.
If you own stock, you can transfer your own shares or a mutual fund to a loved one through your broker by submitting a transfer form.
If you have something specific in mind, you can also purchase individual shares with popular companies through sites like GiveAShare or Stockpile.
Parents can snag their child’s attention with examples they may particularly care about, such as Apple, Amazon, Netflix or Nike.
However, if you want to give stock to a minor, you’ll need to create an account under the Uniform Transfers to Minor Act, which is a custodial account managed by an adult until the child turns 18 years old.
The UGMA variety allows for bank deposits, stocks, bonds, mutual funds and insurance policies. The UTMA allows for all of that plus real estate. As with other types of monetary gifts, individuals can deposit up to $15,000 and couples up to $30,000 without incurring federal gift tax.
In these cases, the assets belong to the child upon reaching the age of maturity (typically 18 or 21 depending on the state you live in) and your child will be able to use the funds as cash.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
