With holiday time fast approaching, you may be trying to decide what you should get some of your favorite children in your life. This year, in addition to the typical gifts for kids, why not consider gifting them something that will grow with them and will ultimately benefit them financially in the future. This month’s newsletter will discuss some of these alternative holiday gift ideas.
A popular financial gift idea for young kids, is to gift them stock at an early age. Depending upon your state, the most efficient way to gift them stock or other tradeable securities is through either a UGMA account or its more developed successor, UTMA. Uniformed Gifts to Minors Act or UGMA is the predecessor to the Uniformed Transfer to Minors Act accounts, known as UTMA for short. Both are essentially the same, but some states have not adapted the newer UTMA format. The main difference between the two is that UGMA limits what assets can be held within the account and considers the age of majority, the age at which the owner (child) can control the account, to be 18. UTMA accounts have the ability to hold more assets, like real estate, and consider the age of majority to be 21 with the possibility of extending that four years to 25. Both are investment accounts that list the child as the owner, but give the creator of the account full control until the child turns the age of majority. The age of majority varies from state-to-state (See your state’s age here). These accounts function like a typical brokerage account, in that you can invest in any tradeable stock, bond, mutual fund, ETF, etc. The benefit is that you can invest in any of these different assets in the same account. The negative to these accounts is that once the owner transfers money or securities to the child’s account, they are considered property of the child and cannot be transferred back. Therefore, once the child reaches the age of majority, 18 or 21 years old, they have full control over their accounts and the funds within them.
If you are interested in an investment account focused on education that gives the owner (You) more control, then you should consider opening a 529 account. As we have previously discussed on our site, here, 529 plans allow people to fund future educational expenses on a potentially tax-free basis. Once the account is created, funds are contributed to the 529 plan, they then grow tax- free and when the funds are withdrawn for qualified educational expenses, the gains and income earned are not taxed. In addition, the owner of the account, has full control of the account as long as the account is open and funded. The owner also has the power to change the beneficiary of a 529 plan in case the funds were not used for the original beneficiary. Meaning, the owner has the ability to change the child who benefits from the account. For example, if you opened a 529 plan for one child, only to realize one day they do not need funds for educational needs, you can transfer their 529 plan funds to a different child’s 529 plan. Louisiana offers a great 529 plan to the state’s residents, however not every state offers a great 529 plan as Louisiana. One negative with 529 plans, is that you may be limited to the investment choices depending on the 529 plan you have chosen. Each plan has their own respective investment options. If you would like to learn more about 529 plans, I recommend reading our article to understand the power of these accounts, here.
Another popular investment style gift to offer children is the timeless investment of savings bonds. A savings bond is essentially a loan to the United States Government. In order to give a child a savings bond, you would buy them a bond directly from the Treasury’s website, www.treasurydirect.gov , then simply register the bond in the child’s name. These bonds are not tradeable on the secondary market. Meaning, they can only be redeemed by the US Treasury themselves, and cannot be bought and sold to other entities. There are two types of savings bonds, series EE and series I. The main difference is that series EE bonds pay a fixed rate of interest, where series I bonds pay a fluctuating rate based on inflation. The bonds can be cashed in anytime after 12 months of issuance, at which point the beneficiary will be paid the principal plus any interest earned. There are some potential repercussions if the bonds are cashed in before the 5-year mark. The main repercussion from cashing the bond in early is that the owner forfeits the interest they’ve earned during the final 3 months before cashing in the bond. While there is little flexibility with these accounts, they are still very popular because of their safety and simplicity.
Finally, an easy and captivating investment to gift children would be to simply buy them a gold or silver coin. Minted by the U.S. Government, American Eagle is a popular coin to purchase, silver $1 coins currently go for $15-$20 while gold $10 coins go for around $130-$140. This can be done by buying them through a coin dealer either online or in person at a coin shop. There are reputable coin shops to consider in the Greater New Orleans area such as: Blanchard and Co. Gold or Southern Coins & Precious Metals, to name a few.
Each of the investments mentioned above would be great gifts for a child in your life. It all depends on what type of gift you are looking for and what you would ultimately like to provide them. If you have any questions about our alternative holiday gift list, please contact us as we would be more than happy to discuss your options with you.
Schwab UTMA Accounts
CSL's Article on 529 Plans
US Mint Website