Invest instead of Cash Gifts for Christmas
With the holiday season fast approaching, many parents and grandparents may wonder how best to invest in a child’s future, rather than simply to hand over a sum of cash. When I was younger, my father would deposit any cash I received over the holidays into a custodial investment account in my name which I was unable to withdraw until I reached 18 years of age. He did allow me to pick my favorite companies, in which he showed me how to invest the money into shares of their stock. At a young age, I learned the magic of investing and receiving compounding returns.
So, what’s the best way for Grandma to give Junior a $500 check this year? Here is a short breakdown of good ways to invest in Junior’s future:
- 1. Custodial Account (UTMA/UGMA) – This type of account, used in my example above, is in the child’s name, but is managed by a custodian (usually the parent) until the child reaches the age of majority (18 in California, however, there are other details to this which won’t be discussed here for brevity). There are no limits to the amount gifted to the child (however, any amount gifted to a child above $14,000 from any one person may incur a gift tax). Keep in mind that any gains in the minor’s account are taxable.
- 2. Roth IRA – If the child has earned income this year, a Roth IRA may be a great choice. This type of account grows tax-free, and all qualified distributions are tax-free. Let’s say Junior worked at a pizza store over summer break – you may contribute up to the amount earned into his Roth IRA (up to a maximum of $5,500).
- 3. Educational Savings Plan (529 plan) – This is a tax-advantaged plan that can be used to pay for education-related expenses at most two- and four-year accredited colleges and universities. Any earnings from the 529 plan are tax-free when used for education-related expenses. While some states allow for income tax deductions of 529 contributions, unfortunately, California does not allow this. The good news is that anyone can contribute to Junior’s 529 plan, and anything up to $14,000 from a single person per year will not incur any gift taxes.
Depending on the circumstances, these accounts may or may not apply to your individual case. However, if you can contribute to any of these accounts then I highly encourage to start as early as possible. Even a small contribution each year can add up to huge sum after compounding growth. Furthermore, these plans are not exclusive – participating in one plan does not preclude participation in the others. Please keep in mind that there are many more intricate details and rules than discussed, so please consult a financial advisor or tax professional for more details. SlavisCapital.com 949.431.2000 x 100
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