Tis the season for gift-giving, and procrastinators know it's nearly impossible to get your hands on a Play Station 5 for the young people on your list. So we offer another idea, one they'll appreciate for decades to come: financial gifts that will keep growing.
It might seem like a long shot to get your teenager thinking about retirement, or how to buy a first home, but giving the means to financially prepare for the future — and taking the time to explain why it’s important — could go a long way.
Here are five financial gift ideas for those who want to go beyond the usual gift cards and cash:
Gift a stock
Giving a young person a stock is really two gifts in one: 1) money that will potentially grow and that can be used for college, to buy a car or a first home in the future, and 2) the opportunity to learn about investing and compound interest.
That’s according to Mitchell Kraus, a financial planner at Capital Intelligence Associates in Santa Monica, Calif. — and he knows this first hand. Kraus’ father gives all his grandchildren stocks as gifts (out of love, which is why he usually goes with the ticker symbol LUV, Southwest Airlines). Their parents, including Kraus, are custodians of the brokerage accounts until the grandchildren are old enough to do it themselves. It’s a long-standing tradition, and one of Kraus’ cousins, now age 40, just bought a house in part from selling stock he was gifted as a kid.
Kraus recommends giving children a stock of a company they care about, as they'll be more invested in its performance. It’s also easier to show them how a stock price relates to the company. For example, maybe a child has a toy she hasn't played with in a while, the company hasn’t come out with any new products and the lack of popular new toys is reflected in a lower stock price.
You can gift a stock by transferring it to someone’s brokerage account (part of the gift may be helping set up this account) or as a stock certificate via a site like GiveAShare.com.
“It’s a gift that generally young children do not understand but given time — and some focus on the parents’ part, can be much more meaningful than a toy that is played with for a few weeks then is tossed aside,” Kraus says.
Contribute to a Roth IRA
Another gift option is a Roth IRA. With this type of individual retirement account (IRA), you pay taxes on the money you put into the account, but withdrawals are tax-free — it’s the opposite tax treatment of a traditional IRA or 401(k). Opening a Roth IRA may be a good idea for the people in your life who are earlier in their careers, as they are likely in a lower tax bracket now than they will be when it's time to withdraw the money.
“It’s a great conversation opener, because kids usually have no idea what you’re talking about when you talk about retirement planning,” says Catherine Valega, a financial advisor at Green Bee Advisory in Waltham, Mass. Especially for those who will eventually be offered a 401(k) or similar retirement plan by their employer, this gives them a basis of financial knowledge, she adds.
To open a Roth IRA, you need to have earned income, meaning a job that comes with a W-2 or 1099. Minors will need to have a custodial Roth IRA in which an adult controls the account until they turn 18 or 21, depending on the state. And while some financial institutions will let you write a check directly to someone else’s Roth IRA, Valega says that it might be easier come tax season to give giftees the money and have them deposit the money themselves while keeping record of the check or transfer. Remember that you can only contribute to a Roth IRA as much as the owner of the account earns, and although you can give up to $15,000 in 2020 without paying a gift tax, the contribution limit of a Roth IRA for this year is $6,000 if you’re under age 50.
If you’re gifting to someone who has many years before retirement, Valega recommends investing in a broad stock market index like the S&P 500. That way the recipient will recognize a lot of the companies in the index (think Google and Apple), which makes explaining how investing works a bit easier.
Contribute to a 529 college savings account
For those saving for education costs, consider gifting a contribution to a 529 college savings plan. These tax-advantaged accounts allow the owners to save for costs like college tuition without paying federal income tax, and many times state income tax, when they withdraw the money (as long as the money is used for qualified education costs).
Parents, grandparents or whoever is doing the gifting can either open a 529 savings account — which gives them control over the money and how it is invested — or give to an existing account. Fidelity, for example, has a college gifting program that allows people to give a 529 online. Keep in mind that qualified education distributions from a 529 plan owned by a grandparent are treated as untaxed income to the student on the subsequent year's Free Application for Federal Student Aid (FAFSA), which could potentially have a big impact on eligibility for need-based financial aid. To avoid this, other family members can make gifts to the parent-owned 529 account, Laino says.
Contributing to someone’s 529 as a gift can lead to conversations about how much school costs, how to support yourself while in school and managing debt, says Andrew Laino, a financial planner at Prudential Financial based in Jacksonville, Fla. And it helps the recipient think about the ultimate goal: getting through education with minimum debt.
“It offers a lot of opportunities for financial literacy, as well as teaching them math skills, basic financial skills and critical thinking skills,” Laino says.
Open a donor-advised fund
Contributing to a donor-advised fund for a cause your recipient chooses is a particularly good idea in 2020, when many have suffered, and your recipients may have causes or charities that are especially meaningful to them, says Michael Metzger, a financial advisor at Lifepoint Financial Design in San Luis Obispo, Calif. You can contribute money in various forms, like cash or stocks, and the money grows over time until you choose when the money should be distributed out to the charitable organizations.
By opening a donor-advised fund (which you can do via most investment companies like Fidelity and Vanguard), you can make a contribution to the account and choose a charity of the giftees' choice. Then, add them as an account holder or make a donation to that charity with an acknowledgement to them. You can add multiple names to the fund, so it could become a family legacy in support of a particular cause, Metzger says.
“It’s a great way to get involved and be able to help in a time of need,” he adds. And for kids particularly, it can be a good way to start them thinking philanthropically and consider which causes are most important to them.
(It can also help you out as the giver, as you can receive an immediate deduction to help lower your taxes if you itemize. Or, if you’re taking the standard deduction and not itemizing deductions, the CARES Act allows a $300 charitable deduction that wasn’t previously allowed.)
Make an appointment with a financial advisor
Many experiential gifts, like concerts and vacations, might be not be possible this year — but you can still give the gift of a meeting with a financial advisor. Financial professionals can go over basic money tips young people should think about as they get started, but they can also get into the weeds for those who are interested in learning more, says Ian Persaud, a financial advisor with Equitable Advisors in Baltimore, Md.
Whether your giftee is managing student debt, saving for retirement or planning to buy a home for the first time, giving this appointment could alleviate some of the stress. There are also a lot of choices when it comes to what type of financial advisor is best for someone’s specific situation, from an investment advisor to help choose securities to certified financial advisors who can recommend tax strategies. Finding out what they need and doing the bulk of the research for them may be a gift in itself.
If you have your own financial advisor you like working with, it might be best to set up an appointment for your giftees with your advisor. That way they will be familiar with the advisor both as a professional and, more importantly, as a person, Persaud says.