Looking to give a holiday gift that will help set a young one on the right financial path? A savings bond or 529 account contribution probably won’t be the gift that gets the most attention on Christmas morning, but it just might end up being the most appreciated. Parents, grandparents, and other interested adults can give financial gifts to children that can help secure their futures, whether it’s saving for a first car, college, or a down payment on a house.
- If you're looking to change it up this holiday season you may want to consider a financial gift instead of the usual stocking stuffers.
- Financial gifts can help young people understand investments and appreciate savings with first-hand experience holding stocks or bonds.
- Savings bonds, 529 account contributions, gifting shares of stock and, of course, an envelope full of cash are all ideas for financial gifts.
Sam Davis, partner/financial advisor with TBH Global Asset Management, notes that financial gifts have merit beyond the obvious monetary rewards. “Parents and grandparents should consider making financial gifts because they can help children achieve something that would otherwise not be possible,” explains Davis. “This can include things like medical school, which has now become unaffordable for many, or helping a child get through a short-term, hard financial situation. It can also include, however, things like trips around the world, which can help better a child's understanding of global dynamics.”
Whether your financial gift helps a child pay for college, travel across Europe for the summer, or sparks an interest in saving and investing, your child or grandchild will thank you because, as Davis notes, “You are personally invested, physically and financially, in the things that are important to them.”
Remember, though, any gift over $15,000 per year per individual may be subject to a federal gift tax.
Savings bonds make excellent financial gifts because they can grow steadily by earning interest. Treasury securities are types of debt instruments that include Treasury bills, notes, bonds, Treasury inflation-protected securities (TIPS), and savings bonds. Most Treasury securities are called “marketable” securities because they can be bought and sold in secondary markets after they are purchased from the Treasury.
Savings bonds differ from other Treasury securities in a few ways:
- Savings bonds are “non-marketable” and therefore cannot be traded on a secondary market.
- Minors can own savings bonds.
- Savings bonds are available for purchase as gifts.
The money you pay for a savings bond represents a loan to the U.S. government. In exchange for the loan, the savings bond continues to earn interest for up to 30 years. Any time after 12 months, the savings bond can be redeemed for its face value, plus any interest it has earned; however, if the bond is redeemed before it is five years old, you will forfeit the last three months’ interest.
Savings bonds are available as Series EE or Series I bonds, both of which accrue interest monthly and compound interest semiannually. The biggest difference between the two is the interest rate you receive. Series EE bonds issued on or after May 1, 2005, earn a fixed rate of interest. The interest rate of Series I bonds is based on both a fixed rate of return and a variable semiannual rate, indexed for inflation. EE bonds are guaranteed to double in value from their issue price no later than 20 years after their issue date to reward long-time bondholders.
You can purchase a digital savings bond as a gift through the TreasuryDirect website, a secure, web-based system operated by the U.S. Department of the Treasury. Although the process is a bit more complicated than it used to be when you could purchase paper savings bonds with the help of financial institutions, here are the basics for buying digital savings bonds:
- Go to www.treasurydirect.gov.
- Log into your TreasuryDirect account (or open one in your name).
- Purchase the type of savings bond you wish (Series EE or Series I), in the desired denomination ($25 to $10,000).
- Deliver the savings bond gift to the recipient’s TreasuryDirect account.
- Print out a gift certificate to give to the recipient.
You will need to know the recipient’s legal name, Social Security Number, and TreasuryDirect account number. For a minor under years to receive a savings bond as a gift, the parent or legal guardian must set up a Minor Linked Account within their own TreasuryDirect account. If the child’s parent/guardian does not set up an account (for whatever reason), you can still buy the bond, hold it in your own account’s “Gift Box,” and transfer it at a later date.
The reason you need to provide the child’s Social Security number is that the bond applies to the recipient’s annual bond purchase limit; not yours. The annual purchase limit for savings bonds is a combined $10,000 in Series EE electronic bonds, $10,000 in Series I electronic bonds, and $5,000 in paper Series I bonds.
It’s no secret that post-secondary education is expensive. College costs are increasing at about two times the rate of inflation each year, and the trend is expected to continue. According to the College Board, the average cost of tuition and fees (not including room and board) for the 2020-2021 school year was $10,560 for in-state public colleges, $27,020 for out-of-state public colleges, and $37,650 for private, not-for-profit colleges.
“One of the best ways to help a child financially while limiting your own tax liability is the use of 529 college plans,” Davis says. 529 College Savings Plans are tax-advantaged plans that allow families to save for future college expenses. These are typically state-sponsored investment plans, and each state has different requirements and benefits, including tax advantages. There are two types of 529 plans: savings and prepaid plans.
- 529 Savings Plans: These plans work similarly to other investment plans such as 401Ks and IRAs in that your contributions are invested in mutual funds or other investment products. As a state-sponsored investment plan, the state coordinates with an asset management company (such as Vanguard) to handle the investment according to the state's plan features. The owner of the account (i.e., the parents) deals directly with the asset management firm, rather than with the state. The beneficiary (your child or grandchild) is the person for whom the account is set up and who will use the money for college.
- 529 Prepaid Tuition Plans: Prepaid tuition plans, also called guaranteed savings plans, are administered by states and higher education institutions. They allow families to plan for future college expenses by prepaying tuition and locking in today's tuition rate. The program pays future college tuition at any of the state's eligible institutions. If the student goes to an out-of-state or private college or university, an equal amount of money is distributed.
“I strongly advise my clients to fund 529 plans for the unsurpassed income tax breaks,” says Davis. “Although the contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free. Rules for 529s do vary by state, and I would encourage everyone to understand their state’s rules. For example, your own state may offer some tax breaks also (such as an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment."
In December 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) designed to improve the retirement system for Americans. Part of the Act made changes to 529 plans.
Now, qualified higher education expenses, for which 529 plans may be applied, include expenses for Apprenticeship Programs. The Act has also introduced distributions for “Qualified Education Loan Repayments,” which can be used to pay the principal and/or interest of qualified education loans but limited to a lifetime amount of $10,000. This limit is per person, but an additional $10,000 may be distributed as a qualified education loan repayment to satisfy outstanding student debt for each of a 529 plan beneficiary’s siblings.
Savings bonds and 529 contributions are just two of many different financial gifts that are appropriate for children. You can also consider giving the following:
- Stocks: You can gift or transfer stock you already own, or you can purchase individual shares through an online brokerage that supports stock gift-giving (such as ShareBuilder or OneShare, among several others). Often, you can even obtain a paper stock certificate for the shares to give to your loved one.
- IRA Contributions: If the child has earned income from a job, you can fund their annual contribution up to the allowable amount.
- Cash: Cold hard cash is always a welcome gift, but it might be most effective if it is money earmarked for a specific purpose, such as paying for a car or summer camp or to pay down an adult child’s debt (such as student loan or credit card debt).
- Financial Advice: A trip to a qualified financial planner can help even young children understand the value of money, savings, and investing.
The Bottom Line
For tax years 2020 and 2021, you are allowed to give up to $15,000 per year ($30,000 if you and your spouse give together) to as many people as you want, without any tax consequences to you; including a gift to a 529 account. Because tax laws are complicated, work with qualified tax professionals. A front-seat approach can ensure that your family can bestow financial gifts while at the same time minimizing tax consequences.