Now that we are in the Holiday season, it’s time to think about gifts for your family. If you are interested in a Holiday gift that helps a grandchild learn about money and investing, here are five ideas to consider.
College Savings Plans
Most of us hope for our grandkids to go to college. Today, that’s a substantial financial commitment. The average cost to attend an in-state public university was $26,820 last year while private universities averaged $54,880, according to The College Board. Consider a gift contribution to a 529 college savings plan. Investments in the account grow tax-free, and all the money stays tax-free if it's spent for college. Each grandparent can contribute up to $15,000 per year per grandchild or even prepay five years -- $75,000 -- at once.
Another college savings plan -- a Coverdell ESA -- lets you spend the money on primary and secondary schools, too. The catch? The gift can only be $2,000 per year per grandchild, and to contribute, grandparents’ adjusted gross income can't exceed $110,000 per year if you're single or $220,000 if you're married.
These accounts are meant for educational spending. If your grandchild doesn't go to college, the balance can be transferred to another family member. Otherwise, withdrawals of investment gains not used for education are taxed as income and hit with a 10% penalty.
Roth IRA
For grandkids who earn some money, a Roth IRA account is a great gift. Every child can contribute to a Roth IRA up 100% of their earnings or $6,000, whichever is less. You can provide funds and set up the Roth for the child. The money will grow tax-deferred, and all distributions will be Tax-Free after kids reach age 59.5
Custodial Investment Account
If you would like a simpler account with fewer rules, consider a custodial account for minors. This account is legally the property of the child, but an adult must be the custodian until the minor reaches legal age in their state of residence. These accounts can hold any amount of money and can invest in any securities. All dividends, interest, and capital gains in this account are reported on the child’s tax return. As of 2021, the first $1,100 of investment gains are free of tax and don't need to be reported. The next $1,100 of gains are taxed at the child's marginal tax rate and require filing a return. As the account custodian, you are responsible for taxes on any gains over $2,200 at your marginal income tax rate, not the lower rate for capital gains.
Municipal Bonds
If your grandkids live in a state with high state income tax, like Minnesota, you might find municipal bonds to be appealing. If you live in Minnesota and own Minnesota municipal bonds, interest is paid income tax-free at the federal and state level.
Current income tax rates for Minnesota residents are as follows:
- Minnesota Income Tax -- Single taxpayers with income up to $27,230 must pay 5.35% tax.
- Federal Income Tax -- Single taxpayers with income up to $14,200 must pay 10% tax.
So if you own a Minnesota Municipal Bond fund that owns a basket of great bonds and pays 4.1% interest tax-free, that’s equivalent to owning an investment that pays 4.88%.
Gold, Silver, Coins
When I was a kid, we had a family friend who loved to collect coins. So, my family got in the habit of buying coin proof sets from the mint for special occasions. They are beautiful and it’s cool to see coins from the year of your birth or another special occasion. But they aren’t a great investment. I recently had my proof sets valued and they were worth about what Mom and Dad paid for them. Plus, the capital gains tax rate on collectibles is 28%; the highest rate for long-term gains on other investments is 20%.
I think that a better investment might be shares of a gold mining exchange-traded fund. These funds own stock in mining companies and can grow in value.
If you would like to talk about your financial-based Holiday gifting ideas, I would love to offer my advice. Follow this LINK to find a time for us to talk.
If you are looking for an experienced, skilled CERTIFIED FINANCIAL PLANNER™ professional to help put your holiday gifting into the larger context of your financial goals, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-first advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.