Have you thought of giving financial gifts? They may sound less exciting, but in the long run they'll be much more appreciated. And financial gifts can grow in value over time.
Here are a few ideas you might want to consider.
- Fund a child’s Roth IRA. If your teenagers worked this summer, chances are they spent their earnings. But they can use your gift to open a Roth IRA, up to the amount of their earnings or the regular $5,000 limit. The IRA will grow tax-free, and by the time the teenager retires, your gift should have compounded to a substantial tax-free retirement fund.
- Fund a 529 education account. Anyone can contribute to a child’s Section 529 college savings plan, which accumulates savings for tuition and living expenses. There are no income restrictions on the donor, and few practical limits on the amount that can be saved. Your gift will grow tax-free in the plan.
- You could also make your gift to a Coverdell education savings account. These IRA-like accounts also grow tax-free, but there’s a limit on total contributions of $2,000 a year from all sources. The amount of your gift may also be limited, depending on your income.
- Consider this gift if you just want to encourage an interest in saving and investing. Buy a small number of shares in a mutual fund and package them with a book on basic investing. The child can watch the investment grow over time and can enjoy dividend payouts too. Modest amounts of investment income can be tax-free to children, although the kiddie tax may apply at higher levels.