When planning gifts for children on your holiday list, you might want to think beyond the traditional retail offerings. Consider financial gifts that can bestow benefits for many years to come.
Some financial gift options you might consider:
U.S. savings bonds- Savings bonds are used by many families to introduce children to the savings concept. I bonds are indexed for inflation and can provide some relatively attractive rates of return.
IRAs (regular or Roth)- For 2012, you can contribute the lower of $5,000 or the earned income of the child. An early financial start can produce amazing benefits from compounded interest accumulated over several decades.
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 $2,000 limit on total contributions 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.
Please call us if you would like to review the tax issues related to any of these financial gift options, especially if you are considering a larger amount.