How do you give your children or grandchildren the right attitude about money? And a good financial start? While you can gift your child up to $13,000 a year tax-free, consider these options, wrapped up with financial lessons. After all, what better time than during a financial crisis to convey your hard-earned financial wisdom to little Junior?
Roth IRAs. If your child has a job, why not encourage saving for retirement with one of these accounts? Your child can contribute to the Roth IRA, and so can you. An individual can put up to $5,000 in a Roth IRA during a single year, but you cannot contribute more than the child or grandchild will earn annually from his or her job.
529 plans. These are state-based college savings accounts, and federal laws now make all investment gains in these plans tax-free (provided you use the money for qualified higher educational expenses). Each year, a married couple can put in up to $26,000 per beneficiary without triggering gift taxes; grandparents can put in up to $130,000 by making a 5-year election*. Plans vary by state and you do not need to choose the plan from your state - Utah, Iowa, New York and Nevada offer some of the most highly regarded 529s. However, by investing outside of the state in which you pay taxes, you may lose tax benefits offered by the state's plan and tax treatment at the state level may vary. Illinois' BRIGHT DIRECTIONS 529 Plan, for example, does provide a state tax deduction to Illinois residents for 529 contributions up to $20,000 per year per couple. And BRIGHT DIRECTIONS withdrawals are exempt from Illinois state taxes as long as the money is used to pay for qualified higher education-related expenses.
Stock. Grandparents and parents might think about gifting stock shares from a well-known company to a child - preferably, a company the child knows about and has an interest in. Over time, a child can follow the progress of the stock and the company, and learn lessons about the economy and the markets.
Custodial Accounts. Minors under the age of 21 can't legally own stocks, bonds, mutual funds, annuities, or life insurance policies directly. For this reason, the Uniform Gifts to Minor's Act (UGMA) established a simple way for minors to own securities though state-structured trusts known as custodial accounts. The Uniform Transfers to Minors Act (UTMA) is similar, albeit more recent, but more flexible, also allowing minors to own fine art, real estate, patents and royalties. Custodial accounts are typically established at banks and brokerages, with the custodian (i.e. trustee) - typically the child's parent, guardian, or grandparent - controlling the account and managing the money until the minor turns 21, although the child technically owns the account once the UGMA or UTMA account has been set up by a donor. Establishing a custodial account is simple and inexpensive.
Books and games. Consider The Sims 2: Open for Business, a computer game in which a child can set up and run a mock chain restaurant, hair salon, fashion boutique, or almost any other kind of small business - even a lemonade stand. Most likely they'll have fun and not even realize they're learning valuable financial lessons. In print, you might try Growing Money: A Complete Investing Guide for Kids by Gail Karlitz (Penguin Putnam), Investing Tips Grampa Taught Us by Victor Eber (Authors Choice), and Ben Franklin's The Way to Wealth (Applewood), just 30 pages and full of timeless principles.
Most importantly, start talking candidly to kids about money as early as possible. With the media covering the global financial crisis 24 x 7, kids can't help but be exposed to all kinds of financial and economic reporting that must seem confusing if not frightening. Too often children have little or no information about finances until they're forced to deal with them. By sharing your knowledge now and providing a grown-up's perspective, you can take the fear out of financial matters and help your child plan for a more secure future.
* According to January 2007 data.
This was prepared by Peter Montoya, Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative or Broker/Dealer give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information. Stock investing involves risk including loss of principal.