Looking for a holiday gift that will help put a young person on the right financial path? A savings bond or contributing to the 529 account probably won’t be the most attention-grabbing gift on Christmas morning, but it just might end up being the most appreciated. Parents, grandparents and other interested adults can donate financial donations children who can help secure their future, whether it’s saving for a first car, college or a advance payment on a house.
Key points to remember
- If you’re looking to switch it up this holiday season, you might want to consider a financial gift instead of the usual stocking stuffer gifts.
- Financial gifts can help young people understand investments and appreciate saving through direct experience of owning stocks or bonds.
- Savings bonds, 529 account contributions, stock donations and, of course, an envelope full of cash are all ideas for financial donations.
Sam DavisPartner/Financial Advisor at TBH Global Asset Management, notes that financial gifts have merit beyond obvious monetary rewards. “Parents and grandparents should consider making monetary donations because it can help kids achieve something that wouldn’t otherwise be possible,” Davis says. “This can include things like medical school, which has now become unaffordable for many, or helping a child through a difficult short-term financial situation. It can also include, however, things like trips around the world, which can help a child better understand global dynamics.
If your financial donation helps a child pay for collegetraveling across Europe for the summer, or sparking 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 things that are important to them.
Remember, however, that any donation over $15,000 per year per person may be subject to a gift tax.
Savings bonds make great financial gifts because they can grow steadily while earning interest. Treasury securities are types of debt instruments that include goods of treasurenotes, bonds, Inflation-protected Treasury securities (TIPS) and savings bonds. Most Treasury securities are called “negotiable” securities because they can be bought and sold in secondary markets after being purchased from the Treasury.
Savings bonds differ from other Treasury securities in several respects:
- Savings Bonds are “non-negotiable” and therefore cannot be traded on a secondary market.
- Minors can hold savings bonds.
- Savings bonds can be purchased as gifts.
The money you pay for a savings bond represents a loan to the US government. In exchange for the loan, the savings bond continues to earn interest for up to 30 years. At any time after 12 months, the savings bond can be redeemed for its face value, plus any interest he has earned; however, if the bond is redeemed before it is five years old, you will lose interest for the last three months.
Savings bonds are available in the form of EE-Series Where Series I Bonds, both of which generate interest monthly and compound interest semi-annually. The biggest difference between the two is the interest rate you receive. Series EE bonds issued on or after May 1, 2005 bear interest at a fixed rate.The Series I bond interest rate is based on both a fixed rate return rate and a variable semi-annual rate, indexed to inflation.EE bonds are guaranteed to double in value relative to their issue price no later than 20 years after their issue date to reward long-term bondholders.
You can purchase a digital savings bond as a gift through the TreasuryDirect website, a secure web-based system operated by the United States Department of Treasury. Although the process is a bit more complicated than it was when you could buy paper savings bonds using financial institutionsHere are the basics for buying digital savings bonds:
- Go to www.treasurydirect.gov.
- Log in to your TreasuryDirect account (or open one in your name).
- Buy the type of savings bonds you want (Series EE or Series I), in the denomination ($25 to $10,000).
- Deliver the gift of savings bonds to the recipient’s TreasuryDirect account.
- Print a gift certificate to give to the recipient.
You will need to know the recipient’s legal name, Social Security numberand CashDirect account number. In order for a minor under the age of 10 to receive a savings voucher as a gift, the parent or legal guardian must create a linked minor account in their own TreasuryDirect account. If the parent/guardian of the child does not create an account (for whatever reason), you can always buy the deposit, keep it in the “Gift Box” of your own account and transfer it later.
The reason why you need to provide the child Social Security number is that the voucher applies to the beneficiary’s annual bond purchase limit; not yours. The annual purchase limit for Savings Bonds is $10,000 Series EE e-Bonds, $10,000 Series I e-Bonds and $5,000 Series I Paper Bonds.
It’s no secret that post-secondary education is expensive. College costs are rising at about twice the rate of inflation each year, and the trend is expected to continue. According college councilthe average cost of tuition and fees (excluding 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 State and $37,650 for private, non-profit colleges.
“One of the best ways to help a child financially while limiting their own tax liability is the use of 529 college plans,” says Davis. 529 education savings plans are tax-efficient plans that allow families to save for future college expenses. These are generally state-sponsored investment plans, and each state has different requirements and benefits, including tax advantages. There are two types of 529 plans: savings plans and prepaid plans.
- 529 savings plans: These plans work the same way as other investment plans such as 401Ks and IRA 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 manage the investment in accordance with the features of the state plan. The account holder (i.e. parents) deals directly with the asset management company, rather than the state. The beneficiary (your child or grandchild) is the person for whom the account is opened 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 current tuition. The program pays for future tuition at one of the state’s eligible institutions. If the student attends 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 unparalleled tax relief,” Davis says. “Although contributions are not deductible on your federal tax return, your investment grows tax-deferred and distributions to pay for of the beneficiary tuition fees are exempt from federal income tax. The rules for 529s vary by state, and I encourage everyone to understand the rules for their state. For example, your own state may also offer tax relief (such as an upfront payment deduction for your contributions or income exemption on withdrawals) in addition to federal treatment.”
In December 2019, President Trump signed the Every Community Establishment Act for Retirement Enhancement (SECURE Act) aimed at improving the retirement system of Americans. Part of the law made changes to 529 plans.
Now, eligible higher education expenses, for which 529 plans can be applied, include expenses for apprenticeship programs. The law also introduced distributions for “qualified student 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 can be distributed as qualified student loan repayment to settle 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 suitable for children. You can also consider giving the following:
- Shares: You can offer or transfer the stock you already own, or you can buy individual stocks through an online brokerage that supports stock donations (like ShareBuilder or OneShare, among several others). Often you can even get a paper stock certificate for the stock to give to your loved one.
- IRA contributions: If the child has earned income from employment, you can fund their annual dues up to the authorized amount.
- Cash: Cash is always a welcome gift, but it can be more effective if it’s money earmarked for a specific purpose, like paying for a car or summer camp or paying off a child’s debt adult (such as a 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, saving and investing.
For the 2020 and 2021 tax years, you are allowed to give up to $15,000 per year ($30,000 if you and your spouse donate together) to as many people as you want, without any tax consequences for you ; including a donation to a 529 account. Because tax laws are complicated, work with qualified tax professionals. A forward-thinking approach can ensure your family can donate financially while minimizing the tax consequences.
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