Tax Advantaged Holiday Gift Ideas for Grandchildren
Shopping for grandkids can be difficult. Clothes and gift cards are usually boring and toys are only exciting for a day or two, but there’s another solution: financial gifts. While a financial gift might not be fully appreciated by kids or teens when they’re young, they will get far more from it than the momentary joy of receiving the newest, trendiest toy. To get your grandkids started early on the road to financial independence, here are some gifts to consider:
529 Plans
With student debt being one of the biggest anchors around young people’s finances, securing an account that helps pay for college can positively impact your grandchild’s entire financial future. A 529 Plan is simple to start and can help pay for rising college costs down the road.
Each state offers their own 529 plan. While you can choose a plan from another state to get the option you want, there are some tax advantages when choosing a plan from your own state. A 529 is also good for avoiding a gift tax, allowing up to $30,000 in contributions per couple and $15,000 for an individual which aligns with the annual gift tax exclusion. You can also contribute up to $75,000 per beneficiary in a single year ($150,000 for married couples) and take advantage of five years’ worth of tax-free gifts at one time. *
Remember college savings plans are intended to be used for educational expenses only. If the money is withdrawn and used on other purposes, a 10% penalty will be charged.
Roth IRA
If you have older grandkids who have already started working, help them begin a Roth Individual Retirement Account by matching their contribution. This is one of the best ways to help kids and young adults plan for their future and their retirement.
A Roth IRA’s biggest advantage is that both withdrawals and earned interest are generally tax free. This means your grandkid will only pay taxes on the money based on their current income and not their future income when they take it out. While the interest can’t be taken out before retirement without a penalty, the contributed amount can be taken out at any time. **
Stocks
While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who qualify. If so, consider giving them some appreciated stock or mutual fund shares that they can then sell and pay 0% federal income tax on the resulting long-term capital gains. Gains will be long-term if your ownership period plus your gift recipient’s ownership period (before the recipient sells) equals at least a year and a day. ***
As always, when making these considerations you should consult your financial advisor and tax professional.
*Ohio College Advantage Website
** IRS.gov
*** Forbes “Gifting Appreciated Stock to Family Members”
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