Investing in Loved Ones’ Futures This Holiday Season

By Kayla Hult, MBA – Vice President & Wealth Management Advisor

As the holiday season approaches, many of us are seeking meaningful gifts that go beyond the usual material items. This year, consider giving a financial gift that can help build a lasting foundation for your loved ones’ future. Whether it’s funding a college education, helping them get started with investing, or even contributing toward a future home purchase, there are several options for thoughtful, impactful gifts with long-term financial benefits. Here are some effective ways to invest in your loved ones’ futures this holiday season.

 

Contribute to a 529 College Savings Plan

A 529 plan is one of the most tax-efficient ways to save for education. These state-sponsored investment accounts allow your contributions to grow tax-free, and withdrawals are tax-free when used for qualified education expenses, including tuition, room and board, and even K-12 private school costs in some cases.

Benefits of a 529 Contribution as a Gift

• Tax Advantages: Contributions grow tax-free and, when withdrawn for qualified education expenses, they aren’t subject to federal income tax.
• High Contribution Limits: You can contribute up to the gift tax limit of $18,000 per year per individual in 2024 ($36,000 for couples). Alternatively, the “superfunding” option lets you contribute five years’ worth of gift-tax exclusions in a single year ($90,000 per person or $180,000 for couples).
• Potential State Tax Deductions: Many states offer state income tax deductions or credits for residents contributing to their state’s 529 plan.

How to Gift: If your loved one’s parents already have a 529 plan set up, you can contribute directly to it, or if not, consider opening an account for them. If you’re unsure of the recipient’s future education plans, the 529 is versatile; funds can be transferred to other beneficiaries within the family if circumstances change.

 

Set Up a Custodial Account (UGMA/UTMA)

Custodial accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) allow you to gift cash or investments to a minor without needing to set up a trust. The funds are managed on behalf of the minor until they reach the age of maturity, at which point they can use the assets freely.

Benefits of Custodial Accounts as Gifts

• Flexible Use: Unlike 529 plans, funds in a UGMA/UTMA account can be used for any purpose once the minor reaches the specified age, whether for education, travel, a car, or other needs.
• Investment Options: You can contribute cash, stocks, bonds, or mutual funds to grow over time. This early exposure to investing can also provide a foundation for future financial literacy.
• Moderate Tax Advantages: Some income generated by custodial accounts is taxed at the child’s lower tax rate, which can provide some tax savings on investment gains, though amounts exceeding certain thresholds may be taxed at the parents’ rate.

How to Gift: Once the account is set up, you can gift cash or stock up to the annual gift tax exclusion of $18,000 per year. A UGMA/UTMA account is a great way to teach children about investing and saving while setting aside funds for their future.

 

Fund a Roth IRA for Teens with Earned Income

If a young family member has a part-time job, consider funding a Roth IRA for them. A Roth IRA grows tax-free, and since contributions are made with after-tax income, withdrawals in retirement are tax-free as well. For a teen or young adult, the power of compounding over several decades can turn even modest contributions into a significant retirement fund.

Benefits of a Roth IRA Gift

• Long-Term Tax-Free Growth: The longer the investment horizon, the greater the benefit from compounding and tax-free growth.
• Flexibility: While Roth IRAs are intended for retirement, contributions (but not earnings) can be withdrawn without penalties, providing flexibility if they need funds earlier.
• Financial Literacy: Setting up a Roth IRA introduces young people to retirement planning concepts early, helping them develop positive financial habits.

How to Gift: You can match your loved one’s earnings, up to the annual contribution limit of $7,000 for 2024. Just make sure they have sufficient earned income to match the contribution.

 

Consider Cash Gifts for Debt Reduction or Emergency Savings

While not as glamorous, cash gifts can be invaluable for young adults just starting out. A cash gift can help reduce student loans or build an emergency fund, which are foundational steps toward financial stability.

Gift Tax Implications: Cash gifts fall under the same annual exclusion limit of $18,000 per recipient.

 

Final Thoughts

This holiday season, think beyond the traditional gifts and consider how your present could lay a foundation for financial success. Contributing to college funds, custodial accounts, or Roth IRAs can be both meaningful and practical, giving your loved ones a head start on their financial journeys. By making smart use of tax-advantaged accounts and understanding the gift tax limits, you can maximize the impact of your financial gifts while helping your loved ones build a more secure future.