Your grandchildren will likely say they would love a toy or bicycle this holiday season, but adults themselves might prefer a financial gift with long term payoff. What’s the best way to do it? “The answer depends on how you want to use these funds,” says Todd Soltow, co-founder and retirement planner at Frontier Wealth Management in Houston.

Hard cash is always an option, but it doesn’t pay off in the long run, especially when interest rates are too low to keep pace with inflation. Because of the temptation to spend it, cash also makes it difficult to teach the next generation good financial habits. “Young people need to learn the value of a dollar, and that comes from earning it,” says Wilson Coffman, president of Coffman Retirement Group in Huntsville, Alabama. “If you give it to them, it defeats the purpose. “

Considering utility, potential returns, and taxes, here are five best financial gifts to give.

1 of 5

Education savings plans

The average cost to attend a state public university was $ 26,820 last year, while private universities averaged $ 54,880, according to the College Board. Any contribution, such as to a 529 Education Savings Plan, will certainly be appreciated.. Investments in the account grow tax-free, and all money remains tax-free if spent on college. You can contribute up to $ 15,000 per year per grandchild or even prepay five years – $ 75,000 – at a time. The donation is double for married couples.

Another college savings plan – a Coverdell ESA – also lets you spend money on primary and secondary schools. The trap ? The donation can only be $ 2,000 per year per grandchild, and to contribute, your adjusted gross income cannot exceed $ 110,000 per year if you are single or $ 220,000 if you are married.

These accounts are intended for education expenditure. If your grandchild does not go to college, the balance can be transferred to another family member. Otherwise, withdrawals of investment earnings not used for education are taxed as income and subject to a 10% penalty.

2 of 5

Roth IRA

A jar with money in it with a sticky note that says Roth IRA.

Carlos Dias, founder of Dias Wealth in Orlando, Florida, says a Roth IRA is a great gift for a grandchild who earns income from work, such as paper travel or child care. You can donate up to the amount the child earns per year, subject to the annual IRA limit ($ 6,000 for 2021). “If you can start your grandchildren’s retirement now, they will have a lifetime to see that money grow.”

3 out of 5

Investment account on deposit

Two young children in costumes laugh while holding wads of banknotes.

These accounts are a good way to teach a newcomer how to invest. Although the investment is in your grandchild’s name, you control the custody account until your grandchild is 18 or 21, depending on your state. In 2021, the first $ 1,100 of the child’s investment earnings is tax-free and does not need to be reported. The following $ 1,100 in earnings are taxed at the marginal child tax rate and require filing. As the custodian of the account, you are responsible for taxing any gain greater than $ 2,200 at your marginal income tax rate, not the lower rate for capital gains.

4 out of 5

Municipal bonds

municipal bonds written on small blackboard

Soltow prefers municipal bonds to the traditional financial gift of EE savings bonds. Not only are interest rates higher for municipal bonds, but payments are exempt from federal income tax and, in some cases, state and local taxes as well. Be sure to look for creditworthy bond issuers. Higher quality bonds should be at least BBB, with AAA being the safest rating.

5 out of 5

Gold

A photo of a gold mine.

Collectibles like gold coins might catch your grandchild’s attention, but Dias warns, “My father used to buy collectibles like rare coins. Many of them turned out to be only worth what he paid for or less. »In addition, the capital gains tax rate on collectibles is 28%; the highest rate for long-term gains on other investments is 20%.

A better option: Buy your grandchildren exchange traded funds or gold mining company stocks to avoid higher taxes on physical collectibles.

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