Can you give a child you love the gift of money? Of course. But what we’re really asking is: “How should you give a child the gift of money?”
Take it from legendary investor Warren Buffett. He advises that loved ones gifting money to children should only give them “enough that they would feel they could do anything, but not so much that they could do nothing.”
Translation: you can’t just toss loads of cash at kids and expect them to instinctively make responsible choices about what to do with it. You’ve got to think hard about how you’d like to gift money to the children in your life, what value it will bring to their lives, and how to communicate that value.
In this article, you’ll learn the etiquette and the options for gifting money to children, as well as the best way to contribute money to a child’s future.
How to prepare yourself for gifting money for children
Let’s say you’re known as the generous aunt (or uncle), and you want to give the little kid you absolutely adore $500.
Will your favorite little munchkin honestly appreciate the value of the gift or what it enables them to do?
It depends on if the adults in the child’s life spend time teaching the value of having the options financial wealth bestows on all who spend it wisely. The time to build good spending habits and begin conversations about money and its relation to “wants” and “needs” is around age five.
Personal finance “guru,” Suze Orman describes two paths a child takes when they’re first gifted money.
They might love seeing their piggy banks fill up with gifts from grandparents or godparents. Or they might be really resentful of having to put their money in a savings account.
That’s why Suze has a plan for adults gifting money which helps kids to absorb the maximum benefits of financial literacy and learn how to handle monetary gifts
- Grandparents, aunts and uncles, and godparents should check with parents first and see whether they’ve started those conversations around saving and spending.
- She also encourages extended family members to give non-cash financial gifts such as treasury bonds and stock certificates. This will help expand a child’s financial education process.
- Suze advises extended family members and friends to use the “three-option framework.” For example, grandparents can let children know they have three options for the money they gift to them: To save for a future goal, to spend, or to share some of it through donations.
From a child’s perspective, money is something they know has value. But they’re still deciding for themselves what that value is by watching the adults in their world and their attitudes towards money.
That’s why using an app like EarlyBird simplifies the conversations around money and a child’s understanding of its value and power.
Parents who set up a UGMA custodial account through EarlyBird can invite grandparents, godparents, aunts and uncles, and even family friends to contribute to a child’s financial future and financial education by joining in the conversation.
Relatives have even got the opportunity to leave a video memory alongside their financial gift. This makes that gift all the more meaningful, personal, and timeless.
At the same time, children can physically see their finances building through their UGMA and start aligning the money they’re accumulating in these accounts with worthy goals.
Kids and money: the options open to you when gifting money for children
Parents have a slight advantage over other relatives because they get to see their kids and talk to them every day. They can have important conversations around money daily, and they can guide and influence their choices.
But there are a range of options for extended family members and friends, too.
You can use the next five ideas when gifting money for children.
1) Gifting money through a UGMA
One of the most flexible ways you can gift money is through a UGMA custodial account.
Named after the law that created it (the “Uniform Gift to Minors Act”), the best part about this account type is that your child can use the funds in a UGMA however they want once they come of age.
There’s always a chance your kids may decide not to attend post-secondary school, so locking the funds away in an Education Savings Account (ESA) or 529 for college only could keep your hands tied.
UGMAs hold and protect financial contributions that any family member, and even godparents and family friends not immediately related to the child, give as gifts to children they love.
Parents will set up these custodial accounts to gift money to their kids tax-free. But as an extended family member, you can also purchase stocks, bonds, and mutual fund investments to gift to the same account quite easily without having to set up a separate account.
Because UGMAs are so beneficial and flexible, children will often have multiple family members contributing to them which helps them grow even faster.
Setting up a UGMA with EarlyBird eliminates multiple separate accounts and extra, unnecessary paperwork when you’re gifting money to grandchildren, nieces and nephews, or godchildren.
With the annual gift tax exclusion limit in place, everyone can pitch in for a significant sum without reaching this individual limit. As a point of reference, the IRS gift tax exclusion limit in 2022 was $16,000, and for 2023, it will be $17,000. (For married couples filing jointly, the threshold for 2022 was $32,000, and for 2023, it will be $34,000.)
2) Set up a 529 college savings plan
A contribution to a 529 savings plan is another solid choice if you’d like to give a monetary gift. You’re investing in a child’s future — a child you care about and want to see succeed in later life. It takes a lot of stress off parents, and, as children mature into young adulthood, they’ll be able to graduate debt-free.
But there’s the rub — with a 529 college savings plan, you can only ever use the accumulated contributions as “qualified education expenses”. If you divert the funds for other purposes, it becomes taxable income. Families will also pay a 10% penalty.
That doesn’t mean you have to forgo the goal of potentially contributing to paying for college. It just means that you can hedge risk with a more flexible option, such as a UGMA.
Children can use UGMA funds for any dream, and withdraw the money for various goals. This is exactly what helps children realize the value of money and how to spend it.
Trusts are another flexible instrument for gifting money to children.
Many families use trusts for estate planning because of tax implications. For example, families using trusts can protect the total value of their estate by reducing the inheritance tax for beneficiaries. Though beneficiaries may still have to pay a capital gains tax on anything they profit from within the trust if the interest income is distributed to them.
Beyond these details, trust funds are a great container for essentially any asset that has a valuation, not just your estate. This is just one of their many benefits.
Businesses, cash, investments, real estate properties, and even artwork — a trust can hold all of these entities. You can also impose rules around how your beneficiary can and can’t use the funds (for example, stipulating that the child can’t use funds to pay off debts).
4) Contribute to a Roth IRA
Like 529 college savings plans, contributions to a Roth IRA allows your financial gift to grow tax-free and to be used for qualifying education funds. If your child is getting any sort of employment compensation, Roth IRAs are also a fantastic way to invest that income for your child’s future.
Roth IRAs allow you to contribute any amount up to the total the child earned for the tax year. That means if your kid is getting money for babysitting or mowing lawns, you can be using a Roth IRA to save for them.
Many grandparents who choose this option decide that a great way to further their grandchild’s financial education is to create a “matching funds” incentive plan.
The only downside to bear in mind here is that Roth IRAs have pretty low contribution limits. The limit for 2023 is $6,500 ($7,500 if you are 50 or older.) That means if you’re wanting to gift a larger amount of money, a UGMA custodial account might be the more flexible option.
5) Give cash
Inconvenience is half the reason why grandparents, aunts and uncles, and godparents don’t opt for gifting stocks and savings bonds to children. Giving monetary gifts to children can be tedious because you have to set up accounts and go through all the paperwork.
With EarlyBird, families and relatives can instantly eliminate the hassle of transferring money to children as gifts or the process of choosing specific stocks to gift or invest in. As parents set up their custodial account on EarlyBird, the monetary contributions from grandparents, aunts and uncles, and godparents are automatically invested into the child's curated EarlyBird portfolio.
That certainly beats the traditional cash gift stuffed in an envelope. After all, cash is easily spent by parents, especially when they have to go through the additional work of going to the bank to deposit the funds.
Contrast this with the simple, click-of-a-button transfer you can make when you contribute through the EarlyBird app. You can ensure your funds go exactly where you intended: to the kids you love and want to support.
Giving gifts to children is often means last-minute shopping, scrambling to find the perfect gift, wrapping it up, and presenting them with it — only to have them forget all about it two weeks later.
Even if you’re gifting money for children so that “they can get whatever they want,” rest assured it won’t make a lasting impression unless children already have a sense of the value of money already instilled in them.
Give children the gift that will help them flourish throughout their entire lifetime by participating in their financial literacy. Download the EarlyBird app today to invest in your loved one’s growth — financially and personally.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.