The Best Ways of Gifting Money to Grandchildren
- Reviewed by: Brian Stormont, CFP®
- March 15, 2022
We all know grandparents love giving gifts to their grandchildren, but we know that some gifts can go further than others. While the latest trendy toy or clothing may win you some points, gifting money to grandchildren in a way that benefits their future is something they can be forever grateful for. Beyond the suggestions we have below, spending time talking about how finances work is a gift that can keep on giving. Whether you are playing Monopoly with your younger grandkids or gifting your older grandchild a subscription to a financial newsletter, there are many ways to help them gain better insights on how to properly manage their money and eventually grow their wealth.
529 plan for educational costs
529 plans can be a powerful tool to help save for a grandchild’s education. These plans grow on a tax-deferred basis, and the distributions are tax-free when they are used to pay for qualified expenses, such as tuition and fees, books and supplies and room and board1. 529 plans are one of the easier ways to setup an ongoing investment, as they can be linked to a bank account for an automatic investment plan. They can be opened with your financial advisor and easily managed by them as well. 529 plans also have a minimal effect on the family’s expected family contribution, so will not have a large impact on the student’s eligibility for financial aid. This flexibility and efficiency make 529 plans a vital tool for asset protection, without significantly affecting your taxable income or exposing you to high inheritance tax. They are very flexible and offer the same benefits for all families, no matter the income or the contribution amount and you can invest in most any 529 plan, no matter where you live or where the college your grandchild will attend is located1.
Series I savings bond
Gifting your grandchild a savings bond is generally considered a safe investment because it is guaranteed by the United States Government. They are also a good choice because you do not have to pay local or state tax on any interest that is earned2. While you use to be able to purchase these bonds at your local bank, they are now limited to being purchased on the TreasuryDirect.gov website, where they have step-by-step directions on how to setup an account, purchase the bond and give it as a gift.
Custodial Roth IRA
Opening a custodial or guardian Roth IRA for your grandchildren under 18 can be a good way to teach and encourage good money practices by showing them how their money can grow when invested. If they need some additional encouragement, you can make matching contributions for the first few years and the hope is once they see the money growing, they will want to begin contributing as well. Most financial institutions do not have any contribution minimums for a Roth, while the maximum is $6,000 for children (as of 2021) 3. Because you are the custodian on the account, you would control the assets and investment decisions until your grandchild turns 18. At that point they will be able to make withdrawals without penalties for house down payments, educational expenses or unreimbursed medical expenses. This type of account can be a valuable tool in estate planning, helping to reduce your taxable estate while benefiting your loved ones. They will be able to make tax-free withdrawals after they are 59.5 years old3. Learning about the benefits of estate planning can further enhance your strategy to secure your grandchildren’s financial future.
Debit Card for young people
A great way to give a gift and help your grandkids learn how to manage their spending is helping them get setup with a debit card (with some boundaries of course!). Depending on their age, a monthly fixed allowance along with a card that tracks their spending can help them see where their money is going and help them learn how to budget and spend intelligently. You can talk to them about setting savings goals for a large purchase they may want and parents can set flexible controls and get notifications every time the card is used. This approach aligns with smart wealth management practices and teaches them about the value of money. Luckily, there are quite a few cards like this on the market, like the Greenlight debit card or GoHenry 4.
Additionally, providing financial tools or making an outright gift to a family member can have implications for gift tax. It’s important to consult with a financial advisor to understand how these gifts fit into your broader financial strategy and how they might affect your estate.
Remember that it is always a good idea to speak with your financial advisor to truly start mastering financial success.
Reviewed by,
Brian Stormont, CFP®
Brian Stormont is a comprehensive, fee-only financial advisor with Insight Wealth Strategies who began his career in the financial industry in 2000. His expertise encompasses retirement planning, investment planning, estate planning, and high-level strategies to help business owners and individuals minimize their income taxes.
Insight Wealth Strategies, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Insight Wealth Strategies, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Insight Wealth Strategies, LLC unless a client service agreement is in place.
Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
