A savings bond or piggy bank probably won't elicit a squeal of delight from a small child or melt a sullen teenager's face into a smile the way a video game will. But there are few people who wouldn't appreciate a gift that appreciates over time. Here are six financial gift ideas that will make future holidays even brighter than this one.
529 plan. 529s can be prepaid tuition plans for specific colleges or education investment accounts. These college savings plans are tax free when used to pay for higher education expenses. Also, "the owner of the account has complete control over the money and can change the beneficiary," says Nick Bapis, a financial adviser and managing director at HighTower in Salt Lake City. So your child can't blow the money on a new car instead of room and board. But creative parents can still make this an exciting gift. "I think it's fun to put these things in regular boxes as presents," says Donald Patrick, a certified financial planner for Integrated Financial Group in Atlanta. "When there is a contribution to a 529 plan, put banners or a hat in there from the school your child wants to attend or your alma mater to tie it in to the ultimate end goal."
Roth IRA. If your child has a job, you can contribute the amount of his earned income up to $5,000 to a Roth IRA. Since contributions are made with after-tax dollars, the account will grow tax free. Your child will appreciate this gift at age 59½ or later—when he or she is eligible to take tax-free withdrawals of the principal and decades worth of accumulated returns. "One of my clients gave fake money of what the contribution would grow to by the time they are age 60," says Patrick. For example, a Roth IRA gift of $1,000 for a 16-year-old that earns 7 percent annually will be worth $27,530 at age 65 with no income tax applied to withdrawals. And that's without any additional contributions in future years.
Savings bonds. Savings bonds are a great way to teach your children about the power of compound interest and the benefits of investing over the long term. Although interest rates are lower than for many investment products—they currently range from 1.2 percent for EE/E bonds to 3.36 percent for I bonds—earnings from savings bonds are generally exempt from state and local taxes and may also be federally tax free if used to pay for college tuition. These safe and conservative savings plans can be purchased at almost any bank and online at treasurydirect.gov. And beginning in 2011, you will even be able to use your tax refund to buy a savings bond in your child's or grandchild's name by checking a box on your tax form. The Treasury's website also has a gift certificate you can print out and present with your savings bond.
Cash. There's no gift that holds as much possibility as cash tucked into an envelope. Individuals can give up to $13,000 ($26,000 for couples) in 2009 before incurring the gift tax. Money used to directly pay for college tuition or medical expenses does not count toward this limit. Alternatively, you can buy your adult children financial freedom by helping them pay down their credit card or student loan debt. "Anything you can do to give your children the ability to pay off those debts goes a long way to help their financial security," says Robert DiQuollo, a certified financial planner and president of Brinton Eaton Wealth Advisors in Madison, N.J.
Financial advice. Holiday dinners and gatherings inevitably come with stories and advice for the new year. Try to pass along a few gems about the importance of saving, avoiding debt, and living frugally. If you don't feel that you can impart that message to your children, hire out some help. Some financial advisers are willing spend an hour or two teaching children about money. "Find a financial planner who perhaps works by the hour and with young people who have not accumulated any money to invest," says DiQuollo. "Or call your own financial adviser and see if you can send your child to them for a couple of hours." DiQuollo says many financial advisers will meet with their client's children for free or for a nominal cost.