Financial Gifting

By Kevin Chambers

Every parent, aunt, uncle, and grandparent wants what’s best for the next generation. For those that can afford it, helping family members financially can be a great way to get children exposed to investments, and help them save for important milestones down the road. The Federal Government limits the amount you can give to $14,000 a year per person without having to pay tax on the transferring amount [1]. This is a limit that prevents people from gifting their estate before they pass and avoiding estate taxes. Still, $14,000 is a considerable amount of money, and this blog post will detail a few creative ways to gift.

Roth IRA:

Starting and contributing to a Roth RIA is a great way to jumpstart their retirement savings. Roth IRA accounts can be opened on behalf of any person earning income. As soon as a child gets their first job you can open a Roth IRA for them. Because Roth accounts grow tax free, and the withdrawals are tax free they are excellent tools for saving for retirement.  The sooner money goes into a Roth, the more time compounding interest has to take hold and grow the account. The contributions to a Roth may not exceed the income earned, and max out at $5,500[2]. Contributions into Roth IRAs has to be made in cash. When parents set up an agreement with their newly employed child to match contributions to their Roth, it ensures more active involvement and the child is more likely to form the habit of saving for retirement.

529 Plans:

Saving for college education is increasingly more important as the price of college has skyrocketed across the country. Depositing to a 529 plan allows parents and grandparents to invest college savings for future use on education. Like an IRA, earnings on 529 plans accumulated on a tax-differed basis. Also, distributions that are used for education expenses are tax-free. There are two types of 529 plans: prepaid tuition and college savings. Prepaid tuition plans allow the contributor of the plan to purchase credits in advanced for the beneficiary. This allows the contributor to essentially lock in the future cost of tuition. They pay the price for credits now, not the cost of credits when the beneficiary is in college. As the cost of higher education rises, this is a good way to save money on college tuition. The drawback is that these plans are specific to a certain institution.  If you buy credits at Oregon State University, for example, the credits are only eligible for use at Oregon State University. The credits are not transferrable. College savings plans are more flexible. They are investment accounts that allow contributions to be made on behalf of a beneficiary for use for educational expenses. Just like the Roth IRA only cash can be contributed to the 529 plan.

Brokerage Account:

If your child is already maxing out all of their retirement options, parents can also start a taxable investment account for their kids. This could be an account to save money for a down payment, wedding expenses, or some other life event. Unlike the Roth or 529 options, after opening a brokerage account, a parent can transfer securities to the account. For some people who have securities with high capital gains, gifting securities can have a tax benefit. As long as the child is no longer a dependent, often they are in a lower tax bracket. Therefore, they can sell the highly appreciated security and possibly pay minimal or no capital gains tax.

Gifting to children can better set them up for financial success in the future. In terms of tax implications for any of these strategies, it is important to consult with a tax professional before making any gifts. If you are planning on making a gift to a loved one, especially if they are young, think about one of these strategies. The sooner people get comfortable and familiar with investment options and processes, the sooner they can learn to save on their own in the future.
 

[1] Source: IRS; 2016 gift exclusion limit is $16,000

[2] Source: IRS; 2016 Roth IRA contribution limit is $5,500 (or $6,500 if you are age 50 or older)