It’s that time of year when your child is about to be inundated with the hottest toys, the newest gadgets and, likely, some cash.
Gone are the days of grandma and grandpa giving paper savings bonds. Instead, many tech savvy grandparents and extended family members can transfer money with the click of a button online or through smartphone apps.
And, of course, there’s always good old-fashioned cash.
Your child’s holiday windfall could provide the perfect opportunity to establish a new tradition of saving for the long term.
“It’s so important to teach kids the power of investing,” says Tim Channel, financial advisor for Ameriprise Financial Services in Akron. “If we teach kids to spend, spend, spend, that carries over into adulthood.”
There are many ways family members can contribute to a long-term savings plan for your child. Parents can establish an account and provide the information to family members, or family members can set up an account on behalf of the child, as long as they have the proper information about the beneficiary.
“The biggest question you should ask yourself is, ‘What do you intend to have this money for?’” says Tim Porter, financial advisor with Wentz Financial Group in Hudson. “The first thing that comes to mind for a lot of parents is saving for college.”
Porter says the most popular account he sees families opening is the 529 college savings plan.
“The 529 account allows you to put money aside and it grows tax free, but it has to be used for some kind of higher education,” Porter explains.
These accounts are easy to establish, have low minimum contributions and allow anyone with the child’s information to add to them.
“I like the 529 because it teaches kids to plan for the future,” Channel adds. “Obviously they don’t know how much college is going to be and you’re earmarking money for something they’re going to need.”
Another common account for children is the Uniform Transfer to Minors Act account or UTMA, which allows relatives to gift money, valuables and even real estate to children. While the account belongs to the child, they do not have access to it until they become a certain age.
Once the beneficiary has access to the account, they can do what they want with their gifts.
For those who’d like more control over how their gift is used, Michael Kostelnik of Family Life Financial Planning in Mentor says a trust might be a better option.
“When we think about trusts, we think about rich kids on television,” Kostelnik says. “But the truth is, they don’t have to be multimillion dollar trusts.”
Specific terms and conditions can be established for a trust to limit how much money the beneficiary has access to at one time.
If you’re looking for a gift similar to a savings bond, financial experts say investing in a CD or mutual fund will give you more bang for your buck than a savings bond.
Additionally, a share of stock is a creative way for your child to take ownership in something they love, such as Disney or Apple.
“You can buy the actual stock certificate in the child’s name and give it to them,” Kostelnik says. “I like it because you’re doing two things — you’re giving them a gift but you’re also teaching them how investing works.”
