Giving Financial Gifts Wisely

Ray Martin: There Are Much Better Vehicles Than Cash For Kids

(CBS) 
Give the Gift of an Education

Parents, or anyone who wants to give the gift of a future education to a child, should think about contributing to either a 529 plan account or a Coverdell Education Savings Account. The advantage is that money accumulated in these accounts can be withdrawn tax-free when used to pay for qualified education expenses.

529 Education Savings Plans: These accounts have received a lot of attention, and for good reason. They are investment plans sponsored under specific state and federal tax laws that allow gift-tax-free contributions and tax-deferred growth of investments. Qualified distributions used for education expenses will be received income tax-free by the recipient. Many of these state-sponsored programs allow accounts to be opened with as little as $25, allow contributions as little as $25 a month, and can be added to by automatic deductions from a checking account or paycheck. Most providers of 529 Education Savings accounts have a menu of investment options and offer a competitive range of investment funds suitable for a child's education goals. The only drawback is that individual stocks cannot be owned in these accounts.

Why contribute to a 529 education savings plan account now? Contributing to a 529 Plan account sponsored by your state may allow you to tack a deduction on your state's income tax return for contributions made this year.

Coverdell Education Savings Accounts: These accounts come with the tax benefits of 529 accounts, but allow more investment flexibility. Coverdell Education Savings Accounts can be opened through most brokerages; an adult must be the custodian and the child is the beneficiary of the account. Distributions used for elementary and secondary education and post-secondary education are tax-free. The annual limit on contributions to these accounts is $2,000 per child. A great feature of these accounts is that you have more control over and choice of investments, including the ability to invest in individual stocks.

Why open and contribute to a Coverdell Education Savings Account now? The limit on annual contributions is, as we said, $2,000 per year, so if you open and contribute to one of these accounts in December, you can contribute to the account again in January and have a good start -- $4,000 -- on college savings.

Accounts for Youngsters

The basic problem with giving investments to children is that, generally, someone under the age of 18 isn't permitted to own investment accounts. However, there are several types of accounts that allow folks to make gifts to children, the fund in which they could later use toward the down payment on their first home or to give them a head start on their retirement.

Here are a few of my favorite accounts that can be used to hold gifts of investments for children:

Roth IRA: Children can open and contribute to a Roth IRA, as long as they have taxable compensation, regardless of their age. Contributions can be invested in stocks or mutual funds and distributions after retirement are tax-free. These also allow tax-free withdrawals of contributions and penalty-free withdrawals of earnings when taking money out for the first-time purchase of a home. Up to $4,000 in annual contributions to a Roth IRA is allowed. If your kids have any taxable earnings in 2007 and you want to give them a head start on the future purchase of a home or their retirement savings, then help out by opening and making a contribution to their Roth IRA.

Grantor Trust: Individuals who want to give their children or grandchildren larger financial gifts, but want to maintain some control over how the money is managed and when the children receive it, should consider what's called a Grantor Trust. Under these trusts, parents specify a trustee and that the money contributed is used for the child's education, care, etc. Under certain procedures, the person setting up the trust can contribute up to $12,000 per year into a trust for each child named as the beneficiary. This technique is used mostly for estate tax planning purposes.

Give a Million Dollars

Here's an example to inspire you to consider making a financial gifts to the children in your family. Unlike a stuffed animal or cell phone, these gifts can grow into something truly spectacular over time. Suppose you made a one-time gift of $2,000 to an IRA for your child or grandchild. Do you know how much that $2,000 can grow into, without adding another penny? Invested over 65 years in a stock or stock mutual fund earning a 10 percent annual return, it could be worth almost $1 million! If you do this, put a card in their stocking that reads, “My gift for your future - $1 million!” That's a gift worth remembering!

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