6 Meaningful Ways to Give Grandchildren Money

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This year you’re determined to give your grandchildren a monetary gift for the holidays — rather than the latest trendy trinket. Fortunately, you have quite a few choices, some of which have tax advantages. At the same time, they’re kids, and a savings bond doesn’t have quite the cachet as a PlayStation. You don’t want to disappoint them.

Back in the day, if your grandparents gave you cash in a new bank account, a savings bond or shares of stock, you didn’t know how lucky you were. It wasn’t the shiny bike or ballet slippers you had hoped for. But eventually, you realized that it was a valuable first step toward financial literacy and a solid future.

Pique their interest, give your time

How can you sweeten the deal, and make your gift — and learning about money — enjoyable? How about including a board game? Hasbro now offers at least 16 different versions of Monopoly for various ages, including its Super Electronic Banking Game for kids 8 and older. For younger children, there’s Learning Continuum’s Loose Change, as well as Lakeshore Learning’s Making Cents Money Game and its Allowance Game. 

Enjoy that game with your grandkids; they will remember it. “The gift of your time is priceless, says Bradley Lineberger a certified financial planner (CFP) at Seaside Wealth Management in Carlsbad, California. “There is much wisdom that can be imparted to the next generation, and spending time with your grandchildren will pay dividends in the future.”

For older kids, age-appropriate books, publications or documentary films may get their attention. Lineberger likes The Richest Man in Babylon, by George Clason, and The Wealthy Barber, by David Chilton. “The latter, written in 1926, is a timeless classic, but both are amazing,” Lineberger says.

For teens or college students, George Gagliardi, a CFP at Coromandel Wealth Management in Lexington, Massachusetts, suggests a subscription to the Kiplinger or Money newsletters or magazines. In addition to his suggestions, the documentary The Most Important Class You Never Had features eight personal finance educators who talk to high school students about money, with student and teachers sharing their stories. This 35-minute film by the nonprofit Next Gen Personal Finance is available on YouTube.

Seek advice before you contribute

When it comes to cash and other monetary gifts, here are six possibilities. Before making any moves, however, consult your financial planner and/or tax adviser. Also, talk to your kids to see how your gifts may affect their family financial planning.

1. 529 plan for educational expenses

Your first thought is to start, or add to, a 529 education savings plan for college. Great. In 2020, the average annual cost of tuition, fees, and room and board for a four-year, in-state public college was almost $22,000 — and it was $50,000 for a four-year private college. Plan withdrawals can be used for these qualified expenses.

For tax purposes, your contributions will be considered gifts. You can give up to $75,000 ($150,000 per couple) in a single year to lower your taxable estate, provided you treat it as if you made it in equal amounts over a five-year period (IRS Form 709). “Or you and your spouse could give $15,000 per year, per child, if you prefer,” Lineberger says. That is, $15,000 from you and $15,000 from your spouse. If you have three grandchildren, that’s a total of $90,000 without gift-tax consequences.

Also, under the SECURE Act, in effect since January of 2020, your grandchild, the beneficiary, can use these funds to pay for qualified expenses related to apprenticeships, and up to $10,000 over his or her lifetime to repay student loans. This money can also be used to cover qualified education expenses for elementary and high school students — up to $10,000 per beneficiary per year. All of this is tax-free.

What about student financial aid? Because 529 funds are considered parental assets, they will have a minimal effect on the family’s expected family contribution (EFC) and the student’s financial need. These plans have several advantages over a Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA) account or a Coverdell educations savings account (ESA). For the details, consult your financial planner or tax adviser.

2. Series I savings bond

Have you thought of a savings bond? John Scherer, a CFP at Trinity Financial Planning in Middleton, Wisconsin, suggests purchasing a Series I savings bond directly from TreasuryDirect.gov. “This is a safe investment that’s backed by the U.S. government, with a guaranteed rate and an inflation component. If used for college, the gains can be tax-free.” Interest rates on these bonds change on May 1 and November 1, based on the bond’s fixed rate (0 percent) and inflation. Currently, these bonds earn an annualized rate of 7.12 percent.

3. Custodial Roth IRA

You could encourage good money habits by opening a custodial or guardian Roth IRA for your minor grandkids, as they begin to earn their own money, says Rose Swanger, a CFP at Advise Finance in Knoxville, Tennessee. Realistically, they’ll probably want to enjoy the funds they’ve earned from babysitting, mowing the lawn or a summer job, she says. In that case, you could make matching contributions for the first few years to show how money grows when invested, and then let them start contributing. “Hopefully, they will become more motivated once they see the results.”

At most financial institutions, there is no contribution minimum for a Roth, and the maximum contribution for kids is $6,000 in 2021. You control the assets and make all investment decisions until the child is 18, when he or she assumes control. As adults, they can make withdrawals without penalties for house down payments, unreimbursed medical expenses or qualified educational expenses. Like you, they’ll be able to make tax-free withdrawals after age 59 1/2.

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