How to Give to Children

Your children and grandchildren probably come to mind first when you want to contribute to another’s financial security and future.

Dan Crimmins
Financial Adviser in Woodcliff Lake, NJ

September 10, 2015

Your children and grandchildren probably come to mind first when you want to contribute to another’s financial security and future. Here are key strategies.

The right choice depends on how much you intend to give as well as on your child or grandchild’s stage of life and the goal of the financial gift.

Uniform Gifts to Minor Act (UGMA) or Uniform Transfers to Minors (UTMA) accounts. These plans, sometimes called custodial savings accounts, facilitate saving for a minor child without setting up trust funds or hiring attorneys. You appoint yourself or other adults, such as the child’s parents, to look after the account.

One of the key advantages: flexibility. You can put a huge range of investment options inside a UGMA/UTMA, including stocks and mutual funds. These accounts work well if you save fairly small sums.

Hitches include that the assets become the child’s property at the age of majority (18 or 21, depending on state of residence). This leaves the donor with no real control over spending.

Second, substantial UGMA/UTMA assets hurt college-bound children in financial-aid calculations. If you started one of these accounts years ago with good intentions, revisit it before the child reaches college age.

529 plans. If you save for a college-bound child, 529s help you avoid two pitfalls of UGMA/UTMA accounts.

First, you the account owner, not the child, retains the assets. If one child doesn’t go to college, you use the assets for another child. Second, because the assets belong to the account owner, they affect financial-aid eligibility relatively little.

You owe no taxes on 529 plan investment earnings year to year; withdrawals from a 529 account are tax-free provided you use them for qualified higher-education expenses such as tuition and room and board. You may also qualify for a state tax break on your contribution, depending on certain requirements.

Unqualified distributions of earnings incur ordinary income tax and a 10% federal penalty tax. Also keep assets out of the child’s name when possible: Financial aid shrinks even more when the prospective student owns assets.

Two variations of these plans pay for future tuition of a state's higher education schools at today's rates or accrue savings for general future college expenses.

Roth individual retirement accounts. If your child or grandchild is older and working, you can contribute an amount equal to the child’s earned income up to $5,000. Roths include a range of investments and carry no investment minimums or age limits on contributions.

Contributions to a Roth IRA are not deductible but funds do grow tax-free. You can also withdraw without paying tax if you hold the assets for five years. A 10% federal tax penalty may apply for withdrawals prior to age 59½.

Those who tap the investment earnings of an IRA owe income tax on that portion of the withdrawal but circumvent the 10% penalty on early withdrawals if they use the money for qualified college or certain other expenses.

Again, the child maintains control over the assets in a Roth IRA and can use the money in any way at the age of majority.

On the plus side, you teach them thrift in a modern world of savings by setting up a Roth they can also contribute to – a lesson that’s the greatest gift of all.

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