Many children are busy unwrapping gifts and having fun with their new toys and games. While your kids may be enjoying their action figures or new electronics, these aren’t the only gifts to consider this year. Here are some important gifts you can give that can prepare your children for a solid future.
1. Open a 529 plan
College isn’t getting any cheaper. A good way to pay for this is to spend money on a 529 plan. Although contributions from 529 plans are not tax-free, once financed, these accounts start to grow tax-free. Withdrawals are also tax free, as long as they are used for qualifying educational expenses (which are not limited to college; you can also remove funds from a 529 to pay for private schools). In addition, some states offer their own financial incentives to open a 529. See what benefits are available where you live.
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2. Open a custody brokerage account
Teaching your children from an early age to invest is one of the greatest gifts you can give them. If you open a custody account in their name (instead of buying shares for them on your own account), they will be even more excited. After creating an account, explain to your children how the stock market works and help them identify companies that fit well in their individual portfolios. Your kids will probably prefer brands they know and love, like Disney (NYSE: DIS), and there is nothing wrong with that.
3. Open a Roth IRA
Most of us recognize a Roth IRA as a retirement savings vehicle – not exactly the kind of thing a teenager is able to appreciate. But there are many good reasons to open a Roth IRA for your children this year.
The advantage of saving on one of these accounts is that you can technically withdraw your main contributions at any time, without penalty, so that your children can use their accounts as a source of reserve income as needed. Roth IRAs can also function as a college savings tool. If your children have high hopes for higher education, it is worth considering one. There are no age-related restrictions on contributing to a Roth IRA, but your children must have received income to fund one. This income can come from a part-time job or even from a show job that is reported as taxable income.
Let us be realistic: your children may be much more excited to unwrap a video game or new cell phone than to look at a pile of papers showing their names on one of these accounts. But opening a 529 or Roth IRA brokerage account in your name ultimately gives them even greater gifts: future financial security and the option to meet the various goals they have set for themselves over time. They may not recognize the importance of this gift right away, especially if they are on the younger side, but over time, they can appreciate it immensely.