There are a growing number of investment options that make it simple and cost effective to give financial gifts to kids. Quite a few of these options are aimed at tech-savvy investors.
SparkGift makes giving stock and mutual funds as easy as buying a gift card. The site lets you buy fractional shares in roughly 6,000 investments, from individual stocks, such as Apple (symbol AAPL) and McDonald’s (MCD), to shares in a variety of exchange-traded funds, including the popular Vanguard Total Market ETF (VTI). The minimum investment is $20, and the maximum is $2,000.
You can participate in one of two ways. If you’re a parent and want to create a SparkGift registry, you can upload a photo of your child, along with his or her goals and favorite investments. Share that registry with your friends and family, and they can use it like a wedding registry to follow your wishes explicitly or not at all.
If you’re a donor and want to give stock to a child who doesn’t yet have an account, you pick the stock and the amount you want to spend, then provide the child’s name and the parent’s e-mail address. The site will then notify the recipients and have them set up a new account. You don’t have to be concerned about the market price of the stock. The site will buy as many shares – or a fraction of a share – as your gift allows.
Fees. $2.95 per transaction, plus 3% of the gifted amount. (Mangot says the site is waiving the 3% fee through the holiday season , but will impose it after that. The charge defrays the cost of credit card interchange fees.)
Who it’s good for. If you want to give a financial gift and are not certain how the money will be used, this service gives the recipient the most options of how to spend their funds. It’s also one of the cheapest ways to buy small amounts of stock.
Why look elsewhere. If you anticipate that the accountholder will keep adding to the account in small increments, you may want to give differently because those $2.95 charges can add up. In addition, you can’t use SparkGift to fund a tax-favored college account.
State governments that offer 529 college-savings plans have created “Ugifts” to help facilitate small one-time contributions to these tax-favored accounts, says Betty Lochner, chair of the College Savings Plans Network (CSPN), a cooperative that represents 529 plans and prepaid tuition programs.
Account holders (usually a child’s parents) provide friends and relatives who are interested in giving a Ugift a special code that identifies the child’s account without revealing the account number or recipient’s Social Security number. Givers go to the gift-giving section of the Web site, plug in the code and transfer money from their bank accounts. The account holder gets a message when the process is completed. Givers can also download a gift card that allows them to e-mail a personal message to the parents, the beneficiary or both.
Open a 529
Ritter, the T. Rowe Price financial planner, is a fan of giving through 529 plans, which are tax-deferred savings vehicles for education expenses. These accounts have many advantages. First, although Uncle Sam doesn’t allow you to take any deductions for contributions, 34 states and Washington, D.C., provide account holders with some sort of tax break or matching program. The federal government, meanwhile, doesn’t tax the investment buildup in the account unless the money is used for a purpose other than qualified education expenses.
Most 529 plans also offer the equivalent of a target-date fund: age-based portfolios that are well-diversified among stocks, bonds and cash and that become more conservative as the child gets older and closer to the first tuition payment. Ritter thinks the concept of diversification is a lesson worth learning, even at an early age. Moreover, he likes the idea of talking about college and making it an economic priority when kids are young and impressionable.
Fees: Vary based on the plan selected. Many plans charge no annual account fees but charge annual fees for asset management, much like any mutual fund. For a comparison of fund fees, go to http://www.savingforcollege.com/529_fee_study/.
Who it’s good for. If you are planning to give regular gifts earmarked for education and you live in one of the 34 states (or the District of Columbia) that provide tax breaks or matching contributions, starting your own 529 is the best bet. The tax breaks are generally reserved for residents who contribute to their own state’s 529 plan. Matching contributions of up to set amounts — $400 in Arkansas and $500 in Colorado, for instance — are made to the account for “qualified” recipients in some states. Qualified recipients are usually those with low incomes or those who meet certain requirements, such as opening the account before the beneficiary’s first birthday. You are the account owner. This typically allows you to claim the tax breaks and control when the beneficiary gets the money. (Every plan varies, so be sure to read the terms and conditions.) You can even change beneficiaries, if the original recipient changes his or her mind about college. You can open a new account with as little as $250, and you may have no initial minimum investment requirement if you sign up for automatic monthly contributions of as little as $25. You can find a comprehensive list of 529 minimum investment requirements at www.savingforcollege.com.
Why look elsewhere. If you are contributing a small one-time amount or live in a state that doesn’t provide tax breaks for 529 contributions, you needn’t go through the trouble of starting a separate account. Also if you want to give a financial gift to someone who is over the age of 18, it makes little sense to lock the money up in a 529 plan. That’s because a young adult is likely to use the money well before he or she can benefit from the tax breaks and the long-term compounding of the investments.
Platforms for Young Adults
Children who are 18 years of age or more have more options, such as Robinhood — a free brokerage platform that operates via smartphone — and Acorns, an investment platform that charges just $1 per month to manage a diversified portfolio of exchange-traded funds. Motif Investing, which gives account holders the ability to buy a theme-based package of stocks for $9.95, is another option for those willing to spend $300 or more to set up an account for a young adult. Any of these three investment programs would make more sense for an 18-year-old who wanted to learn about money management.