Kids are never too young to start learning about saving. If you have some money to pass along, a general savings account might be a great place for it.
A high-yield savings account might be a great place to start, and could keep their gifted savings growing for years to come. Start gifting them cash there for the future, and by the time they're old enough to need it for their first car, home, or college degree, it will be a sizable sum.
With college costs and debt on the rise, just about the best thing you can do for a grandchild these days is help them avoid starting out their adult lives in the red.
For a grandchild who's still rather young, helping them start saving for college in a state-sponsored, tax-advantaged 529 savings plan could be a big help. These investment accounts are opened in a child's name, anyone can contribute to them, and they can be transferred to another beneficiary to be used for qualified education expenses, should the original beneficiary not need the funds.
Each state specifies a different annual contribution limit, but note that in 2019 the IRS allows individuals to gift up to $15,000 a year without incurring the gift tax — meaning as a couple, you and your spouse could gift each of your grandkids up to $30,000 a year, 529 contributions included.
But you don't have to give them $15,000 — or $30,000 — a year for your gift to be truly valuable in the future. Any amount counts. "We're facing an era of high debt," says Pak. And for most kids starting their life today, he says, the philosophy is, "If you can can get any type of assistance, you have to take it."
Even if they're already in college and it's too late to start a 529 plan for your grandchildren, they'll probably be grateful for a little extra help around the time tuition is due.
"If you're looking at trying to save on taxes and to give as much as you can, my recommendation would be to give the money directly to the school," Pak says. Again, that's because gifts over $15,000 in 2019 are subject to a gift tax, but if you pay a school directly, that money is not considered a gift and therefore not taxed as one.
The average public school college grad leaves with about $30,000 worth of debt, so anything you can contribute could save them lots of struggle later.
These days, young adults are renting longer, mostly thanks to stagnant wages and increasing housing and living costs. "I'm in west Los Angeles, where a down payment on a home could easily be $100,000 to $300,000," says Pak.
If you're willing to help them start saving for their first down payment on a home, even while they're still fairly young, Pak says it it could be a big leg up, especially for children living in expensive housing markets.
Pak says that he's noticed quite a few grandparents helping pay the mortgage. "I've seen a lot of grandparents who were willing to help out with paying down the principal on an annual basis," he says. "I've seen them say, 'hey, grandson, granddaughter, pay down your principal balance, whatever your payments are, tack on my $15,000 on an annual basis.'"
Only two in five young adults today have had exposure to the stock market, according to a paper published by the Federal Reserve Bank of St. Louis. That means they're missing out opportunities for long-term growth, and lots of wealth-building.
"If a grandparent wants to write a check, you've got yourself money in a brokerage account that they can pretty much invest in anything, from stocks, bonds, and commodities, to mutual funds and ETFs," Pak says.
There are plenty of ways to help them get started with investing, from setting up an easy-to-use robo-adviser account, to teaching them about index funds.
Giving your grandkids money, whether in a brokerage account or a savings account, is just the first step. If you want them to get a leg up with their finances, you'll want to teach them what you know about money management.
Or, if you don't feel comfortable sharing your own expertise, you can set them up with professional help from a fee-only financial planner. Paying for a few sessions could help them create a plan for how to better manage their money and build wealth in the long term.
If you're looking for a good financial planner, SmartAsset's free tool can help you find licensed professionals with the skills you need.
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