The Right Way to Gift Money to Your Kids
If you want your kids to learn the right way to handle money, they have to have some money to handle. It’s something I’ve learned from raising two children — and I’ve also learned that while many gifts are fleeting (toys break, sweaters pill, gadgets are replaced by newer models), the gift of money is one that can keep on giving. But you have to give it correctly, keeping in mind everything from etiquette to tax implications.
Whether you’re giving money for the holidays, birthdays, or graduation, here’s a guide to the best way to give the green stuff.
Decide What You Want to Accomplish
Before giving a monetary gift, it’s important to understand why you’re doing it. Are you looking to fund a future goal like college or retirement? Do you want to teach a child how to invest in stocks or mutual funds? Is your aim to see the joy on your kid’s face when he realizes he has cash of his own to decide how to spend? Or are you just at a complete loss for what to buy your child?
Any and all are fine, but they should be handled in different ways explains Susan Beacham, founder of Money Savvy Generation and co-author of “OMG: The Official Money Guide for College Students.” The one big caveat: “If you want to give money as a gift, make sure it’s a gift and doesn’t have strings attached,” she says. And if you do decide to attach some strings?
"Make sure you are very upfront about that.”
Understand the Meaning of Cash…to the Recipient
Here’s a good way to disappoint a 7-year-old grandchild at Christmas: Put a check in her stocking. “If you’re expecting a super response from that child, you’re not going to get it,” says Beacham. To a young child, a check isn’t money that can be spent — it’s an abstract concept.
Cash is better, but even that has to be in a form that the recipient can understand. “A hundred dollar bill is the same size as a twenty is the same size as a ten,” she says. “Some kids get it. Most kids don’t.” And even those kids who do understand also know that no one is going to let them hang onto a hundred dollar bill — it’s just too big.
So, if you want to keep a gift in cash, break it down into pieces a child can actually transact with so that they learn to handle money. For young children, consider a roll of quarters (provided, of course, that they’re not so young that quarters present a choking hazard!). For pre-adolescents and teens, give bills with a letter that explains why. Beachem suggests something like this:
“What we’re giving you this holiday is cash. We want you to get something for yourself that you really want. It’s okay for you to buy something you need like a new pair of gym shoes. But if you want to put it towards your new bicycle, we would really love that.”
In that way, you’re not attaching strings to it, but you’re giving some clarification and suggestion.
Set Gifting Expectations Very Carefully
Experts recommend you be very clear and careful about your intentions when you begin a pattern of gifting, especially if you’re giving large sums to older or adult children.
Recipients very quickly come to both expect and (in some cases depend on these gifts, budgeting them in for college expenses, home renovations, annual vacations, and more. If your intention is to gift once or to only do it sporadically, let your children know what the plan is.
Understand the Tax Implications
The tax rules on gifting money are very straightforward. You are allowed to give up to $14,000 to an individual every year; your spouse can do the same, which allows for a joint gift of $28,000. If you want to give more than that, you can dip into the $5 million-plus you’re allowed to give away during your lifetime or at death (the so-called Unified Credit). But that will trigger the need to file a gift-tax return. (These taxes are in places because the wealthy use gifting to move money out of their estate prior to death so that it won’t be subject to estate taxes.)
You’ll also need to know about the kiddie tax, especially if you’re planning to turn the gift into an investment lesson. This IRS provision was established to prevent well-to-do parents in high tax brackets from trying to shelter money in the names (and custodial accounts) of their less well-to-do kids who happen to be in lower tax brackets.
The first $1,000 of unearned income (capital gains, interest, dividends, etc.) in a child’s account is tax-free; the next thousand is taxed at the child’s tax rate, and anything over $2,000 in unearned income is taxed at the parent’s rate. So if you’re planning on investing that cash gift, understand that there could be tax implications if the investment pans out.
Gift Today for Tomorrow
One of the ways a gift of money is particularly valuable is that it can fund future dreams from college to retirement, explains Chris Chen, Wealth Strategist at Insight Financial Strategists. But you have to put it to work. If your child is working, you can contribute to a Roth IRA on his or her behalf in an amount equal to their income (up to the yearly cap of $5,500). The gifts count as part of the $14,000 you’re allowed to give them.
When you make the gift of a Roth contribution, sit down with your child and talk about how to invest the money to make it grow for the future (or just gift it alongside a personal finance book.) You could also put the funds in an account at a robo-brokerage like Wealthfront or Betterment, then give your kids the password so they can log in and follow their progress. If the gift is for college, there’s a tax provision (often used by generous grandparents) that allows five years of $14,000 gifts to be made at once to a 529 college savings account. That gives the money more time to compound.
Don’t Get Stuck on the “Appropriateness” Question
Finally, there’s absolutely no doubt that the gift of money comes with baggage. Beachem suggests you don't get hung up on it. “Don’t overthink it,” she advises. If it feels good to give it, it will feel good to get it.
With Hayden Field