By Nick Fortuna Dec. 1, 2023 The Wall Street Journal
U.S. consumers entered this holiday season planning to spend an average of $654 on gifts, with the likeliest purchases going to gift cards, vacation and travel, and toys and games, according to the Conference Board Holiday Spending Survey.
Instead of giving these traditional gifts, wealth advisers say a financial-related gesture or present might be the best gift of all—the one that keeps on giving. Even small financial gifts can help to position young people for success or help seniors to enjoy their retirement, financial advisers say.
Here are some of their financial gift ideas, broken down by age.
Contributing to a “529” education-savings plan, or a qualified tuition program, for a child or grandchild is a good gift option because those after-tax contributions grow tax-free, and distributions are tax-free as long as the money is used for the beneficiary’s qualified education expenses, financial advisers say.
And if the recipient decides not to go to college or doesn’t need the 529 for other education expenses, the contributions can jump-start retirement savings.
Before the Secure 2.0 Act was signed into law a year ago, most withdrawals from 529 plans for anything other than qualified education expenses were subject to income tax and a 10% penalty. However, the new law allows owners of 529 accounts—typically parents and grandparents—to roll over money that isn’t spent on education into a Roth individual retirement account for their child or grandchild.
This eliminated one of the main potential drawbacks of a 529 account—the possibility that the beneficiary won’t pursue higher education, says Dean Catino, president and co-founder of Monument Wealth Management in Alexandria, Va.
Owners of 529 accounts may now roll over a lifetime limit of up to $35,000 into a Roth IRA for the designated account beneficiary. Rollovers are subject to the annual cap on Roth IRA contributions, which is $7,000 in 2024 for people under the age of 50.
Some limits apply. The 529 plan must have been established at least 15 years before the rollover, for example, and any contributions within the past five years can’t be rolled over.
Alternatively, a 529 account owner could change the beneficiary to another child who likely will have education expenses.
Contributing to a 529 plan is an option for older children, but with the college years drawing nearer, the money won’t have much time to grow. Instead, consider custodial brokerage accounts for teenagers, exposing them to basic principles of long-term investing, Catino says.
Through a custodial account, teenagers can learn about the importance of building their investments over time, regardless of how the market is performing, says Derek Miser, chief managing partner of Miser Wealth Partners in Knoxville, Tenn.
“That educational piece, introducing teenagers to investing, is a valuable gift,” he says. “Financial responsibility and the power of compound interest is something everybody should learn earlier in life rather than later, and since they are young, they can handle the volatility of the stock market.”
When it comes time to apply for financial aid, however, custodial bank and brokerage accounts are considered assets of students and might affect their eligibility for aid, says Jaime Eckels, partner at Plante Moran Financial Advisors in Auburn Hills, Mich. Conversely, a 529 plan for a student is considered an asset of the parent on the Free Application for Federal Student Aid, and 529 plans owned by grandparents and other nonparents don’t affect aid eligibility, she says.
Expenses such as student loans and rent leave many young adults with little to save for retirement, even if their jobs encourage them to save through matching 401(k) contributions. To get the ball rolling, parents or grandparents could open a Roth IRA for a young professional and pledge to match that child’s contributions, up to the $7,000 annual cap for 2024, according to Nick Strain, senior wealth adviser at Halbert Hargrove in Long Beach, Calif.
Matching contributions give grandparents and parents an opportunity to discuss their lifelong investment strategies and experiences with their adult children, he says.
“I think the gift is important, but you also can talk about what you’ve learned over the years,” Strain says. “Putting those two pieces together makes it more personal.”
They may be at the height of their earning power, but midcareer workers also may be weighed down by their own student loans, mortgage payments, auto loans, personal loans and credit-card debt. Eliminating interest-bearing debt, helping to pay for children’s education expenses or contributing to Roth IRAs all can relieve some financial stress on middle-aged workers, says Miser.
Paying down high-interest debt for a loved one can be a thoughtful gesture, says Eckels. “It relieves a lot of stress for people,” she adds.
A universal life insurance policy also holds appeal because gains on the cash-value component of the policy grow tax-free, Miser says. The cash-value portion earns interest tied to the performance of a stock-market index such as the S&P 500. It is typically shielded from market losses, though the gains are likely to be capped. The policy also provides a death benefit to survivors.
Sometimes the best gift for a senior relative is a splurge on a traditional gift he or she wouldn’t otherwise consider. Paying for a bucket-list vacation, for example, and having multiple generations of the family along for the trip can create memories that transcend price, says Eckels.
If seniors don’t have specific wants or needs, consider a donation to their favorite charities, she says. “A lot of times, they’re decluttering at that point in their life and are trying to get rid of things, so this allows you to do something meaningful and nice for them that also benefits others,” Eckels says.
Nick Fortuna is a writer in Ocala, Fla. He can be reached at email@example.com.
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