4 Great Ways to Give Investments to Kids
When Peggy Mangot began giving her nieces and nephews financial gifts more than a decade ago, the process was frustrating. Buying shares of individual stocks was costly and time-consuming; most mutual funds were out of reach because of high minimum-investment requirements; and purchasing a simple U.S. savings bond proved so difficult that Mangot gave up. Sending checks accompanied by newspaper articles with suggestions of how to invest the money wasn’t ideal, either. “Sometimes the check would end up in a drawer,” says Mangot, now CEO of SparkGift, a San Francisco company launched in March to make it easier to give investments to kids. “It wasn’t fun or rewarding for me or for the kids.”
Giving financial gifts today is far simpler and more cost-effective, thanks to a growing number of investment options aimed at tech-savvy investors. However, the best option for any individual, regardless of age, will depend on a variety of factors, including the goal of the financial gift. “Ideally, you want to look at this as not only a gift but a teachable moment,” says Stuart Ritter, a certified financial planner at T. Rowe Price who has three children of his own. “That lesson starts with what your goals are.”
For relatives and friends who want to buy a modest financial gift for a minor, here are four low-cost options.
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.
Who it’s good for. People who want to give modest gifts to a beneficiary who has an established account will like this. Many 529 plans accept Ugifts in denominations ranging from $15 to $50.
Why look elsewhere. If you don’t want to put limits on how the money is spent, avoid 529 plans. Withdrawals from these accounts are subject to income taxes and penalties if the money is used for anything unrelated to schooling. Moreover, if you plan to give a substantial amount and live in one of the 34 states that provide tax breaks for contributing to a 529 plan, you have better options (see “Open a 529” below).
Started by Mangot to address her financial frustrations, 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.