Struggling to find last-minute holiday gifts that won’t be delayed by supply chain issues?
One simple way to help children or relatives start investing is to gift them stocks or other financial assets.
“If you’re looking at it as a Christmas gift or a holiday gift for a young person, I think purchasing stock is a great way to introduce them to investing,” said Judson Meinhart, a certified financial planner and manager of financial planning at Parsec Financial in Winston-Salem, North Carolina.
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“It can be something that they have an interest in, or potentially a long-term growth company they can follow along as they grow,” he added.
Investing in the stock market is a great way to exponentially grow a monetary gift – this year to date, the S&P 500 index is up more than 21%.
Buying stock for someone else
It is relatively simple for parents to purchase stocks for their children.
To do so, parents need to set up a custodial brokerage account — often called a UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gift to Minors Act) account —for their children or another minor in their care. Then, guardians can buy the stocks they want via the account for their kids.
When the child who the account belongs to comes of age — either 18 or 21, depending on the state in which they live — they gain full control and can use the money as they please.
If you’d like to gift your child stock, experts advise making it fun and finding stocks that the child has a connection with.
“It’s important that there’s some sort of emotional attachment to it,” Meinhart said. “It makes for a nice story and can kind of engage the child a little bit more.”
“You could give your daughter a Barbie and give her Mattel stock,” said Clark Kendall, a CFP and the president and CEO of Kendall Capital in Rockville, Maryland.
You can also make a habit of looking over quarterly statements or news about companies you’ve invested in with your child to show them how the market works. This can also help solidify lessons like not selling when a stock dips, and instead staying invested over the long-term.
“It’s an opportunity to educate them,” said Kendall, adding that this can help jumpstart an interest in financial literacy early.
Gifting stock you currently own
If you’re looking to gift to an adult friend or family member, you can generally transfer shares from your brokerage to theirs if you have their account information.
You can also gift stock that you currently own to non-profit charities as a donation, instead of writing a check.
This comes with certain tax advantages that make it attractive. If you give assets directly to a qualified charity, they don’t have to pay capital gains.
Still, you should only give stocks to charity because you genuinely want to make the gift, according to Mark Jaeger, director of tax development at TaxAct, a software provider.
“It should be about the spirit of doing it and then wanting to do it to support a specific charity,” Jaeger said.
If you’re looking to gift a child money that will be invested and grow over time, there are a few other ways to do it.
You could help contribute to a 529 plan for their future education. If your child has a job, you could also help them establish a Roth individual retirement account and contribute either money or gift assets that way.
Such plans don’t offer the same flexibility as a custodial brokerage account. If the child ultimately decides not to go to college, it can be difficult to access the money in a 529 plan without penalty. With a Roth IRA, they need to have earned income, and there are limits on how much they can contribute and what they can withdraw before retirement.
With a custodial account, there aren’t any limits on how the child can use the money. Such an account also gives parents or people gifting stock more options on what they can give.
If you’re gifting or donating stocks, there are a few things for both giver and receiver to consider.
It can be beneficial for people to give stocks to avoid paying capital gains taxes, but it means that you’re passing a potential tax along to whomever you’re gifting. This could be worth it, though, if the person you’re giving to is in a lower tax bracket. Depending on their income, they may pay a 0% capital gains tax.
And, if you gift more than $15,000 per year, including stocks, you must file extra paperwork with the IRS. You may also be subject to a gift tax, but only if you’ve gifted more than the current lifetime cap of $11.7 million.
If you want to make the most of gifting stocks and other assets, a financial advisor can help you with the process.
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