The holidays are here, and like many parents, I am busy wrapping presents for my kids. My son is desperate for anything Lego-related, and my daughter has dreams of a Barbie beach house. These toys bring so much joy in the moment, and therefore tempting for parents to purchase, but we all know they often lose their luster (or their pieces!) within just a few months. I would argue that some of the most meaningful gifts aren’t found in a toy box, they are the gifts that grow, such as gifts that build an early financial foundation.

Whether you are a parent, grandparent, or friend, financial gifting can provide a head start on everything from college tuition to a first home. Here is a breakdown of the most popular ways to give “gifts that grow,” including the pros and cons of each.

1. 529 College Savings Plans: A 529 plan is a tax-advantaged account specifically designed to encourage saving for future education costs. It is one of the most popular ways to give because of its high contribution limits and tax efficiency.

• The Pros:
  • Tax Benefits: Your investments grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses (tuition, books, room and board). Some states, including Michigan, offer tax deductions for 529 plan contributions (for 2025/2026: $5,000 for single-filers, $10,000 for joint).
  • Flexibility: While designed for college, funds can also be used for K-12 tuition or apprenticeship programs. In addition, funds designated for one child can easily be transferred to another child or beneficiary.
  • New “Rollover” Rule: Under recent legislation, unused 529 funds (up to $35,000 lifetime) can be rolled over into a Roth IRA for the beneficiary, subject to certain limits.
• The Cons:
  • Specific Use: If you use the money for non-qualified expenses, you’ll face a 10% penalty, plus income tax on the earnings.

2. Custodial Accounts (UGMA / UTMA): The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) create a trust-like account for a minor without the complexity of a formal legal trust.

• The Pros:
  • No Spending Restrictions: Unlike a 529, these funds can be used for anything that benefits the child (a car, a summer program, or a house down payment later in life).
  • Simplicity: They are easy to open and allow you to gift stocks, bonds, and mutual funds directly to the minor.
• The Cons:
  • Irrevocable: Once you put money in, it belongs to the child.
  • Loss of Control: When the child reaches the “age of majority” (usually 18 or 21, depending on the state), they gain full control of the money.
  • Higher Impact on Financial Aid: These are viewed as the child’s assets, which can reduce financial aid eligibility.

3. Roth IRA for Kids (Custodial Roth IRA): If a child has any earned income (from a summer job, babysitting, or paper route), you can open a Custodial Roth IRA for them.

• The Pros:
  • Decades of Growth: Because children have a long-time horizon, even small contributions can grow into a massive nest egg by retirement.
  • Tax-Free Income: Like a standard Roth IRA, withdrawals in retirement are completely tax-free.
  • Penalty-Free Access: The contributions can be withdrawn at any time if the child needs them for a major life event, like buying a first home.
• The Cons:
  • Income Requirement: The child must have documented earned income. You cannot contribute more than they earned that year.
  • Record Keeping: You need to keep track of the child’s earnings to satisfy IRS requirements.

4. Direct Cash Gifts: Sometimes the simplest way to give is a direct check or a transfer into a savings account.

• The Pros:
  • Instant Impact: It’s the easiest gift to give and receive.
  • Educational Opportunity: It provides a chance to teach a child about “Spend, Save, and Give” buckets.
• The Cons:
  • Inflation: Cash sitting in a standard savings account rarely keeps up with inflation, meaning it loses purchasing power over time compared to invested funds.
  • Gift Tax Limits: For 2025, the annual gift tax exclusion is $19,000 per person. If you give more than that to one individual in a year, you may need to file a gift tax return.

5. Donor-Advised Funds (DAF): For families who want to pass down values of generosity, a Donor-Advised Fund allows you to involve children in charitable giving.

• The Pros:
  • Family Legacy: You can name children as “successors” or “grant advisors”, allowing them to help choose which charities receive grants.
  • Immediate Tax Benefit: You get a tax deduction the year you contribute to the fund, even if the money isn’t distributed to a charity until years later.
• The Cons:
  • Not for the Child’s Personal Use: This money is committed to charity and can never be used for the child’s education or personal expenses.

The Bottom Line

There is no “one-size-fits-all” financial gift. The right choice depends on your goals, whether you want to fund an education, jumpstart a retirement, or simply teach the value of a dollar.

At Bloom Advisors, we help families navigate these choices to ensure your generosity leaves a legacy. If you’re ready to start a conversation about gifting to the next generation, reach out to us today.