It wasn’t that long ago that investing for your kids meant going to your local bank and withdrawing $25 for a savings bond that would be worth $50 in about 7 or 8 years. The savings bonds were collected and stored away somewhere safe for when your kids were ready for college and cashed in as they were needed to pay tuition. If you were one of the few who qualified (very few from Orange County), the interest would be tax free as long as it was used to pay for tuition at an eligible institution.
Fortunately for everyone, times have changed and even the government now offers online accounts and direct access through www.treasurydirect.gov. Anyone over 18 can create an account online and purchase savings bonds direct from the treasury. Another advantage of the treasury direct service is that the bonds can be purchased in any denomination from $25 to $30,000. The paper versions from the bank only came in a few denominations, which usually meant multiple transactions or building up funds to a round lot before investing. The only disadvantage that I can see is that they still pay much less interest than almost any other comparable investment.
The series EE Bonds rate is fixed at 90% of the five-year treasury rate and adjusted every six months. Currently it stands at 3.5% which is about the same rate as a six-month CD. Not very attractive when you consider you are locking up this money for at least five years and usually longer. The series I Bonds pay a lower fixed rate and combine it with an inflation adjustment on the value of the bond. The fixed rate stays the same for the life of the bond and the inflation rate is semi-annually adjusted according to the Consumer Price Index for all urban consumers (CPI-U). The I Bonds are currently paying 4.8% which is still low for such a long-term investment but much better than the 3.5% available on the EE Bonds.
For people wanting higher returns and willing to accept a little volatility the choices available today are better than they have ever been. With choices like 529 plans, Roth IRA’s, Coverdell savings accounts and custodial accounts, just to name a few, you really need to speak to your financial advisor to determine which type of account is best for your situation. Each account has advantages and disadvantages. Some accounts will be considered the child’s assets if they are applying for financial aid and some accounts have more tax benefits than others. Custodial accounts become the child’s assets when they turn 18 and they can spend it any way they want…even if they just want to blow off college and float around Europe for a while.
Once an account is set up for your child anyone can make gifts to it. For 2005 each person is allowed to give $11,000 to anyone without paying gift tax ($22,000 for a married couple splitting the gift). This amount goes up to $12,000 ($24,000) in 2006. In some cases you can even give stock instead of cash. This can be very beneficial to parents or grandparents wanting to give highly appreciated stock. If you have grandchildren or really anyone in college that you want to help out, you can pay the school directly and the funds are not limited to the annual exclusion amount. This also applies to gifts to help someone pay for medical expenses.
There are several newer services available on the Internet that allow anyone to buy small amounts of stock as low as one share for a reasonable price. Sharebuilder.com allows you to invest in stocks or Exchange Traded Funds (ETF’s) for as little as $4 per transaction with no minimum investment. You can set up a variety of accounts and have money automatically invested on a regular basis. Or, if you truly just want to give a stock as a gift and have a certificate framed and sent to the recipient, try www.oneshare.com. They offer the most often gifted stocks like Disney or Nike that come beautifully mounted and framed for about $100. The downside to this is that the actual value of the gift is much less than what you will spend. Your $100 gift is actually a $20 gift with a $40 transfer fee and a $40 frame. But it does make for a very nice decoration in a kids room and starts them thinking about investing. If you already own the stock you want to give you could also gift a share you already have and it will only cost you about $40, but you will have to mount and frame it yourself.
The bottom line here is that there are many ways to give financial gifts and the best solution for your neighbor might not be the best solution for you. You need to consider who the gift is for, where the funds are coming from, and what is the purpose of the gift. If it gets too complex you need to speak to an advisor that you trust. For an excellent book on financial gifts beyond just the monetary aspects, read “the Ultimate Gift”, by Jim Stovall. It could change your whole outlook on wealth and giving and what really matters most in l