Ask Money

Smart money gifts for kids

Chris Farrell Jan 13, 2011

Question: My husband and I do not plan on having children, but want to put money into an investment for our nieces and nephews on a yearly basis as gifts. We do not have much money right now because of school and am very close to paying off our credit cards, we also have IRA’s. We want to be realistic about our capabilities because we are trying to plan our retirement as well (we are 32) however, we want to start sooner than later making deposits even if it is a small portion for now. What is the best option for something like that so that they can have some money for school when they get older? They range from 2 years old to 7 years old. Maria, Athens, GA

Answer: It’s a wonderful thought. I have two suggestions, but first I’d love to ask other people to send in their recommendations for making small money gifts for kids over time. It’s a question we get a lot.

One thought is to persuade the parents to establish 529 college savings plans for each of their children. For most state-sponsored plans the initial investment is minimal, about $25. They can research 529 plans at savingforcollege.com. The big advantage of a 529 plans is that anyone can put money into the account (with after-tax dollars) and the contributions can be small. If the parents have already set up 529s for your nieces and nephews then I would put money into them when its convenient.

Of course, this limits the use of your financial gifts to pay for qualified college education expenses. You may want to offer greater financial freedom with the money for when your nieces and nephews are young adults.

In that case, my other recommendation is to periodically buy them I-bonds, the U.S. governments inflation-hedged savings bonds. You can purchase I-bonds online at Treasurydirect.gov. You can buy them in small denominations. The investment compounds tax sheltered until they’re redeemed. There is no credit risk since they’re backed by the full faith and credit of the federal government. Inflation won’t erode the value of the savings.

I-bonds are a deal and they fit in with my motto of, Keep It Simple.

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