Even people with modest incomes consider long-term investments when choosing baby gifts these days. Some types shelter income from taxes while setting aside money specifically for future college expenses, while others are savings vehicles with no specific goals other than making sure a tiny recipient has a nest egg. Your personal financial circumstances, risk profile and penchant for creativity are all factors to be considered when setting up such funds, so make your choice so everybody involved benefits -- especially you.
U.S. Savings Bonds
Once upon a time, parents and grandparents socked away money in U.S. Treasury E-bonds with seven-year maturity limits. These days, bonds still exist and make a great investment choice if you don’t have lots of money to invest and are looking for a slow and steady strategy. Choose I-bonds rather than EE/E bonds. I-bonds are hedges against inflation and include two interest rates: one fixed and another that adjusts to the consumer price index. They’re simple and safe, and you can invest up to $10,000 per year. I-bonds mature at five years, there's no commission fee and you can buy them from banks or via treasurydirect.gov. Ask for a free gift certificate to present to the child if you buy one. That said, Kelly Campbell, founder of Campbell Wealth Management, advises her clients against bonds because they “often don’t outpace inflation.”
If you’ve discarded investing in government I-bonds, but you still like the idea of investing in bonds for a baby’s future, look into buying zero-coupon bonds. Safer than playing the stock market, these instruments mature in seven-to-10 years, depending upon the issuer. If the bond market stays healthy and strong, today's baby can benefit from your generosity when she's grown. Interest rates and yield curve should determine your bond investment strategy, but like all long-term investments, there are no guarantees that the bond market won’t be affected by economic downturns once you’ve made your purchase.
Hand Over the Cash
Parents and grandparents can hand over $13,000 per person as a gift (that’s $26,000 per couple) to a baby without being hit with a gift tax, but if you’ve tracked the interest rates being paid by banks on savings accounts these days, you know the news is grim. According to Grandparents.com: “Current tax laws allow for a gift-tax exemption for monetary gifts of up to $1 million. And specifically for grandparents giving monetary gifts to their grandkids, there is also a “generation-skipping” tax exemption for gifts of up to $1.5 million.” Robert DiQuollo, president of Brinton Eaton Wealth Advisors of New Jersey, has a different perspective on giving cash gifts to babies: He advises his clients to give the cash to debt-ridden parents instead so baby grows up in a more financially secure home.
College Savings Accounts
Choose a popular 529 college savings plan as your long-term investment gift for a baby and join the movement that has won the hearts, minds and wallets of parents and grandparents across the U.S. Is this the best long-term investment choice? Yes and no. A 529 account doesn’t have to be reported when the child fills out financial aid applications, so if he grows up and lands a scholarship, funds can be diverted to a sibling, but they must be used solely for education. If not, the account is subject to taxes and penalties. All is not lost if a scholarship recipient has no siblings: She can still use the 529 account proceeds to go to grad school, or she can change the name on the plan and give it to her child.
Giving stocks to a baby as long-term investments is not a wise move for risk-averse people, but if you like to walk on the wild side, you can show your creativity by putting together a mini-portfolio of fun stocks like Disney, Mattel or Dreamworks. Some companies supply whimsical stock certificates for a baby’s nursery wall so he grows up knowing he’s got cash awaiting his future aspirations. Bill Keen, of the Keen Insight Group and grandfather to 17, recommends transferring existing, "highly appreciated stocks" into an account for a baby as a clever strategy. There's no out-of-pocket outlay and when she grows up and liquidates the stock, she can “collect the difference in capital gains between the original price-per-share and the current price-per-share.” Penalties for this stealthy maneuver aren’t bad if based on a child’s post-college tax bracket, adds Keen.
Unusual Investment Ideas
You can donate money directly to a college or university as a way of pre-paying a baby’s tuition and ensuring that your long-term investment will ensure her college education. Such transactions aren’t subject to gift taxes. If the baby grows up and chooses a different college, the money is returned and can be used to pay tuition at the other school. A life insurance policy with cash value is another way to invest for the long haul since rates are so inexpensive for newborns. Here’s a creative idea from Angelo Robles, author of "College Money Planning": Go to websites like Upromise.com and Babymint.com. Register the names of the baby's parents. Each time a parent patronizes a participating retailer, a modest rebate goes directly into the 529 or savings account established in their baby’s name.
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