Saving and Investment Gifts for the Next Generation

As the holidays approach, we all face the same conundrum: what to get the young people in our lives. While many givers fall back on cash or gift cards, they may be missing out on presents of potentially more lasting value.

"Personally, I love giving my nieces and nephews investment-based gifts because they spark invaluable conversations around financial literacy and often are more meaningful in the long run," says Susan Hirshman, director of wealth management at Schwab Wealth Advisory, Inc.

Here are five gifts to consider this season:

"It's never too early to teach kids about the market and compound growth," Susan says. "Consider gifting them a stake in a company that makes something they know and value, such as their favorite gaming console or TV show. You can even periodically review the stock's performance together to help determine why the price performed the way it did.

Contributing to a child's 529 plan is one way to help make sky-high college costs more manageable. "The younger they are when you contribute to their 529, the longer the account has to potentially benefit from compound growth," Susan says. Plus, many states offer income tax credits or deductions for contributions to a 529 plan. In 2023, individuals can contribute up to $17,000 per year and couples up to $34,000 per year without eating into their lifetime gift and estate tax exemption ($12.92 million for individuals and $25.84 million for married couples in 2023). However, if you want to supercharge a 529's growth potential, you can bundle five years' worth of gifts into a single year, as long as you treat those gifts as occurring over five successive tax years.

For college-age kids, you can make tuition payments directly to the school. "A bonus is that direct tuition payments are exempt from the gift tax, which may not be the case with 529 contributions beyond the annual gift tax exclusion," says Chris Kawashima, CFP^®, a senior research analyst at the Schwab Center for Financial Research.

For the working teens and young adults in your life, helping them establish and then fund a Roth IRA is a great way to invest in their future. "Roth IRAs are among the most valuable assets you can own, because earnings have the potential to compound tax-free throughout your lifetime and withdrawals are tax-free in retirement, assuming you're at least 59½ and have held the account for five or more years," Chris says. "Just be aware that your total contributions cannot exceed the recipient's earned income for the year."

"Not every financial gift has to be what you might consider 'practical,'" Susan says. "Maybe your granddaughter is saving up for a new computer or concert tickets. By offering to match her savings, you're helping her understand the value of establishing a savings goal and the satisfaction of reaching it."