I have 5 nieces ranging in age from 2 to 14. We want to give them money instead of toys for birthdays and Christmas. We are talking about $25 each for birthdays and Christmas for now. That’s only $50 per year until we can increase it. Where is the best place to put that money?
The ability to delay gratification goes hand in hand with long term success. Not only will your gift help provide financial security but it will set an important example. Sure, every kid would love to have the latest and greatest toy. But – at least to us boring adults – the prospect of an extra several thousand dollars for college, retirement, or a down payment on a home is much more appealing. Granted this is not as tangible and doesn’t present as well to a 7 yr. old as a box of Legos, for example.
The option you choose depends upon the circumstances of each child. If the goal is to fund college my first recommendation would be to use the West Virginia Smart 529 Select plan. This plan has a low minimum initial investment and offers age-based portfolios that allocate amongst stocks and bonds based upon the beneficiary’s age. As the child approaches the distribution phase (college) the portfolio automatically adjusts to a more conservative allocation.
However, the West Virginia does assess a $25 annual maintenance fee for smaller accounts. The details of which can be found in the aforementioned link. In your case it may be best to explore the 529 plan associated with your state of residence. When the account meets one of the exceptions for the $25 West Virginia plan fee you can roll the assets into it.
Another option would be contributing to a custodial account such as a UTMA or UGMA. The downside to a custodial account is that there are no real tax advantages. However, if the child is not going to go to college it may be a sensible option. Unlike 529 plans the only restriction for a custodial account is that the money must be used for the presumed benefit of the minor. As mentioned above this would be an appropriate vehicle to save for something such as a down payment on a home.
Finally, once the kids begin to earn income you have the option of helping them set up an IRA. What I love about this option is the time horizon and the shared responsibility. Not only could you contribute $50/year, but you could encourage them to do the same. Again, this is setting an example that will help shape their perspective and increases their chances, in this case for retirement success.
At the end of the day the foregone toy will be a distant memory. More importantly, you will have made a lasting contribution to the financial security and education of your nieces.