Investing A Large Cash Gift: Strategies For Long-Term Growth

If you're looking to invest a large cash gift, there are a few options to consider. Firstly, it's important to understand the tax implications of monetary gifts. In 2024, you can give up to $18,000 per person per year without incurring gift taxes. This limit is applicable for each individual gifted, so you can give multiple gifts without being taxed. One option is to invest in stocks, which can be a fun and instructive gift that teaches the recipient about the stock market and investing. You can also consider giving savings bonds, which are backed by the government and have a low risk of default. Another option is to put the money into a certificate of deposit (CD) or savings account, which can be a good teaching tool for younger children and teens. Alternatively, you could contribute the money to a 529 plan, which can be used for education expenses such as tuition and textbooks. Finally, you could consider investing in mutual funds, which are likely to be poised for long-term growth. When deciding how to invest a large cash gift, it's important to consider the needs and interests of the recipient, as well as the potential tax implications.

Stocks

Giving stocks to adults:

If you want to give stocks to an adult, you can simply transfer your shares to their brokerage account. You will need their account information and some personal details to perform the transfer. If they don't have a brokerage account, you could help them open and fund one as part of the gift.

Giving stocks to minors:

If you want to give stocks to a minor, you will need to create either a Uniform Gifts to Minors Act (UGMA) or a Uniform Transfers to Minors Act (UTMA) account. These are custodial accounts where an adult manages the money until the child reaches the age of majority, at which point the money becomes theirs to use as they wish. It's important to note that with this type of account, the child will have full access to the money once they reach the age of majority, so consider whether a custodial account is the best option. In some cases, setting up a trust or a 529 college savings plan may be more appropriate if you want to retain more control over the money.

Tax implications:

When giving stocks as a gift, it's important to consider the tax implications for both the giver and the recipient. If you give stocks that you already own, you may be able to avoid paying capital gains taxes. However, if the recipient sells the stocks, they may have to pay capital gains taxes, depending on their tax bracket. Additionally, if the value of the gift exceeds certain thresholds, you may have to file a gift tax return and track the amounts given each year. In the US, as of 2024, you can give up to $18,000 per person per year without triggering gift taxes.

Where to buy stocks:

There are several options for purchasing stocks as gifts:

• Betterment: You can donate shares from taxable accounts to charitable organizations.
• GiveAShare: You can give stocks as gifts, but the options are limited to well-known companies like Coca-Cola, Disney, or Apple.
• Computershare: This platform connects you to companies that sell individual stocks and handles most of the legwork for you.
• Buy directly from the company: Many companies allow you to purchase individual stocks directly from them, but the process can be complicated.

Pros and cons of giving stocks as gifts:

Giving stocks as gifts can be exciting and educational for the recipient, especially if they have an interest in investing. It can also be a convenient option for the giver, as there are many ways to buy stocks and the transfer process is usually straightforward. However, it's important to consider the liquidity of the investment, as stocks may not be easily converted into cash right away. Additionally, there may be fees associated with buying and transferring stocks, which can add up if you have multiple recipients.

Savings accounts

There are several types of savings accounts to choose from, each with its own advantages and disadvantages. Here are some of the most common ones:

Traditional Savings Accounts

Traditional savings accounts are what you typically find at traditional banks or credit unions. They allow you to earn interest on your savings, usually at a low rate. Many banks and credit unions let you open a regular savings account with a low minimum deposit, and they often don't charge monthly fees. Your money is also easily accessible, and you can usually make regular withdrawals with very few restrictions. However, the interest rates are usually low, and you may have to pay a fee for excess withdrawals.

High-Yield Savings Accounts

High-yield savings accounts offer a much higher annual percentage yield (APY) compared to traditional savings accounts. These accounts are typically found at online banks and credit unions, and they often have lower fees. However, there is no branch banking access, and transferring money between accounts can take several days. Additionally, high-yield savings accounts usually have restrictions on withdrawals, typically limited to six per month without paying fees.

Money Market Accounts

Money market accounts (MMAs) combine features of both savings and checking accounts. They allow you to earn interest on your savings, usually at a higher rate than traditional savings accounts. MMAs also offer more options for accessing your money, such as check-writing privileges or a debit card. However, MMAs often have higher minimum deposit requirements, and you may be charged a monthly fee.

Certificates of Deposit (CDs)

CDs are a type of savings account where you agree to leave your money in the account for a set period, during which it earns interest. CD terms can range from as short as one month to as long as five years or more. The advantage of CDs is that you lock in a favourable interest rate for the duration of the term. However, if you need to withdraw your money early, you will likely have to pay a penalty.

Cash Management Accounts

Cash management accounts are different from traditional savings accounts as they are not specifically designed for saving. These accounts are offered by online brokerages and investment platforms, and they let you hold cash that you plan to invest. Cash management accounts often offer competitive interest rates, and they can provide benefits and features of both checking and savings accounts. However, they may not always be covered by FDIC insurance, and the interest rates may be lower than high-yield savings accounts.

Specialty Savings Accounts

Specialty savings accounts are designed for specific savings goals, such as saving for a down payment on a house or for retirement. These accounts can be tailored to your personal needs and can help you stay motivated by working towards a specific goal. They are usually FDIC-insured and may earn interest, although the rates may be lower than other types of accounts. However, some specialty accounts have restrictions on withdrawals, and there may be limits on who can open them.

Mutual funds

When investing a large cash gift in mutual funds, there are a few things to keep in mind. First, consider the investment objectives and strategies of the fund. Different mutual funds have different goals, such as capital appreciation, income generation, or a balance of both. Choose a fund that aligns with your financial goals and risk tolerance.

Another important consideration is the fund's fees and expenses. Mutual funds typically charge management fees, which can vary depending on the fund. It's essential to understand these fees before investing to ensure they fit within your overall investment strategy.

Additionally, research the fund's historical performance. While past performance doesn't guarantee future results, it can give you an idea of how the fund has fared over time. Look at the fund's returns over different time periods and compare them to similar funds to identify those with strong, consistent performance.

When investing a large cash gift, it's also worth considering the benefits of diversification. Diversifying your investment across multiple mutual funds or other asset classes can help manage risk and potentially enhance returns.

Finally, keep in mind that mutual funds are typically a long-term investment. They are usually more suitable for long-term financial goals, such as retirement planning, rather than short-term goals.

If you plan to gift mutual fund units to someone else, it's important to understand the complexities involved in the transfer process. While you can't directly transfer or gift mutual fund units to another person, you can achieve a similar outcome by first transferring cash to their account, which they can then use to invest in mutual funds. This approach ensures compliance with regulations and avoids potential tax implications.

In summary, investing a large cash gift in mutual funds can be a great way to achieve financial goals, but it's important to carefully consider the investment objectives, fees, performance, and long-term nature of the funds you choose. If you intend to gift mutual funds to someone else, follow the appropriate processes to ensure a smooth transfer.

Retirement funds

Another option is to open a 529 college savings plan in the grandchild's name. These plans are great tax-advantaged investments, as they grow tax-free and aren't taxed when withdrawn for qualified education expenses. The gift tax limits are also looser for 529 contributions. You can give up to five years' worth of gifts at once, which is $70,000 per person or $140,000 per couple, without notifying the IRS. The total amount you can contribute to a 529 varies by state but typically ranges from $300,000 to $500,000. Some states also allow you to take a state income tax deduction for a portion of your 529 contributions.

If you want to give a large cash gift to someone who is already retired, it's important to first make sure that you can still meet your short- and long-term money goals. If you are at or near retirement age and have debt, don't have a liquid emergency fund, or haven't planned for how you'll pay for long-term care, it may be best to put your extra cash toward your personal goals instead.

If you are in a position to give a large cash gift, it's worth noting that gifts above $15,000 per person per year will require you to file a federal gift tax return. For gifts above the annual exclusion amount, the IRS requires the submission of Form 709. However, for the vast majority of people, this will not result in additional taxes, as the excess amount is counted against your lifetime exclusion, which is currently $11.2 million per individual.

Education savings

If you want to give the gift of education savings, a 529 plan is a great option. A 529 plan is a tax-advantaged savings account designed for education expenses. The money in the account can be used for a wide range of college expenses at accredited schools nationwide, as well as tuition for K-12 schools, certain apprenticeship costs, and student loan repayments.

There are no income restrictions on 529 plan accounts, and anyone with a Social Security or Tax ID number, of any age, can be a beneficiary. The beneficiary can even be the same person who sets up the account. The account owner maintains ownership of the account until the money is withdrawn, and they can also change the beneficiary if plans change.

There are two primary types of 529 plans: education savings plans and prepaid tuition plans. Education savings plans are tax-advantaged investment accounts designed for education savings. They work like a Roth IRA, investing your after-tax contributions in mutual funds or similar investments. Prepaid tuition plans let you pre-pay all or part of the costs of an in-state public college education, and you may also be able to convert them for use at private and out-of-state colleges.

Contributions to a 529 plan qualify for the annual gift tax exclusion of $18,000 per year as of 2024. This means that contributions up to $18,000 from an individual tax filer ($36,000 for married couples filing jointly) per beneficiary are not subject to the federal gift or estate tax. You can also front-load contributions by giving five years' worth of gifts at once, for a total of $70,000 per person or $140,000 per couple, without notifying the IRS.

Earnings in a 529 plan accumulate tax-free, and withdrawals are not subject to federal income taxes as long as the money is used to pay for qualified education expenses. In most cases, these withdrawals are also exempt from state income taxes.

If you're considering giving the gift of education savings, be sure to research the specific rules and options available in your state, as there may be additional benefits or restrictions.

Frequently asked questions