Saving for college with an education savings account.

How Financial Gifts Can Make Holiday Shopping Rewarding

Maybe you can’t wear or play with a financial gift this holiday season, but they can have a much more important, longer-lasting impact than virtually any other gift. Here are 5 gifts to consider that can keep on giving for years.

Gifts of stock to charity

Donating stock directly to charity can provide significant tax advantages over a cash donation. If you sell stock that has appreciated to make a cash donation, you’ll face a capital gain that would offset any benefit you might receive from the cash donation. If you donate stock, however, you do not have to pay capital gains tax and the cash you would have donated remains in your bank account.

One note of caution: If you donate shares of a stock with a capital loss, you can only deduct the current market value of the stock, which could be far less than what you invested in the first place.

Coverdells

For a newborn baby or a high school student, a gift of a Coverdell Educational Savings Account (ESA) – formerly known as an Education IRA – offers numerous advantages. It can be used for primary, secondary and college education costs of a designated beneficiary.

Even though they are not tax deductible, the earnings grow free of federal tax if the funds are used to pay for the beneficiary’s qualified education expenses. (Some states tax withdrawals for any purpose.) Contributions can be made until the beneficiary turns 18. (Students with special needs can be given Coverdell accounts after they’re 18.) The annual contribution limit for Coverdell ESAs is $2,000 per beneficiary. There’s also an income limit, which you can review at the IRS website.

If funds are withdrawn for non-qualified education purposes, federal taxes will likely be imposed on the account owner and an additional 10% penalty could be tacked on.

If the funds are not used for the original beneficiary, they can be transferred to another beneficiary.

Coverdells can be set up easily. Scottrade offers Coverdell accounts. You can choose your investments and customize your portfolio as you wish.

Custodial Account

Another gift for children you could consider is a custodial account, otherwise known as a Uniform Gift to Minors Act (UGMA) account or Uniform Transfer to Minors Act (UTMA) account. The custodian, typically a parent or guardian, has full control over the account until the child is no longer a minor or the account is terminated. The money in these accounts can be used for purposes outside of education, provided the custodian is able to demonstrate the benefits to the welfare of the minor account owner.

Savings Bonds

Savings bonds may not promise great returns, but they’re a great way to teach children about patience and watching interest grow. A Series EE Savings Bond will double in value if held for 20 years or more. Children can own them and they can be bought online with a Treasury account.

529 Plans

These accounts can help finance qualified educational expenses of a beneficiary. Contributions are not deductible, but earnings are not subject to federal tax. Plus, many states do not tax earnings under these plans, and some offer incentives on contributions. There are limits to gifts (see the IRS website) but the IRS allows for 5 years of gifting at one time. Contributions are also allowed after a beneficiary turns 18.

“A financial gift – whether for a child or a charity – is literally the gift that can keep on giving for many years,” said Joe Correnti, senior vice president of brokerage product for Scottrade. “And not only will it make you feel good, it can be a good financial tool as well.”

Scottrade offers both Coverdell and UTMA/UGMA accounts.

Next Step: Check out 3 Ways to Get Started Saving for Education, Saving for College: How to Get Started and Balancing Act: Saving for Retirement and Higher Education.

Scottrade does not provide tax advice and the information contained herein is not meant as a replacement for professional advice. Please consult your tax or legal advisor for questions concerning your personal tax or financial situation. 

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