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Stocks for Tots: How to Give The Gift of Investing
Stock doesn’t rank very high on my three-year-old nephew’s wish list. Buzz Lightyear, anything with a pirate insignia and the occasional Happy Meal are what make this little guy happy.
But instead of putting more money into Disney’s pockets this holiday season, his grandmother recently decided she wanted to let him and his ten-month-old brother share in some of Disney’s good fortune by buying some shares of stock.
I’ve been toying with the same idea, so I decided to investigate the best way for us to buy them stock or contribute to their college savings accounts. If you’ve also grown tired of giving the little people in your lives disposable pieces of plastic that may be covered in lead paint, we’ve listed a few options to consider below.
Buying stock or mutual funds through an online brokerage: If you’re just buying a few shares of stock, your best option is to find a low-cost online brokerage, like ShareBuilder (now part of ING Direct), where you can keep commission costs to a minimum. If you use their “automatic investing plan” (it’s somewhat misnamed since you only need to make one investment, not a bunch of them automatically), it’ll cost you $4 for a trade. So if you want to invest $100, and Disney is trading at $32 a share, you would get about 3 shares. (ShareBuilder also allows you to own fractional shares, so you can invest any amount you want).
You can do this sort of thing at any online brokerage, though commission costs will vary. E*Trade, for instance, charges $12.99 per trade.
It’s probably easier (and more fun) to explain the concept of owning a piece of Disney than a stake in a staid mutual fund, though a diversified fund is clearly the smarter investment choice. But hey, it’s Christmas. And giving shares of Disney is wiser than buying something the child will outgrow by the time the next holiday rolls around.
Children under age 18 generally can’t oversee an investment account themselves, so you’ll need to set up an account that allows an adult, like a parent, to manage it. Most brokerages offer you the option to set up a custodial account or a Coverdell Education Savings Account.
With a custodial account, once the child reaches age 18 (or 21, depending on where you live) the money is theirs to spend (wisely or unwisely). And if you’re giving more than a nominal amount (you can give up to $12,000 to a child without triggering gift-tax calculations), keep in mind that these assets can hurt the child’s chance of receiving financial aid for college.
Coverdell ESAs, which work much like a Roth IRA, must be used for education expenses. While earnings grow tax-free, they carry a maximum contribution limit of $2,000 a year, per child, and are subject to income limits. Coverdells aren’t a bad option, though they aren’t as flexible as 529 plans, which we’ll explain farther down. Before you choose a Coverdell, read more about them here.
Buying directly from the company: You might also try to buy shares directly from the company through what’s known as a direct stock purchase plan (DSPP) or a dividend reinvestment program (DRIP). This option may be free, though some companies have started to charge fees of various sorts.
With a DRIP, you must already own shares in order to buy directly from the company; any dividends paid are reinvested into more shares. DSPPs work similarly; however, you don’t need to own any shares to get started. Unfortunately, most direct stock plans (at least with companies that a child might recognize) require hefty minimum investments. For instance, McDonald’s requires a $500 initial investment, while Disney requires $1,000.
Buying from “one-share” services: There are several web sites, like Oneshare.com and Frameastock.com, that charge exorbitant fees to buy single shares of stock, which come with a colorful stock certificate in a frame of your choice. A share of McDonald’s, for instance, currently trading at just under $60, could end up costing twice that. Thanks, but I’d rather put this money toward the actual investment.
Contributing to a 529: A 529 is an investment account where you deposit money after paying taxes on it; earnings are free of taxes as long as you use them for higher education costs. Part of the contribution may be deductible on your state income taxes, however, depending on where you live.
Many 529 plans – most states operate their own – will allow anyone to make contributions to a 529 account for a child. Check with the individual plans first though; New York, for instance, will only accept donations from the account owner (usually a parent). Anyone, however, can set up an entirely new 529 for a child, since kids can be the beneficiaries of an unlimited number of 529 accounts. Setting up a separate 529 may be the best approach for givers in states where investments are deductible on the state’s income tax form. For more information about states’ 529 plans, go here.
Savings Bonds: Giving a child a savings bond is probably the most boring option, but it still works. In fact, the interest that savings bonds earn is tax-free if the bonds’ proceeds go toward education expenses, though there are some household income restrictions. If you have the option to contribute to a 529, we’d go that route instead because you can put the money in stocks or mutual funds, which will likely earn more over time.
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