3 Financial Products that Make Great Gifts for Children


The holiday season is among us, which means it’s time to start hitting the stores and online retailers to gift shop for family and friends. This is especially the case with anyone buying for a child, whether it’s an immediate family member, relative, or friend’s offspring still in their early years.

While holiday gift shopping and brainstorming primarily focus on purchases like clothes, electronics and other material possessions, this time of year also provides an ample opportunity to prepare for a child’s future—by looking into financial products.

Children might not initially understand or appreciate the value of such a gift, but you can’t go wrong by looking into one of these financial products to give your or a loved one’s child this holiday season.

We'll discuss three types of accounts you can contribute to for your child or grandchild this holiday season: 

  1. Bank Savings Account
  2. 529 Plan
  3. IRA

Bank Savings Account

Description: This is perhaps the easiest out of the three to open. Opening a savings account for a child isn’t too different from opening one of your own. Despite not having the benefits of accruing significant interest or other potential financial gains, savings accounts are a great way to put money towards forming a child’s own nest egg they can use for future investments and expenses. You can transfer as much as you want into the savings account without worries about cumbersome regulations but may want to consider that only the first $15,000 of any gift is exempt from the gift tax in 2018 and 2019.

Bank Savings Account

Benefits: According to a 2018 survey conducted by BankRate.com, roughly 40 percent of Americans save less than 5 percent of their annual income.1 A Business Insider article written around the same time projected the median savings account balance for individuals under age 35 is only $1,580.2 Although they primarily fluctuate based on the nature of transactions, consistency and persistence are key when using a savings account to set money aside. If you open a savings account for someone at three years of age, for example, and deposit $200 each month ($50/week) until they reach age 18, the child stands to assume a $36,000 balance upon receiving control over the account.

40% of Americans save less than 5% of their income.

529 Plan

Description: These tax-advantaged plans designed to encourage saving for future education costs are sponsored by various state governmental entities and authorized by Section 529 of the Internal Revenue Code.

Every U.S. state sponsors at least one of the two 529 plan types, in addition to numerous private educational institutions.

The first type is called an education savings plan, which lets account holders open an investment account to save for the beneficiary’s future tuition, room and board, along with other mandatory fees.

The second 529 plan type is a prepaid tuition plan, which enables account holders to purchase credits (or units) at participating educational institutions for future expenses like tuition and mandatory fees. Having said that, it’s worth noting there aren’t as many prepaid tuition plans available, and they don’t cover as much as a 529 savings plan. Most of them also have residency requirements.

529 Plans

Benefits: With collegiate expenses vastly exceeding annual inflation rates, families are starting to prepare for their child’s education sooner and more aggressively. As the current cost of tuition for public and private educational institutions spills into the tens of thousands, it’s not inconceivable to think educational expenses could reach six figures in our lifetimes.

These plans offer a variety of investment options like mutual fund and ETF portfolios. While these plans are an ideal way of helping beneficiaries accumulate a sizable financial cushion in their collegiate years, they can also be used to pay for tuitions at K12 schools.

Investment options for 529 plans


Description: Individual retirement accounts can be started at any age under 70 ½, after which you are required to begin making annual minimal withdrawals. IRAs allow individuals to save for retirement with tax-advantaged growth or on a tax-deferred basis.

There are two main types of IRAs—traditional and Roth, whose portfolios can consist of various financial products, from stocks and bonds to mutual funds. Factors like tax-free distributions and deductions vary depending on the IRA type.

Types of IRAs

Regardless of choice, tax benefits allow investments to potentially grow or compound quicker than taxable accounts, based on contributions and earnings. An IRA’s growth rate relies heavily on how much money is invested and the amount of risk the account holder is willing to take, which shapes what types of investments are included in the account. Annual contributions are limited to $6,000 a year as of 2019 or $7,000 for those over age 50.

IRA Contributions

Benefits: Even if you don’t contribute close to the $6,000 annual limit to a child’s IRA, the potential growth these financial products offer make them worthwhile. If set up and contributed to accordingly, a child may never have to worry about retirement. To put this situation in perspective, if you invest $6,000 annually in an IRA at a return of 5 percent over 30 years, the account will be worth over $400,000. If you open an IRA for a 10-year old and contribute at least $1,000 at a return of five percent until age 65, the account’s value can exceed $270,000. In addition, account holders can also reinvest any accrued interest that can grow tax-advantaged.

Not only can gifting a financial product to a child help prepare them for future endeavors like saving for college and retirement, but you’ll also have an opportunity to provide a truly unique gift that veers away from the conventional material presents most children tend to receive. It’s also worth noting the other individualized element your financial product gift offers to a child that nothing else they get this holiday season may offer and personifies the true meaning about this time of year—it’s a gift that keeps on giving.

These products aren’t necessarily for everyone, and there are no guarantees your experience will go as described. While some of the products mentioned (like a traditional savings account) primarily function as an outlet to store money, others like an IRA do present an element of risk, as there is a chance you may experience a loss of principal.

If you’re interested in having a discussion about purchasing of one of the investment products mentioned above, you can contact a North Star financial advisor in one of our offices located in 23 states.

Financial advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.

Interested in discussing this topic further with a financial advisor? With offices in 23 states, there is likely a North Star financial advisor near you. Contact an advisor here.

Note 1: A 529 plan is a tax-advantaged investment program designed to help pay for qualified education expenses.  Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover education expenses.  Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non-educational withdrawals. Your state of residence may offer state tax advantages to residents who participate in the in-state plan, subject to meeting certain conditions or requirements.  You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state-based benefits should be one of many appropriately weighted factors to be considered in making an investment decision.  You should consult with your financial, tax or another advisor to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances.  You may also wish to contact your home state’s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan.

Note 2: This hypothetical example is for illustrative purposes only. Not based on any particular investment. Assumes five percent annual return. Investments will fluctuate and when redeemed, may be worth more or less than originally invested.

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1Martin, E. (2018, March 15). 65% of Americans save little or nothing-and half could end up struggling in retirement. Retrieved from https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-americans-save-little-or-nothing.html

2Elkins, K. (2017, September 13). Here's how much money Americans have in their savings accounts. Retrieved June 26, 2019, from https://www.cnbc.com/2017/09/13/how-much-americans-at-have-in-their-savings-accounts.html

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