Kids & Investing: What is the Right Age to Start and How Do You Gift Stocks?
Updated: Aug 25, 2020
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This week, we're kicking off our Kids & Investing series. Throughout the summer, we will be releasing new articles to encourage financial literacy with the children in your life. Whether it be your son/daughter, niece/nephew, or even grandkids, we believe it is important to share the information you learn about personal finance and investing, so that the next generation can be knowledgeable and prepared for the future ahead of them. We hope you enjoy this first article, and be sure to check back in each Tuesday for more great content like this!
For my 10-year wedding anniversary, my husband and I went on a trip to Belize. Marie came down for that week to watch my son, who was 3 at the time, and in what I can only assume was a bribe to get him to behave, took him to Target to buy a toy. Up until that point, my husband and I had generally avoided Target (particularly the toy aisle) with our son, so when he walked in there with Aunt Re and saw piles of toys as high as the ceiling, his eyes opened wide and he was hooked. A Target-holic was born.
A Shopping Spree
A few months later for his 4th birthday, as his birthday present, we told him he could go on a shopping spree at Target. Every kid's dream! Don't worry, we're not crazy. It was only up to $25.
His eyes lit up as he roamed the aisles trying to find the perfect toys. And that was his first lesson in how much things actually cost. He quickly learned that kids toys are not cheap (though sometimes cheaply made), and $25 does not get you as far as you'd think (or like). He picked out a couple toys and couldn't wait to get home. He loved playing with them...until he didn't. In typical kid fashion, the toys eventually fell by the wayside and joined the ever-growing pile of toys to be donated.
A Gift That Lasts a Lifetime
Since my son is still young, I know that family and friends will generally buy him toys for holidays and birthdays, so for his 5th birthday, I wanted to get him something else. Something that would last. So I decided to buy him a share of Target Corporation.
Seems like an odd gift for a 5 year old, and perhaps it was. But I know he loves Target, and it was a good way to get him started on the concept of investing. Financial literacy has to start somewhere! Why not do it as a gift?
While printed stock certificates are basically a thing of the past, to make it more "real" for him, I printed out a stock certificate template and put his name on it. I even signed and framed it. He didn't quite understand what it was, but I explained that it meant he owned Target, or at least a very small portion of it. That he understood. He loves to ask me about it time and again, "Mommy, that Target picture in my room...it means I own Target, right?" "Yes, it does." His smile is gold.
Getting Kids Interested in Investing
When I decided to buy him a share of Target, it was right around the cash register debacle of 2019. The one where people had to stand in lines for hours to checkout, only to find out all the cash registers were down and no purchases could be made in store. Target shares took a bit of a hit for that, which made it the perfect time to buy. That's the kind of value fluctuation you want in a company when you're looking to buy. Something that might make the company's value drop temporarily, but is certainly recoverable. And let's face it, with all the current and future Target-holics out there (my son included), I knew they would be just fine in the long run.
While I knew the purchase price was a steal, my goal was that the value would grow over the long term. Now granted, a single share in something is not going to make anyone filthy rich, but it's a start, and something to get my 5 year old interested in investing. The whole concept of investing is still a bit perplexing for him (and many adults even), but he understands ownership and he understands Target = Toys (at least for him). So in his mind, each time he sees that "Target picture" he sees himself owning all the toys at Target. That's a pretty powerful thought for a 5 year old. And that's what can get kids interested in investing.
Find something that your child loves, like Disney, Hasbro toys, even Nintendo, and buy them a share of it for their next birthday or holiday. Teach them about what being an investor means and how they are earning money (hopefully) without having to do anything at all (yay passive income!).
Buying Stocks as Gifts
In the US, stocks can be bought at any time for any age. The question then becomes how to buy the stock. Through a financial service like Robinhood or M1 Finance? Through a brokerage like Fidelity or Vanguard? Or maybe a 529C or UGMA (Uniform Gift to Minors Act)/UTMA (Uniform Transfer to Minors Act) account? Then comes the question of whether to buy it in the child’s name or yours.
There are many factors to take into consideration when buying stock for someone, including any tax liabilities for you or the recipient, and how the asset might impact the recipient’s college financial aid. We could write a whole blog post on this subject (and hopefully will in the future), but for now I will lay out a few things I considered when buying the stock for my son:
1) Gift Tax
First were tax liabilities. I wanted to make sure that neither I nor my son would have to pay additional taxes on the stock other than the long-term capital gains. That led me into researching gift tax. In very short summary, the gift tax is a federal tax on gifts of money or other valuable assets, such as property or stocks, in which the person gifting the asset is responsible for paying the tax (based on the value of the item at the time of gifting). For 2020, the annual gift exclusion is $15,000 per recipient with a lifetime exemption of $11,580,000 for a single donor. Talk about how the rich stay rich!
2) College Financial Aid
Luckily that one share of Target was well within the gift tax exclusion, so my next concern was “how would owning stock impact financial aid eligibility?” After a little research, I found that investments held in retirement accounts such as 401Ks or IRAs are not included as assets in financial aid calculations. However, you also have to have earned income to contribute to those, and unfortunately, my 5-year old is not bringing home the bacon quite yet.
3) Taxable Brokerage Account
A next option would be to buy in a taxable brokerage account, which is what I decided to do. Investments owned by the parents count for less than those owned (in the name of) the child in terms of financial aid calculations, so I decided to buy the share in my taxable brokerage account, with the intent that I will gift it to my son at a later time when he is ready to sell or take full ownership of it.
Deciding to buy stocks in your name vs the recipient’s is something that needs to be considered very carefully and researched based on many factors including your personal circumstances, relationship with the recipient, and tax situation. In most cases, a stock valued at a couple hundred dollars, even, isn’t going to have a massive impact on someone’s financial aid eligibility, but all the possible impacts should be assessed when deciding how to gift an investment.
So what is the right age to start investing? Any age really. It's never too soon. Did you or a friend/family member just have a baby? Buy them a share in Johnson & Johnson (lord knows we parents spend a fortune on their products those first few years). Know someone graduating high school this year? Buy them a share of their favorite company (is Tik Tok publicly traded?). Investing is the gift that keeps on giving and that can last a lifetime. They may not remember that random toy you got them for their 8th birthday or that gift card you sent for Christmas, but they'll always remember who bought them their first stock, and hopefully who got them on their path to financial independence.
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