As a kid, there are few moments that match the joy of opening a gift at Christmas, on a birthday, or some other special occasion. But what if you want to give your child something a little different on the next go-round – like company stock?
Getting your child a piece of paper or a gift card to buy stock won’t match the sizzle of some hot new toy. But it will grow in appeal as the years pass. Older kids might even be more excited at receiving a financial gift than a toy. The gift of stock is an opportunity to change the child’s future direction. If they don’t “get it” now, they almost certainly will in a few years.
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🔃UPDATED: Updated the new gift tax exclusion for 2023 which is now $17,000 a year and the Kiddie Tax exclusion, which increased to $1,250 tax-free followed by $1,250 at the kid’s marginal tax rate.
Why Stocks are a Better Gift than Toys
One of the most fundamental problems with giving kids toys as a gift is that they’ll always outgrow them. With some, it’ll happen in a matter of weeks. Others may take a year or more, but rest assured, the toy will eventually be nothing more than a dust collector – and eventually, fodder for a landfill!
This is not the case with stocks. Since most companies stay in business for decades, the stock you gift to a five-year-old could be with them at age 25, 50, and even 75. What’s more, the value of that single stock may rise many times over the years.
That means that while the toy’s value will eventually go to zero, the $50 stock you purchase today could be worth $500 in 10 or 20 years.
But there’s an entirely different dimension that may be even more important. The gift of a single stock could start a child on a lifetime path of building wealth.
That may not be apparent when you give the gift. But as time passes and the stock rises in value, the child will come to realize the power of investing, and that may pique their interest in continuing to invest.
Put another way, that single stock you gave to a child very early in life may form the foundation of a lifetime of financial independence.
It may also stimulate the child’s interest in learning more about investing and finance. After all, that’s not a subject they’re likely to learn in school.
Rest assured, the child will long forget every toy they ever received. But that first stock – and even subsequent stocks – could well become a permanent part of their life.
Tax Considerations of Stock Gifts
Unfortunately, tax consequences may be connected with a gift for both the giver and receiver. The two taxes you need to be aware of are the gift tax (applies to the donor) and the “kiddie tax,” which may apply to the child/recipient.
Gift tax. In an interesting twist, gift tax is the responsibility of the giver and not the recipient. And that tax can be as high as 40% of the amount of the gift given! But not to worry, the IRS grants an annual exclusion on relatively small gifts.
For 2023, you can gift as much as $17,000 to one individual. You and your spouse can gift up to $34,000 to that same individual. Any amount given that exceeds those thresholds may be subject to the federal gift tax.
And just in case you’re wondering, gifts given to minors are NOT tax-deductible for the giver.
“Kiddie Tax.” The child or recipient of the gift is not subject to the gift tax. But he or she, or his or her parents, may be responsible for tax on the income generated by the stock that’s been gifted. That can include income from interest, dividends, or capital gains. But there may be a tax advantage if the total investment income doesn’t exceed certain thresholds.
The first $1,250 of investment income received by the child will be tax-free. The next $1,250 is taxed at the child’s tax rate – typically 10%, which will likely be lower than the rate their parents are paying. But if the total investment income earned by the child exceeds $2,500, it must be reported on the parent’s tax return and taxed at their rate.
How to Buy, Gift, or Give Stocks to Kids
You may be at least vaguely aware of the practice of buying shares of stock evidenced by paper stock certificates. But actual stock certificates have become rare if they even exist anymore.
Buying shares of stock as a gift, especially if it involves only one or two shares, may require opening an account or purchasing a gift card to allow the child to purchase stock in a favorite company.
Fortunately, there are plenty of opportunities to make that happen.
Contribute to an Existing or New 529 Account
You can consider opening a 529 account for your own child or grandchild. This qualified tuition program (QTP) enables parents and grandparents to establish a tax-favored account to accumulate funds for the child’s education.
But even if it isn’t your child or grandchild, you may be able to make a gift of stock to a child’s 529 account if a parent or grandparent has already opened one. One benefit is that dividends paid on the stock won’t be taxable within the account. Meanwhile, you can withdraw funds from a 529 plan free from income tax if you use those funds to pay for qualified education expenses for the child.
A limitation to be aware of is that individual states sponsor 529s. Investment opportunities may be limited to exchange-traded funds (ETFs) offered within the plan, however, you may be able to gift shares in certain ETFs for the 529 plan through some of the providers below.
Open a Custodial Account
You may be able to open a custodial account to purchase and hold the stock for your child. You can do this under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA). The account will be opened for the benefit of the minor but managed by a parent or guardian.
But only a small number of investment brokers can accommodate custodial accounts for minors. Two examples are Charles Schwab and M1 Finance.
Charles Schwab is an online brokerage firm that requires no minimum investment and offers commission-free stock trades and exchange-traded funds (ETFs). They offer customer service on a 24/7 basis. But you should be aware that they don’t accommodate fractional shares. If a stock is trading at $500, and you only want to gift $100 (⅕ of a share), you won’t be able to. Instead, you’ll need to choose a lower-priced stock.
M1 Finance offers custodial accounts through their M1 Plus plan. The plan has an annual fee of $125, but you can purchase individual stocks or ETFs for an unlimited number of personal portfolios – referred to as “pies” – commission-free. From there, M1 Finance, as a robo-advisor, will provide complete portfolio management with no annual advisory fee. You’ll need a minimum of $100 to get started, and the annual fee is waived for the first year.
M1 Finance can be a perfect way to begin investing for a child. As more funds become available, or as you want to gift more money, additional pies can be created within the account.
Earlybird
For $1 per month, you can open a custodial account for a child at EarlyBird. Once you do, anyone can gift funds for the child’s account just by entering a phone number or an email address.
EarlyBird enables parents to kickstart their child’s financial future by opening a custodial investment account that others can gift into. You won’t be able to purchase individual stocks for the child – instead, gifts will be invested in a fixed portfolio model composed of recommended expertly crafted ETF-based portfolios of both stocks and bonds.
Greenlight + Invest
Greenlight offers an investment app for kids as part of their Greenlight+ Invest plan. For $7.98 per month, you can invest, provide your child with a debit card that earns1% cashback rewards, an educational app to learn about investments, core financial tools, and parental controls to enable you to oversee your child’s activity. With Greenlight+ Invest, you can add five children to the plan.
Greenlight+ Invest enables children to buy stock in their favorite companies. They can begin investing with as little as $1, with no trading fees. The plan can even accommodate fractional shares for your child to purchase tiny slivers of higher-priced stocks in their favorite companies.
Acorns Early
Acorns offers investing for children through their Acorns Early plan. You can open an account for the entire family for just $5 per month, including investment accounts for yourself and multiple children.
An Acorns Early account can be opened in under three minutes and set up with automatic recurring investments. It also includes exclusive bonus investments and family financial education.
You’ll be opening UTMA/UGMA accounts for your children, which you will manage for their benefit. Once your child reaches the age of majority in your state, you can quickly transfer the account to them exclusively. In the meantime, Acorn’s robo-advisor will create and manage an aggressive investment portfolio composed entirely of stocks for maximum growth.
Stockpile
Stockpile is a true stock gifting service that anyone can use. There are no commissions or other trading fees, and you can purchase fractional shares in a child’s favorite company for as little as $1.
Stockpile enables you to give a child a gift of stock using a gift card. You can choose a specific company to purchase with the gift card, or they can simply use the card’s value to buy another stock. Both kids and their parents will have an opportunity to choose from thousands of the most popular stocks and ETFs.
Stockpile is an online digital brokerage offering custodial accounts to children under 18. It will need to be managed by a parent or guardian for the child’s benefit until they reach the age of majority. Once you open the account, you can fund it with additional gift cards or direct transfers from a linked bank account.
You can purchase gift cards in denominations between $1 and $500. You can choose from any stock offered by Stockpile for the gift card. Physical plastic gift cards are sent by mail, but you can also do an electronic gift card by text, email, or print at home. You can also use gift cards to invest in ETFs.
Final Thoughts on Gifting Stocks to Kids
When the next birthday, holiday, or special event rolls around for that favorite child in your life, give serious consideration to giving a gift of stock instead of a toy. Not only will it grow in value, but it might be the incentive your child needs to begin developing an interest in investing and building a strong financial future. That’s a gift no toy can match.
