The Best Stocking Stuffer of All: Green That Grows

Christmas club savingsCash is shaping up to be a favorite stocking stuffer, especially when it comes in plastic form. The National Retail Federation says shoppers are spending more than $155 on gift cards this season, the highest total since 2007. Forbes puts the total giving on gift cards at $27 billion.

Are you responsible for some of that spending? Do you plan to be? Allow me to plead a different case.

Instead of getting a loved one some green to spend now, how about investing that money on their behalf so they have a lot more green for holidays yet to come? It's a lot easier to set up than you think.

Ugly Nlikeames, Beautiful Benefits

First, you'll need to learn two acronyms that sound like cruel bulldog nicknames: UGMA and UTMA.

UGMA, or the Uniform Gift to Minors Act, is like a low-grade trust fund, in that you don't need an attorney or accountant to start one. Contributions tend to be taxed at a lower rate because they're intended for the benefit of a minor. The downside? Once given, gifts are irrevocable. The assets also become property of the child at the age of maturity. Thus, if Junior wants the use the funds you've invested to take a trip to Greenland, pack him some snow gear and say goodbye.

UTMA, or the Uniform Transfer to Minors Act, replicates the benefits of UGMA in almost every way. The only real difference is that some states prefer UTMA, and accounts may be state-specific. UGMA accounts can be regionally indistinct.

Funding the Account

Generally, UGMA/UTMA accounts -- sometimes called "custodial accounts" -- are designed for flexibility rather than tax savings. The good news is that the tax laws make it easy to get a break on your tax bill.

Children under 19 years of age (or 24 for full-time students) who file as part of a parent's tax return can claim the first $950 of "unearned income" tax-free and the next $950 at the child's tax rate, which historically has been 10%. Gift contributions up to $13,000 annually are also allowed.

Several discount brokerages offer these accounts. Charles Schwab (SCHW), E*TRADE (ETFC), Fidelity, and TD Ameritrade (AMTD) all offer custodial options and similarly styled 529 college savings plans. (Click here for more on 529s.)

Give Junior an Income Boost

But the real beauty of these accounts is that they allow for hands-on, low-risk learning about self-directed investing. From stocks to bonds to mutual funds and ETFs, most of the vehicles we adults use to boost retirement savings are available to our children via UGMA/UTMA accounts.

So spare the gift cards this holiday shopping season. Give the gift of cash and a passion for stock ideas instead. Some of the best are just a click away at Amazon.com (AMZN).

Motley Fool contributor Tim Beyers didn't own shares in any of the companies mentioned at the time of publication. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Charles Schwab and Amazon.com.

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Plummer, Joseph

Green that grows? you mean .... mold ?

December 26 2011 at 10:11 PM Report abuse rate up rate down Reply
savemycountry911

MERRY CHRISTMAS TO ALL...............even the lunatic left.

December 25 2011 at 4:57 PM Report abuse -4 rate up rate down Reply
1 reply to savemycountry911's comment
jrd000000001

Why do you celebrate a holiday that marks the birthday of someone who you would consider a ultra-liberal hippie today? I guess the irony is just too much for you to comprehend.

December 26 2011 at 9:58 AM Report abuse +2 rate up rate down Reply
1 reply to jrd000000001's comment
wmpeterson54

And just why, pray tell do you think Jesus would be considered an "ultra-liberal hippie" today?
He preached charity, he didn't preach stealing from the "rich". He also preached not to covet.
Ultra-liberals covet the success and wealth of others and believe in a big centralized government to forcibly steal wealth from others . Numerous unbiased studies have shown that conservatives are far more charitable than liberals. I believe the Anti-Christ would be considered an "ultra-liberal".

December 26 2011 at 9:35 PM Report abuse -2 rate up rate down
Noodie1

"Once given, gifts are irrevocable. The assets also become property of the child at the age of maturity. "
Sounds as if the assets become the property of the child once they are bought & paid for to me. If it is irrevocable does is matter whether the child reaches the age of maturity? If so, why? I can understand if you said the child is allowed to spend or do what he or she wants with the assets at the age of maturity but not waiting to actually become the owner of the property or assets at maturity doesn't make sense if they are irrevocable. WOW! Probably doesn't make sense but I try to make it understandable.

December 25 2011 at 3:28 PM Report abuse rate up rate down Reply
mily469

cash is a great gift for everyone i know this year. they can buy food or get gas to get to work.

December 25 2011 at 11:12 AM Report abuse +1 rate up rate down Reply