Giving kids investments this holiday season? 3 accounts that can help you maximize your money

Related StoriesWhen buying holiday gifts for the children in your life this year, some experts say you may want to consider an additional gift, one that may last far longer than a new toy: an investment in the stock market.Giving investments can not only be a great way to start building savings for the child in your life, but it's a gift that can also help foster financial literacy, says Flavio Landivar, a certified financial planner and senior financial advisor at Evensky and Katz/Foldes Wealth Management in Coral Gables, Florida."Kids, even starting at age 4 to 7 years old, start understanding and can have some sort of conversations about money," Landivar says. Gifting a yearly investment "can build a huge foundation for minors at any age."While most brokers require you to be 18 to buy and sell stock, parents, friends and other family members can open certain accounts on behalf of a minor. Before gifting, experts say to consider how much you can comfortably give, the tax rules involved and which account best fits your needs.The amount you choose to give should depend on your comfort level, Landivar says. In 2025 and 2026, the IRS allows you to gift up to $19,000 per recipient annually tax-free without using any of your allotted lifetime gift and estate tax exemption.You don't necessarily need to spend additional money either — you can gift an investment you already own, says Ashton Lawrence, a CFP and director and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina."You might want to start looking at what positions in your portfolio have large unrealized gains that you then can give off to someone else who might be at a lower tax bracket," Lawrence says. "If they do happen to sell it, at least less is going to Uncle Sam than if you were to sell it."Landivar recommends giving broad-based index funds that track the S&P 500 or total stock market because of their low costs and long-term growth potential."We don't need to know which will be the best [performing] company in the future, because it's impossible to do that," Landivar says. "Rather, we want to be able to participate in that growth in a general sense."Giving individual shares of a company may be valuable as well, Lawrence says — especially if it's a company they recognize like Walmart or Disney. Familiar brands make the concept of ownership more tangible for younger kids, and Lawrence says that can make a gift more exciting and help connect abstract financial ideas to businesses they already understand.However, if you decide to do this, use it as a teaching moment on the basics of stock ownership instead of tying the asset to performance, Lawrence says. There are various types of investment accounts you can open on behalf of a child. To determine which one makes the most sense for you, experts say you can consult a trusted financial professional who can make personalized recommendations for your individual situation.Here are three available options and an overview of each's advantages.Landivar says the easiest way to get started is with a custodial account under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. UGMAs and UTMAs are financial accounts adults can open and manage for a minor. When the child turns 18 or 21, depending on the state, full control of the account transfers to the beneficiary. The custodian manages the investments like a normal brokerage account, and the funds can be invested in stocks, bonds or other assets. UTMA accounts can hold a wider variety of assets including property, while UGMA accounts mainly hold cash and marketable securities.Although you may seed these accounts with gifts, once they start earning interest, capital gains and dividends, that unearned income is subject to kiddie tax rules. The first $1,350 of unearned income is tax-free. From there, it's taxed at the child's tax rate until it exceeds $2,700. At that point, the excess is typically taxed at the parent's tax rate, according to the IRS.If you want your gift to go specifically toward higher education, investing money in a 529 college savings account may be more advantageous from a tax perspective than a custodial account, Lawrence says."College isn't cheap; expenses are constantly going up," Lawrence says. "529s are a great way to make those donations and save."A 529 account is a state-sponsored, tax-advantaged savings plan designed to help families pay for education. Anyone can open one and name a beneficiary — typically a child, grandchild or even yourself — with no income limits on contributors.Contributions are made with after-tax income, and the money grows tax deferred. Money can be withdrawn tax-free for qualified education expenses, including tuition, fees, books, supplies, required technology and room and board for eligible programs. These funds can be used for certain K-12 education expenses as well, such as tuition at eligible elementary or secondary schools.Remaining funds can be rolled into a Roth individual retirement account, transferred to another family member, used for student loan repayment or withdrawn outright. Some of these options are subject to specific rules and lifetime or annual limits, and taxes and penalties may apply if the money isn't used for qualified education expenses.If your child has earned income — such as wages from an after school or summer job — Lawrence says contributing your gift toward a Roth IRA for them may be the most advantageous for the tax-free growth and future flexibility. A Roth IRA is a retirement account where you contribute money that has already been taxed. Once in the account, contributions grow tax-free and withdrawals made after age 59½ are generally tax-free. If opening an account for a minor, the account must be in the child's name, and typically a parent or guardian helps open and manage it until they are of age.Contributions, but not earnings, can be withdrawn at any time without taxes or penalties, making the account somewhat flexible. However, there are limits to how much you can contribute to a Roth IRA. The contribution limit is the lesser of the child's earned income or $7,000 in 2025 and $7,500 in 2026. "When they do start pulling out from [a Roth IRA] later in life, in their retirement years, that's going to be huge for them," Lawrence says. "You're not getting that same tax-free growth inside those custodial accounts."Want to give your kids the ultimate advantage? Sign up for CNBC's new online course, How to Raise Financially Smart Kids. Learn how to build healthy financial habits today to set your children up for greater success in the future. Use coupon code EARLYBIRD for 30% off. Offer valid from Dec. 8 to Dec. 22, 2025. Terms apply.CNBC Select is editorially independent and may earn a commission from affiliate partners on links.Get Make It newsletters delivered to your inboxLearn more about the world of CNBC Make It© 2025 Versant Media, LLC.

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