Thank You Message For The Money Gift

Where Should you Put Money Gifted to your Children?

Last updated: February 18, 2021

A friend of mine recently asked me a great question that I'm guessing many parents run in to:

What should you do with the money you receive for your child's birthday or other special occasion? Currently we have ours sitting in savings accounts and are not doing anything with/for the kids funds. Should we invest it for them? If so how should we invest it? Also should we try to steer the relatives away from checks and into something more beneficial for the kid like a 529 account, bonds, etc…?

Well, my friend… I think you take that $50 and run on down to a local brewery to reward yourself for being a father and to support the local economy…

What's that? You have a conscience, you say? Damn…

It's an interesting question for a few reasons:

If your child is young enough, there is probably no use for the money for many years, maybe decades. You have to put it somewhere.
Due to the erosive effects of inflation, $100 today might be worth a fraction of that amount in 20 years, if not invested properly. Unfortunately, that means you have a bit of work ahead of you. Putting the money in a hole in the ground is not a solution.
Investment trading or buying fees can really cut in to returns, and going through the process of trading on random small gifts can be cumbersome.
Savings accounts and CDs have earned paltry returns of around 1% for years and will for the foreseeable future. It's better than throwing the gift in to a piggy jar for 20 years, but not by much.
Can you really ask a generous gifter, "Yeah, I'm going to need you to take this check back and return with a government bond instead, mmmkay?"?

Where to Put your Children's Gift Money

I don't have kids. But here's my thought process:

Outside of maybe the grandparents who have made it known that they want to make a tradition or give a huge lump sum, I don't think you really have much place to negotiate on what format the gift will come in. It just seems kind of unappreciative at best, tacky at worst.

gift money to child

And we've already concluded that keeping the cash in a hole in the ground in your back yard or in a hole in the ground at a bank is not really an option (at least until interest rates return to levels that aren't murdered by inflation).

So that leaves you with a few options:

Set up a custodial IRA for the child and invest the money (note that child must have earned income in order to have an IRA).
Set up a 529 Plan for the child's education and invest the money.
Set up a Coverdell Education Savings Account and invest the money.
Invest the money in a custodial UGMA/UTMA account (non-tax advantaged)
Invest the money in a long-term bond.

Let's take out the last one. Bond yields really aren't much better than the aforementioned bank yields at the moment. This may be a legit option down the road again, but right now, it's a losing proposition.

So that leaves us with…

Custodial IRA vs. 529 Plan vs. Coverdell ESA vs. UGMA/UTMA Custodial Accounts for Gift Money

You may have noticed I have recently covered custodial IRAs, UGMA/UTMA accounts, Coverdells, and 529 Plans in great detail.

That's because I got the earlier question and didn't have a good answer. My research led me to these four alternatives. And I don't think there is one right or wrong answer as to which type of account is the best to put your child's gifted money in.

So, I decided to put together the following chart to help you decide.

If the Chart Doesn't Help

If you're looking for simple solutions and the chart doesn't cut it for you, here's how I would personally handle this:

If I was saving for education, I would probably look towards my state's 529 plan options.
If I was not saving for education, I would probably look towards a custodial Roth IRA.

Children Gift Money Discussion:

Where do you place your children's gift money? and why?
Have you run in to a scenario not highlighted here that a parent should think of or be concerned about?