What to Do with Your Kids’ Holiday Gift Money
Every so often, generous friends or family members gift my kids money for birthdays or Christmas. When that happens, I find myself asking, What’s the best way to handle this gift?
The first step is simple: ask the gift giver. A quick conversation can go a long way:
“Thank you so much for giving Susie this money! That was so thoughtful of you. Did you have any specific ideas about how you’d like it to be used?”
Sometimes, they’ll already have a vision for how they’d like to see the money spent. If they don’t, you can gently guide the conversation with a few suggestions:
- Your child could use it to pick out a special gift for themselves.
- You and your child could use it to help someone in need.
- You could save it for your child’s future needs.
If the gift is intended for “their future,” there are plenty of meaningful ways to put that money to good use… And that’s exactly what I’ll be writing about today!
5 Ways to Maximize Your Children’s Cash Gifts:
1. Open a Savings Account at the Local Bank or Credit Union.
Why do I say it should be local? Because your kids can learn to enter and feel comfortable in these establishments. They learn decorum, terminology, and gain financial confidence from conversing with the local professionals while opening and maintaining their account. One local credit union in Findlay, Ohio offers birthday presents to minor account holders who visit their branch. When they eventually need a loan, or to open their own accounts in adulthood, they have a leg up with already knowing professionals to work with.
A savings account won’t necessarily grow their $50 Christmas gift significantly, but it’s a solid financial foundation.
2. Open a 529 College Savings Account.
You can deposit the money your children receive into a 529 college savings account. Family members can make checks payable directly to that account, or you can be the middleman and deposit it into your own bank account first for a transfer to the 529 after.
I have an older blog here outlining reasons to use a 529. Within a 529, you can invest the dollars for future growth… tax-free growth (if used for education).
3. Open a Roth IRA.
If you really wanted to save the money for your kids’ (extremely) long–term future, you could consider opening them a minor Roth IRA. This is only for older kids who have earned income. They can only contribute to a Roth IRA up to their wages that year or the annual maximum contribution. This is a great way to get tax-free growth in the future.
4. Open an Investment Account (With You, Their Parent, as the Primary Owner)
You can simply open a brokerage account in your own name and earmark it for the child. When they are adults, you can gift it back to them (assuming it is under the annual gifting exclusion). You can select investments for growth and have fewer restrictions than you do with a 529 or Roth IRA.
5. Open a Custodial Investment Account (UTMA or UGMAs).
This will have a similar function to the brokerage account above, but once a parent puts money in the account, the money no longer really belongs to the parents. The child can’t spend it without the parents’ permission, but the parent can’t just “take it back.”
Custodial accounts also carry some different tax consequences. Income earned is taxed annually, just like the joint investment account. However, this money is taxable to the child. Thankfully, your child can have up to $2,200 of unearned income before it is subject to tax. For some families, the prospect of filing an additional tax return is daunting. For others…the idea of earning $2,200 of income tax-free is appealing.
The IRS explains the topic pretty clearly here.
I know there are a lot of options.
Don’t let deliberation cause indecision. If you’re unsure, keep it simple. Start with the savings account. That’s always a solid first step. Personally, I stick with a savings account and a 529 plan for my kids. At this stage in their lives, that’s been more than enough to make the most of their gifted money.
Here are my final thoughts:
Do: Explain to your child what the generous family member or friend gave them and why it’s such a thoughtful gift. Use it as a teaching moment to show them the effort and intention behind the money, and why it’s important to handle it wisely.
Don’t: Let your child think toys or tangible gifts are automatically more valuable than investments in their future. While it’s great for kids to enjoy a mix of time, toys, and treasure, be mindful not to put too much emphasis on the “toys” category. Balance is key.
