4 Savvy Ways to Gift Money to Children (And What You Need to Know)

Ever struggled with finding that perfect gift for the kiddo in your life? Forget those plastic toys that’ll break in a week – sometimes the best present doesn’t come wrapped in shiny paper and bows

I’ve been looking into smart ways to help kids with money, whether they’re your own kids, grandkids, nieces, nephews, or other special kids. And I can tell you, there are some really smart options out there!

In this article I’ll walk through the top strategies for gifting money to children that can help build their financial future. We’ll look at education savings, retirement accounts, custodial options and more – each with their own unique advantages.

Why Consider Financial Gifts for Children?

Before diving into specific methods, let’s talk about why monetary gifts can be so powerful:

• They can provide lasting value (unlike that toy that’ll be forgotten next month)
• They teach important financial lessons early
• They can grow substantially over time through investment
• They can fund important future needs like education or major life purchases

But there’s some important stuff to consider first. Let’s look at a few key factors:

Annual Gift Tax Exclusion Limits

The gift tax exemption for 2025 is $19,000 per recipient per year. This means you can give each child up to $19,000 without having to pay gift tax. When married, a couple can combine their exclusions to give each child a gift of $38,000.

If you give more than that, you’ll need to file a gift tax return, but you probably won’t have to pay taxes on it unless you go over your lifetime exclusion, which is $13,000 right now. 99 million per person as of 2025).

Financial Aid Considerations

If college is in a child’s future, it’s worth noting that assets in a child’s name can impact financial aid eligibility. As David Flores Wilson, a certified financial planner, explains, “An asset owned by a student is penalized in the Student Aid Index (SAI) nearly four times as much as an asset owned by a parent when filling out the FAFSA.”

So sometimes keeping assets in your name until after college makes more sense for maximizing financial aid options.

Now, let’s explore four smart ways to gift money to children:

1. 529 College Savings Plans

If helping with education costs is your goal, a 529 plan is worth serious consideration.

How it works: A 529 plan is a tax-advantaged account specifically designed for education expenses. Money in these accounts grows tax-deferred, and distributions are tax-free when used for qualified educational expenses.

Benefits include:

• Tax-free growth for education expenses
• Flexibility to use at nearly any college nationwide
• Can cover tuition, room and board, books, supplies, and computer needs
• Potential state tax benefits (varies by state)
• Easy gifting options through platforms like Ugift®

One of the coolest features of 529 plans is the “front-loading” option. You can contribute up to five years’ worth of your annual exclusion amount ($95,000 per person or $190,000 for married couples) in a single year without gift tax implications. However, you can’t make additional gifts to the same child during that 5-year period.

Thanks to the SECURE 2.0 Act, there’s an extra benefit: unused 529 funds can now be rolled over to a Roth IRA (up to $35,000 lifetime maximum) for the benefit of the 529 beneficiary. The 529 account must have been open for at least 15 years, and rollover amounts are limited to the yearly IRA contribution limit.

2. Roth IRAs for Children

If the child has earned income from a job (even part-time or summer work), a Roth IRA can be an amazing gift that teaches long-term investing.

How it works: A child with earned income can have a Roth IRA opened in their name (often as a custodial account until they reach adulthood). Contributions grow tax-free, and qualified withdrawals in retirement are also tax-free.

Benefits include:

• Tax-free growth for retirement
• Contributions can be withdrawn tax-free at any time
• Penalty-free early withdrawals are allowed for certain purposes, including qualified education expenses
• Gets children thinking about long-term investing early

For 2024 and 2025, contribution amounts are limited to the lesser of their earned income or $7,000. This means they must have legitimate income from a job to qualify.

Here’s a cool strategy: offer to match what they earn and contribute to their Roth IRA. This lets them keep their hard-earned money while still building their financial future. Win-win!

3. Custodial Accounts (UGMA/UTMA)

Custodial accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) provide a flexible way to gift assets to minors.

This kind of account lets you give money, stocks, or even real estate to a minor. The assets are managed by a custodian, who is usually a parent or family member, until the child reaches the “age of majority” in their state, which is usually 18 or 21. At that point, the child has full control of the assets.

Benefits include:

• Flexibility in how funds can be used (not limited to education)
• Can hold various types of assets (cash, stocks, bonds, even property in some states)
• No contribution limits (though annual gift tax exclusions still apply)
• Easier to establish than trusts

But there are some important considerations:

• The “Kiddie Tax” may apply to unearned income over $2,700 (for 2025), taxing it at the parent’s rate
• All contributions are irrevocable – once gifted, you can’t take it back
• The child gains full control at the age of majority, regardless of their financial maturity
• These assets count as the child’s for financial aid purposes, which can significantly reduce aid eligibility

4. Direct Tuition or Medical Payments

For those concerned about gift tax implications for larger amounts, there’s a special exception worth knowing about.

How it works: Payments made directly to educational institutions for tuition or to medical providers for medical care are exempt from gift tax rules – with no dollar limit.

Benefits include:

• Unlimited amounts can be paid without using your annual exclusion or lifetime exemption
• Helps with immediate educational or medical needs
• Doesn’t count as income to the recipient

The key requirement is that payments must be made directly to the institution or provider – not to the child first.

Bonus Option: Setting Up a Trust

For larger gifts or situations where you want more control, trusts can be an excellent option, though they’re more complex and typically used by wealthier families.

How it works: A trust is a legal entity that can hold and manage assets according to specific terms you establish. You can set conditions for distributions, specify when the beneficiary receives full control, and even direct what happens if the child passes away before the trust’s termination.

Benefits include:

• Significant control over how and when funds are used
• Protection from creditors
• Can specify distribution ages/events beyond the standard age of majority
• Can include detailed instructions for fund management

The downside? Trusts can be expensive to set up and administer, involving attorneys, trustees, accountants, and potentially investment managers.

Which Option Is Best?

So what’s the best way to gift money to a child? Well, it depends on several factors:

• Purpose of the gift: Is it for education, retirement, general wealth building, or specific expenses?
• Child’s age and maturity: Are they responsible enough to manage funds on their own at 18 or 21?
• Tax considerations: Which option provides the best tax advantages for your situation?
• Control preferences: How much say do you want in how the money is used?
• Amount being gifted: Larger gifts might warrant more complex structures like trusts

For many families, a combination approach works best. For example:

• 529 plans for expected education costs
• Roth IRAs to teach long-term investing (if they have earned income)
• Custodial accounts for other general savings
• Direct payments for immediate educational or medical needs

My Thoughts

I personally think one of the best approaches is contributing to a 529 plan for education costs while also helping a working child fund a Roth IRA. The 529 covers their near-term educational needs, while the Roth gives them an incredible head start on retirement that they’ll thank you for decades later.

The match strategy for Roth IRAs is particularly effective – I’ve seen kids get way more excited about saving when they know every dollar they put away gets doubled!

Whatever method you choose, remember that the gift of financial security and financial education may be one of the most valuable things you can provide to the children in your life.

Have you used any of these methods to gift money to children? Which ones worked best for your family? I’d love to hear your experiences in the comments!

Final Tips

• Consider consulting with a financial advisor or tax professional before implementing any of these strategies
• Talk with the child’s parents before setting up accounts for children who aren’t your own
• Use these gifts as teaching opportunities about saving, investing, and financial responsibility
• Document your gifts properly, especially for larger amounts that might require gift tax returns
• Review your gift strategy periodically as tax laws and financial situations change

Remember, the best gift isn’t always the one that brings immediate joy – sometimes it’s the one that provides lasting value and important life lessons along the way.