Personal Finance

I’m wealthy and child-free, how can I set aside money for my nephew to gift him when he is an adult?

Kristin Hitchcock

Published: November 17, 2024 9:32 am

24/7 Wall St. Key Takeaways:

• When it comes to saving money for a younger relative, several options are available.
• For a balance of growth potential and flexibility, a 529 plan or a high-yield savings account may be the best starting point.
• Also: Take this quiz to see if you’re on track to retire (Sponsored)

I’ll be honest; it isn’t often that I come across inspiring posts on Reddit. However, one recent Reddit post was the exception. This poster was looking to save money for his infant nephew’s future, with the intention of providing a gift that can help the child later in life—whether it’s for college, a first home, or another major milestone. With this goal in mind, he’s considering different savings strategies, including high-yield savings accounts or possibly savings bonds.

His monthly savings goal is rather modest at around $50, but that can add up over time.

His main question is about how he should go about this. Let’s explore some smart strategies to help this uncle create a long-term, low-risk gift for his nephew. Remember, this is just my opinion. Speaking with a tax professional can provide you with personalized advice that fits your needs.

1. High-Yield Savings Account

High-yield savings accounts can offer easy access to funds, plus the security of FDIC insurance for balances up to $250,000. The exact interest rate for these accounts varies, but it’s often higher than standard savings accounts.

This higher interest rate makes them a solid option for investments like this one. The fund will grow gradually with compounding interests.

Pros:

• No risk of losing the principal
• Easily accessible
• Low management requirements

Cons:

• Lower returns than stocks
• Interest rates may fluctuate

2. 529 College Savings Plan

A 529 plan can be a valuable tool if education is the primary goal. However, that isn’t necessarily the case in this poster’s situation. These plans allow savings to grow tax-free if the money is used for qualifying educational expenses. Many 529 plans have investment options to choose from, and some states even offer tax incentives for contributions.

That said, these plans cannot be easily used for things that aren’t education.

Pros:

• Tax-free growth on education-related withdrawals
• Potential state tax benefits
• Flexibility for K-12 and college expenses

Cons: 

• Penalties on non-education-related withdrawals
• Investment risk in some cases

3. Custodial Roth IRA

A Roth IRA could be a unique approach if the focus is on long-term growth for expenses that may come up in adulthood, such as a first home or retirement. You may associate these accounts with retirement, which is what they’re usually associated with. However, some contributions can also be withdrawn penalty-free for a first home purchase.

However, a Roth IRA would require the nephew to have earned income, making this an option to consider in the future once he’s old enough to work.

Pros:

• Tax-free growth and qualified withdrawals
• Flexibility for retirement or first-time home purchases
• Potentially higher returns than savings accounts

Cons: 

• Requires earned income to contribute
• Subject to annual contribution limits

4. Custodial Account

A custodial account allows the uncle to contribute to an account in the nephew’s name, which they can access once they reach the age of majority (typically 18 or 21, depending on state laws). This account offers the most flexibility in terms of what the money can be used for.

Pros: 

• Flexibility for various expenses
• Investment options with the potential for growth
• No income requirements

Cons: 

• Once the nephew reaches the age of majority, they can use the funds however they choose
• Investment gains may be taxed

5. U.S. Savings Bond

Savings bonds are a classic gift option with low risk. Bonds can provide guaranteed, steady returns and will mature after a certain period, typically 20 years. They’re easy to set up and transfer, and you can buy them through the U.S. Treasury’s online platform.

Pros:

• Low risk with a guaranteed return
• Simple to purchase and manage
• Funds can be used for various needs upon maturity

Cons: 

• Lower returns compared to other investments
• Limited to $10,000 per year per person in Series I Bonds