It is certainly “the most wonderful time of the year,” and for many, it’s also time to review the year’s gifting results and make any final adjustments before the books are closed on the year 2025. For grandparents, it is also often the time to make year-end gifts to children, grandchildren, and others. Those of with grandchildren may be especially intent on supporting particular goals or financial objectives for the next generation, so we’ve provided a few suggestions for making year-end gifts with maximum impact. Additionally, grandparents with significant means may be looking for ways to make their estates more tax-efficient for heirs and others, and year-end gifting has a part to play there, as well.
How Can I Make a Gift to Support Education?
We’ve written before about 529 education plans, a flexible, tax-advantaged vehicle that grandparents and parents can fund to help with education expenses without creating taxable income for the recipient. Year-end is a great time to review any 529 plans that may already be in place and “top up” as needed. Remember, 529 plans can now be used to pay for private K–12 expenses as well as higher education, and the recently passed One Big Beautiful Bill Act (OBBBA) expands the list of qualified expenses for K–12 education for which 529 funds can be used. Funds deposited in a 529 plan can grow tax-free, and withdrawals for qualified expenses—school tuition, books, room and board, and even necessary supplies and equipment like computers—are also free from taxation. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and a 10% federal income tax penalty. The plans, which have received total deposits of $526 billion in assets as of the end of 2024, are administered by the states, though many states permit the use of funds in plans from other states.
Additionally, gifting 529 plans can be an important part of your estate planning. They are receiving a whole new wave of interest from wealthy parents and grandparents interested in the plans’ potential for trimming down the size of their taxable estate. The Tax Cuts and Jobs Acts (TCJA) of 2017 allows an individual to pre-fund a 529 plan with five years’ worth of non-taxable gifts ($95,000 in 2025). That means that two grandparents, for example, could contribute as much as $190,000 to a 529 plan for a grandchild, and they could do the same for each grandchild. They could then continue to funnel the maximum allowable annual gift per grandchild ($19,000 in 2025) into each plan.
Are 529 Plans Flexible?
Another advantage of the plans is their flexibility when it comes to gifting. For example, if the original plan beneficiary finishes college without using all the funds in the plan, the plan owner can change the beneficiary to a younger sibling, who can then use the remaining funds to pay for a private elementary or secondary school or when entering college. In fact, the beneficiary of the plan can be changed to any other family member, which could include, in addition to the original beneficiary’s sibling, their parents, aunts, uncles, nieces, nephews, stepparents, and even first cousins.
Because there is no time limit on the use of the funds, the original beneficiary who has finished school without using the entire balance of their 529 plan may later decide to go to graduate or professional school, at which time the previously unused funds may be tapped again. In fact, in today’s economy, with Millennials and GenZ expected to change jobs almost four times as often as previous generations, 529 plans may evolve into an important source of funds for the periodic re-training necessitated by frequent career shifts.
Can I Gift a Roth Account?
Another way to give tax-efficiently and also trim the size of the taxable estate is by gifting a Roth IRA or contributing to an existing Roth IRA owned by a grandchild. Roth IRAs have become increasingly popular since their launch in 1998. One of the principal reasons is their ability to convert after-tax contributions to tax-free income during retirement. They also have the additional flexibility of no required minimum deposits (RMDs), providing greater flexibility when it comes time to tap them for retirement income.
But even beyond the advantages to the account owner, many parents and grandparents have also discovered that one of the secrets to teaching kids about money is giving them a chance to handle it responsibly, which includes saving a portion and watching it grow. The magic of compounding, if learned early in life, can impress upon even the very young that money is something that can actually work for you, rather than the other way around.
Roth IRAs are actually a great vehicle to drive home this vital lesson, and there’s more than one way to incorporate the benefits of a Roth IRA into your gifting plans. Because qualified deposits into a Roth IRA can grow tax-free, and because there are no RMDs for Roth IRAs, these accounts are an excellent way to show the next generation the real-world benefits of smart, disciplined saving and investing.
One way to do this is simply by contributing to a Roth IRA held in the child’s name. Even if the parent or grandparent doesn’t qualify for a Roth IRA of their own because of income restrictions (in 2025, individuals earning above $150,000 and couples earning above $236,000 in modified adjusted gross income—MAGI—annually cannot make qualified contributions to a Roth IRA), they can contribute to a child’s or grandchild’s Roth IRA, as long as the child has earned income equal to or greater than the amount of the contribution. So, if a child or grandchild earned $6,000 at a summer or part-time job, the parent or grandparent can gift $6,000 (the maximum annual contribution) and deposit it in a Roth IRA in the child’s name.
Obviously, for a young person, the potential future value of the account after compounded growth can be impressive. And with the ability to make qualified, penalty-free withdrawals from the Roth IRA account—up to a lifetime maximum of $10,000—for expenses like higher education or the purchase of a first home, it’s a perfect way to nurture a lifelong habit of saving and investing, combined with some additional pre-retirement flexibility. Note, however, that withdrawals for higher education, though penalty-free, are still taxable as ordinary income in the year received. For first home purchases, the Roth account must be at least five years old and the funds must be used with 120 days of the distribution date. You may take nontaxable withdrawals from a Roth IRA if you are at least 59 1/2 and the account has been held at least 5 years. Otherwise, earnings withdrawn may be subject to ordinary income tax and a 10% penalty.
If you would like to explore further the ways that tax-efficient gifting can fit into your estate plan, Mathis Wealth Management is ready to provide the help and guidance you need.
