Looking for that perfect, last-minute gift for your adult children or grandchildren? Help them secure their financial future by directing a contribution towards their retirement.

With year-end fast approaching, the last-minute tasks are piling up. But here’s a way to cross two items off your list at once: give the young professional or recent college grad in your life a jumpstart on saving for retirement. You’ll optimize your annual exclusion gift while helping them establish disciplined lifelong savings habits.

Make Saving for Retirement a Priority

If your adult children or grandchildren are like many of their peers, saving for retirement probably isn’t top of mind. For many, daily living expenses like mortgages, rent, and credit card debt take precedence. For others, retirement seems light-years away—or perhaps not worth saving for, given the prospect of an inheritance. Whatever the reason, there are a number of advantages to earmarking your gift this way:

•Allows kids/grandkids to enjoy greater economic freedom later in life;

•Instills essential financial knowledge without undermining their sense of independence;

•Prevents them from spending lavishly on immediate lifestyle needs

Most important, you can impart these benefits all while reducing your taxable estate.

How it Works

Among the most popular provisions in the US tax code, the annual exclusion gift allows anyone to make a gift of up to $14,000 to any other person every year, without any adverse tax impact for the giver or the recipient.

The annual exclusion gift can be a highly effective wealth-transfer tool—but it’s even more powerful when combined with a contribution to a 401(k) or IRA. That’s because investing in a tax-deferred retirement plan creates more wealth compared to investing in a taxable account.

To illustrate how the benefit of tax deferral compounds over time, consider two gifts—one consists of straight cash and one is a gift directed towards a tax-deferred retirement account. Both start with a single contribution of $14,000.

If the recipient only keeps the gift in a tax-deferred account until age 45, and accepts the 10% withdrawal penalty, he or she would still come out ahead by about $5,000. However, a smarter approach would be to wait until age 65.

That’s because, generally speaking, the longer the horizon, the greater the value of the tax deferral. Assuming the young person in your life wouldn’t need to access the funds for at least 40 years, on an after-tax basis, his or her 401(k) and IRA accounts would be worth nearly $70,000 more than putting the same money into a taxable account (Display).

Note that IRS rules prevent you from contributing directly to a beneficiary’s 401(k) or IRA, but that doesn’t stop you from placing parameters around your gift. Make the designation clear to your children and grandchildren—or consider structuring it as a match that’s conditional upon their contribution, too. Be sure to adhere to the IRS’ annual contribution limits for 401(k)s and IRAs. In some cases, you might have to divide your gift between the two.

As you look over your year-end “to do” list, keep this year-end strategy near the top. There’s still time to make a gift for 2017; looking back, it may end up being the most valuable yet.

The views expressed herein do not constitute and should not be considered to be legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.

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