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I'd pass it on to someone younger than you. You didn't benefit, the tradition/luck was upheld, seems like the best answer here.
Morally that makes you all squared up, although legally you still accepted it, so this advice is only good if you know you could get away with accepting money, since this sounds like you visit this guy as part of a job.
Keep it. Use the red packet for something or someone nice. I'm Chinese and people do this all the time. My parents who are over 50 still occasionally get red packets (not just from family either) and they just take them straight to the bank and nobody complains.
I suspect that red packets are more so used to give money to someone who would otherwise refuse it because it's rude to not accept one.
They give red packet for visiting? Or because they received a gift?
All sorts of reasons. Birthday, anniversary, Lunar new year (up to 6 months late), etc.
People make up excuses to give a red packet when they want to pay someone money.
Maybe bring them another gift the next time using the money or spend it on something together like taking them out to a lunch or dinner. If they are old they might like the change of scenery.
They told me to stop bringing gifts when I visit but I cant do that of course, can't buy then dinner either because they would never let me pay since I'm younger
It sounds like your compulsion to bring them gifts is very similar to their compulsion to give you a red packet.
It also sounds like there's a power dynamic in this exchange. That is, for some people, gifting is an expression of power: boss gifts employees without anything in return; older family gift younger; etc. If you want to be right in your own head, then you can pass the red packet down the line, and you can stave off your discomfort in the future by not gifting up.
Just don't bring a big gift. Or bring something meaningful like something you hand crafted
Donate direct to a non corrupt verified charity of your choosing
Keep it, be grateful and do something good with that money. You can thank them for the gift as well if that is appropriate in the culture.