Your Graduate
Give Your Graduate Cash—a Lifetime of It
These gifts will demonstrate the power of long-term saving and investing. Teach your child to save! Teach your child to plan!
Cash is the now the most common graduation gift, according to a new survey by the National Retail Federation.
It’s also the most welcome one, according to common sense and a highly unscientific online poll of seniors in the undergraduate business program at the University of Texas at Austin’s McCombs School of Business1. Cash dominated the student wish list, followed by travel and “a watch [Rolex, Omega, etc.] that I could wear for the rest of my life!”
Graduation gift-giving is at its highest point, in dollars, since the retail group began its annual survey a decade ago. The total is expected to reach $5.4 billion. About 56 percent of people will give cash.
But the best gift may be twofold: some cash your grad can spend as he or she likes, plus a gift that introduces the power of long-term saving and investing.
Here are some ideas from financial planners.
The Roth IRA
Roth IRAs are a popular suggestion. These accounts, created with after-tax dollars, are easier to tap into, if needed, than traditional IRAs, which are funded with pre-tax dollars. The beauty of both types is watching earnings compound tax-free over time, a crucial concept for a grad to grasp early on.
With a Roth, there’s no income tax on withdrawals in retirement. To give a graduate a Roth, he or she has to have some earned income for the year. You can give the amount of that income, up to the annual limit of $5,500.
It’s the gift that will give long after you are gone. It will cause [your child] to think fondly of you when they’re in their seventies and start to withdraw the 50-year compounded nest egg you created for them.
What if she wants to tap the account before retirement? Not a problem, as long as the amount she takes doesn’t include earnings on money that has been in the account for less than five tax years. That would bring a 10 percent penalty on that amount. There are exceptions for down payments on first homes (a $10,000 lifetime limit) and for education payments.
Matching gifts
Match your grad’s savings or payments on debt. Say a graduating senior has the average student debt burden for 2015 of about $35,000. Parents or relatives might match every dollar paid above the minimum loan payment, or every dollar saved in a Roth IRA or savings account.
A gift to match student loan payments can be a great motivator. People get out of college and make those first few loan payments and say where did that money go, because payments at first just barely cover interest costs. If you match, they’ll see progress in paying down the loan, pay it off faster, and pay a ton less in interest.
Or, if you give cash, tell beneficiaries you’ll match whatever portion of that money they put in an IRA. This way the kids have to think about how much to save and how much to spend, and learn about the benefits of saving in tax-advantaged accounts for the long term before playing with any brokerage account.
For more information please contact
Robert A. Housman, Esq.
310-276-3550
rhousmanlaw@gmail.com
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