Good morning, everyone!
Here in New York and all across the land, hope is in the air, as students bid farewell to their universities and look ahead to transitioning to life in the working world.
There’s one other reason for these budding grown-ups to be hopeful: friends and relatives are planning to spend more than $4.7 billion on graduation gifts for them (Source: NRF).
Giving cash is a great idea because no one knows what the graduate needs better than they do. Gift cards also put keep some choice in their hands while guiding them to a particular store to shop at. Countless others will conspire to ensure that every graduate ends up with at least three copies of this book.
I’ve got one other idea.
Enter the Roth IRA
So here’s a graduation gift that I like: Offer to match contributions to a Roth IRA.
As background, a Roth IRA is a tax-advantaged retirement account, into you which you put after-tax money whose growth is tax-free, under the condition that this growth is not removed until after retirement (or in a few other special cases). There are a lot more specifics available from the IRS. Canadian readers, the equivalent is the TFSA.
So why is it great for graduated?
Right now they’re likely in the lowest tax bracket they’ll be in their working lives (This matters because choosing to contribute to a Roth IRA over a traditional IRA is effectively a bet that your marginal tax rate now is lower than it will be during retirement). They’re also the farthest away from retirement they’ll be in their working lives, and thus have the most time to watch their investments to grow.
However, because of commitments to funding a life in transition, student loans, the job hunt, and simply living life, they may find it difficult to contribute much of anything to a Roth IRA.
Why not incentivize a little retirement saving, while helping them reach their goals at the same time?