Overall spending on graduation gifts in 2018 was $5.2 billion, with an average gift purchase of $102.51. According to an annual survey on graduation gift spending, graduates will soon have wallets filled with gift cards and cash of that amount—often spent on items that won’t serve them long term. Consider a gift with greater longevity and contribute to a Roth IRA for your graduate’s future retirement.
Deposit $1,000 in a Roth IRA for a 15-year-old today, and by age 75 the account could be worth more than $100,000 (assuming an 8% annualized return). For 2019, the Roth IRA contribution limit is $6,000—you can open and fund accounts until your tax filing deadline.
As long as a child has earned income, money received from another source can be used to fund an IRA. It doesn’t matter if the child is a teenager with a part-time job or a young adult with a full-time position. The only stipulation is that the child must have earned income—not investment income—equal at least to the amount of the contribution.
If your graduate is off to college, your Roth IRA contribution will not affect their potential financial aid package. The Free Financial Application for Student Aid (FAFSA) will not consider the value of a Roth IRA account as an asset.
A Roth IRA also offers the account holder a unique tool for accessing money in a pinch, like for a future down payment on a home. Contributions, but not earnings growth, are eligible for withdrawal at any time without taxes or penalty. Once your graduate sees the account grow, however, he or she may decide to keep those dollars for retirement.