Help Your College Grad Become an Investor

May 10, 2022
Looking for a meaningful college graduation present? Consider opening up the world of investing.

Finding the right gift for a college graduate can be tough. It's nearly impossible to pick out the latest gadget—let alone the latest fashions—and giving just cash may strike you as too impersonal. So, what can you give a young person, just starting out, that would be useful and meaningful?

Consider opening up the world of investing.

Many young people find the idea of investing intimidating or figure they'll wait until they have more money to put away. That's a shame, because they often miss out on one of the most powerful drivers of return: time in the market. Compounding can have a substantial impact on the value of money, and the earlier your college grad starts investing, the greater the potential benefit.

Compounding makes a lifelong difference

The chart compares the performance of two hypothetical investors. Both investors invest $1,200 per year. Investor 1 started investing at age 40 and after 25 years has $69,787. Investor 2 began at age 18 and has $306,667 after 47 years.

Source: Schwab Center for Financial Research

This example is for illustrative purposes only and does not indicate or guarantee future performance. It is not intended to represent a specific investment product. Assumes 6% average annual growth and does not account for any fees, costs, or taxes. The actual annual rate of return and values will fluctuate with market conditions.

How can you help a young person start down the path to a lifetime of saving? Consider the following gift ideas:

1. Match savings contributions

Saving can be hard to do on a small salary, but it's an important skill to learn. Encourage your new graduate to open a savings account to stash away money for an apartment, a new car, or some other goal—and as an incentive, make the initial deposit and offer to match a portion of their contributions.

Keep in mind that taxes may apply on gifts, depending on the amount gifted. Currently, you can give up to $16,000 per recipient ($32,000 if you're giving as a couple) without reducing the lifetime gift exemption (in 2022: $12.06 million if single, $24.12 million if married). Check with your tax advisor or the IRS website for more information.

2. Fund an IRA

Help your new grad open a tax-advantaged individual retirement account (IRA) to jumpstart retirement investing. IRAs can be effective savings tools, especially if your grad isn't yet working for a company that offers a workplace retirement plan like a 401(k).

Roth IRAs, which are funded with after-tax dollars and offer tax-deferred growth and earnings—as well as tax- and penalty-free withdrawals in retirement1—are particularly practical for younger investors, who are likely to be in a lower tax bracket today than they will be in retirement.

Roths also provide flexibility, since contributions can be withdrawn at any time without tax or penalty.2 However, grads should be encouraged to keep the funds invested for retirement.

One thing to keep in mind is that you'll have to make sure the graduate has earned income that's greater than or equal to any contributions made to the account. You'll also want to consider potential gift tax liability unless funding the IRA is your only gift, as the annual gift-tax exclusion is greater than the maximum allowable IRA contribution ($6,000 in 2022 for all under 50).

3. Give stocks with youth appeal

The stock market can be intimidating to young people, who often don't know where to start. The great thing is that time is on their side. They will have plenty of time to recover if a high-growth stock runs out of steam or a portfolio begins its life a bit unbalanced.

To pave the way, start by helping the recipient establish a brokerage account if they don't have one already. Once that's out of the way, consider piquing their interest in investing by gifting individual stocks in companies they like or shares in a mutual or exchange-traded fund (ETF) that invests in sectors that interest them, like technology or biotech.

If they're socially conscious, consider gifting them shares of an environmental, social, and governance (ESG) fund. There are dozens of such funds in the market that seek to invest in companies engaged in environmental or social justice causes, or companies that are pushing for changes in business practices to emphasize equity, diversity, and accountability.

In each case, be sure to communicate the importance of an emergency fund that allows the young investor to leave investments in long-term positions when times get tight.

4. Automated investing

Automated investment advisory services, or robo-advisors, can help build a portfolio that is appropriate for various goals and time horizons.

For young people, robo-advisors have a lot of appeal, and funding an account could be a great gift for new grads. It's easy to get started. Typically, most investors only need to answer an online questionnaire to establish their goals, risk profile, and timeline before reviewing their recommended portfolio. There's no need to speak to a human investment professional (unless they want to), and many robo-advisors have additional tools to help track performance and progress toward goals—all monitored easily on a mobile device.

1 Withdrawal of earnings from a Roth IRA are generally tax- and penalty-free if the account has been open for at least five years and the withdrawals are taken after age 59½.

2 Earnings are subject to taxes and/or penalties depending on the individual’s age, how long the account has been opened, and the purpose of the withdrawal. Read more about IRA withdrawal rules.

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Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Because environmental, social and governance (ESG) strategies exclude some securities, ESG‐focused products may not be able to take advantage of the same opportunities or market trends as products that do not use such strategies. Additionally, the criteria used to select companies for investment may result in investing in securities, industries or sectors that underperform the market as a whole. 

Since a sector fund is typically not diversified and focuses its investments on companies involved in a specific sector, the fund may involve a greater degree of risk than an investment in other mutual funds with greater diversification.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Investing involves risk including loss of principal.

Automatic investing does not ensure a profit and do not protect against losses in declining markets.