Finding the right gift for a college graduate can be tough. You don’t want to try picking out the latest gadget—let alone the latest fashions—and 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. Data shows that young people typically don’t invest right away—only 26% of adults under age 30 hold any stock at all, according to a Bankrate survey.¹ 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 you start, the greater the potential benefit.
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 a hard to do on a small salary, but it’s such 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 his or her contributions.
Keep in mind that taxes may apply on gifts, depending on the amount gifted. In 2016, you can give up to $14,000 per recipient without incurring the gift tax ($28,000 if you’re giving as a couple). Check with your tax consultant or the IRS website at www.irs.gov for more information.
2. Fund an IRA
Help your new grad open a tax-advantaged individual retirement account (IRA). Especially if the young person isn’t yet working for a company that offers a workplace retirement plan such as a 401(k), opening an IRA now is a great way to jumpstart retirement investing. Roth IRAs, which are funded with after-tax dollars and offer tax-free growth and earnings—as well as tax- and penalty-free withdrawals in retirement²—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Roths also provide flexibility, since contributions can be withdrawn at any time without tax or penalty.3 (But encourage your grad to keep the funds invested for retirement!)
You’ll have to make sure that the graduate has earned income that’s greater than or equal to any contributions made to the account. And you’ll also want to consider potential gift tax liability—although the annual gift-tax exclusion is greater than the maximum allowable contribution for a young person ($5,500 in 2016), if funding the IRA is your only gift.
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 they’ve got time to recover if a high-growth stock runs out of steam or a portfolio begins its life a bit unbalanced. Pique their interest in investing by gifting individual stocks in companies that they like or shares in a mutual fund or exchange-traded fund (ETF) that invests in sectors that interest them, such as technology or biotech. (You may want to help the recipient establish a brokerage account as part of the gift.)
If they’re socially conscious, consider helping them invest in a socially responsible investing (SRI) fund—there are dozens of funds in the market that seek to invest in companies engaged in “green” technology, social justice or other themes.
4. Automate investing
One of the newest financial innovations on the market is the online investment advisory—a service that provides algorithm-based portfolio management advice and can help build a portfolio that is appropriate for various goals and time horizons. Some, like Schwab Intelligent Portfolios™ offered by Schwab Wealth Investment Advisory, Inc., also offer automatic rebalancing to help keep your investments in line with your risk tolerance as different assets move up or down in value.
For new investors, an online investment advisory service has a lot of appeal. It’s easy to get started—just answer a questionnaire to help determine risk profile and time horizon, then review the recommended portfolio. There’s no need to speak to a human investment professional (unless you want to). Many online investment advisory services have additional tools to help track performance and progress toward goals and can be monitored easily on a mobile device.
1 Bankrate, “MoneyPulse: Did you miss the stock market rally? You’re not alone,” April 9, 2015.
2 Withdrawals 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.
3 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.
What you can do next
You can give a graduation present that is remembered for a few weeks or one that lasts a lifetime. Consider giving the new graduate in your life a nest egg for the future—and the tools to help it grow. Talk to a Schwab Financial Consultant at your local branch, or call us at 800-355-2162 to learn more.