By Damon Poeter
If you want your new graduate to thank you while they’re dressed in their cap and gown, throw them a graduation party. If you want them to still be thanking you years from now, give them financial gifts that get them on the path to financial responsibility and independence.
Graduating high school and college are accomplishments worth celebrating. But when their graduation caps hit the ground, new grads will be facing new financial challenges. Graduating high school seniors might be concerned with paying for college. New college graduates may be anxious about entering a competitive job market while saddled with student loan debt.
Gifting a new graduate with an investment product is a gift with both short- term and long-term potential benefits, says Robert Steen, USAA advice director for retirement and complex financial planning.
“Certain investment gifts can also be a learning opportunity for a new graduate,” he says.
The good news is that even if you aren’t personally able to give a large financial gift to your new grad, there are investment products worth gifting that start as low as $25. Let’s look at three categories of financial gifts you might consider: gifts over which you’ll be able to exert some control, gifts that require some creativity and commitment between you and your new graduate, and gifts over which the recipient has total ownership.
It may be that you want to help your new grad financially but want to do so in a way that ensures your gift will be used for a purpose you prefer or be restricted in some other way. Here are a few ideas for financial gifts that allow the giver some measure of control over how they’re used.
Paying off student debt. If your son or daughter has graduated from college owing money for student loans, giving them an assist in paying them back can be a great financial gift, Steen says. This is a gift that you can scale to your own means – you’re helping whether you’re able to pitch in $500 or $10,000, he says.
Life insurance. Most young people aren’t in a rush to buy life insurance. But getting a policy sooner rather than later can save them money later in life; perhaps when they’ve started their own family, they will come to appreciate your initial investment on their behalf, Steen says.
Trust funds. A trust fund is usually set up to transfer a lump sum or some combination of assets – like stocks, bonds or real estate – to an individual or individuals when they reach a certain age. But trusts can be complicated, expensive and difficult to set up, Steen says. It might be simpler to gift them the sum or assets outright instead of setting up a trust.
If educating your new graduate in financial responsibility is important to you, negotiating a custom financial plan with certain goals and milestones can be a great project, according to Steen. Here are a few ideas to get you started:
Retirement fund assistance. Have your son or daughter consider a conventional IRA or a Roth IRA and offer to gift payments into it or match their contributions each month for a set number of months or years.
401(k) matching. Suppose your new grad lands a job with an employer who matches their regular 401(k) contribution on the company plan. But after making a monthly budget, your son or daughter decides not to make the maximum possible contribution. That leaves money on the table their employer is willing to contribute to their retirement savings fund. Work out a deal where your child signs up for the maximum 401(k) contribution and you supplement their monthly expenses by making up the shortfall in their budget.
Starting a retirement fund, beginning to build an investment portfolio and getting out from under debt are all potential financial gifts to give to graduates, Steen says. Each of those types of gifts also offers an opportunity to sit down with your son or daughter and discuss responsible financial planning.
“When young people graduate from school, it’s important for them to get off on the right financial footing,” he says. The type of financial gift you give may help them get off to a good start financially, require them to take on some responsibility for managing their financial portfolio or some combination of both. If they don’t have debt, helping them to get started on a retirement fund is a potential gift. And if they do have debt, assisting them with it will create better opportunities for them earlier to start building their financial portfolios.”
When you give a cash gift to an adult child, they now own it. You can advise them on what to do with the money, but they have the power to decide how to use it, even if their decision doesn’t please you. Many investment gifts work the same way, Steen says. Here are some investment gifts you might consider giving:
Government bonds. Products like treasury bills can be low-risk investment gifts for graduates. Once you give a government bond to a new grad, they own it completely, but the bond will have to mature over months or years before they can cash it out. Visit Treasury Direct for more information about bond gift options costing as little as $25.
Stocks or mutual fund shares. The simplest way to gift stocks or shares in a mutual fund is to arrange to transfer them from your brokerage account to an account the graduate either already has or sets up for this purpose. If you want to give the grad a physical stock certificate, you’ll have to sign it over to them with a guarantor like a bank or a stock broker. Make sure to tell the gift recipient they may be levied taxes on any capital gains made upon sale of the gifted investment from the point the stocks or shares were originally purchased by you, not from the date they were gifted.
Down payments toward a house or condo. Real estate is a popular investment regardless of age. Helping a new grad purchase a home will be beyond the means of many. For those who can afford it, assisting in a home purchase would give a young person both a place to live and a foundational piece of their investment portfolio.
Robert Steen, CFP®, MBA, is the enterprise advice director for retirement and complex financial planning at USAA. Robert serves as the advice professional on topics such as maximizing retirement savings, establishing a retirement income plan, managing financial needs during retirement, estate/trust/inheritance tax planning, charitable gifting and distribution of assets.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
USAA means United Services Automobile Association and its affiliates. Financial advice provided by USAA Financial Advisors, Inc. (FAI), a registered broker-dealer, USAA Investment Management Company (IMCO), a registered broker-dealer, and for insurance, USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # OE36312). Investment products and services offered by IMCO and FAI. Life insurance and annuities provided by USAA Life Insurance Co., San Antonio, TX, and in NY by USAA Life Insurance Co of New York, Highland falls, NY. Other life and health insurance from select companies offered through USAA Life General Agency, Inc. (known in CA (license #0782231) and in NY as USAA Health and Life Insurance Agency). Banking products offered by USAA Federal Savings Bank and USAA Savings Bank, both FDIC insured. Trust services provided by USAA Federal Savings Bank.
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