Recently, an investment savvy friend of mine, looking to start his young graduate on the road to wealth, was evaluating the benefits of a Roth IRA vs traditional IRA.
You see, setting up investment funds for young people is the latest trend in graduation gifting. Not only does the growing value of one of these accounts provide the gift that keeps on giving, but it helps teach young people about the importance of saving and investing.
Of course, making the decision to give such an important gift may not be as straightforward as it first appears. There are some important issues that you must first take into consideration before heading over to your banking institution.
First, and most important, is your relationship with the graduate. How well do you know their current financial needs?
If you're the parent you'll probably be aware that you son or daughter is going to have some expenses as they head out into the adult world. Paying off student loans, relocating for a new job or just buying new clothes for a job search can mean your child might be better able to put a cash gift to immediate good use.
However, if you're not the parent, but a beloved family member, you won't get a lot of "say-so" in how your monetary gift will be spent. Since your intentions may be more future-oriented, setting up an investment fund may just be the way to go.
Next, trying to decide between a Roth IRA vs traditional IRA means determining if the graduate would benefit from the pre-tax savings of a traditional, or after-tax benefits of a Roth.
Regardless of which account you decide to open, you'll need a minimum contribution of $1000.00 to get what's known as a Custodial IRA going. As the parent or guardian, you will be in charge of managing the funds on behalf of the child.
That being said, however, you must be sure the graduate is employed and has an earned income. Graduation or birthday checks, as well as, allowance, don't qualify as earnings.
The great thing about having one of these savings accounts is that the young person can easily develop the discipline to contribute $100.00 per month just by setting up automatic withdrawals from their paycheck into their savings account.
If their place of employment doesn't offer this type of payroll service, the young person can still be encouraged to make regular contributions simply by making it clear how, with this early head-start, their earnings could potentially benefit from all the years of tax-deferred earnings.
It's important to be aware that any and all monies placed in the Custodial IRA are considered to be an irrevocable gift and are the total property of the child. Furthermore, once the child reaches the age of majority as determined by your state (i.e., 18 or 21), you will no longer be in charge of the funds and the young person can choose to withdraw any and all assets as they see fit...even though the purpose of the IRA is to provide for their retirement.
If you've made all the necessary considerations, decided between a Roth IRA vs traditional IRA, then you're probably ready to make a gifting decision which can have a significant impact on the financial future of your graduate. After all, isn't the future what graduation is all about?
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