Personal Finance

Give Your Graduate a Roth IRA

You can’t wrap it and it won’t fit in a card, but a Roth individual retirement account (IRA) is a graduation gift that can last a lifetime. What better way to encourage your new graduate to invest than to provide a head start on retirement savings.

Let’s say you contribute the maximum amount of $5,500 to a Roth IRA when your graduate is 21. Assuming a hypothetical 6% return and no withdrawals, the account could be worth $71,420* at age 65, even if no further contributions were made. And all the money in a Roth account can potentially be withdrawn income-tax free.

Roth Eligibility 

You can open a Roth IRA for a graduate who has earned income at least equal to the amount contributed. Earned income from a salaried job or from odd jobs, such as yard work and babysitting, qualifies. Your graduate must keep accurate records of income that doesn’t come from a salaried job and declare all earnings at tax time. 

Tax Considerations 

Contributions to a Roth IRA are made after tax, so they’re not deductible. However, contributions can be withdrawn tax free at any time. Earnings generally can’t be withdrawn before age 59½ without paying tax and a possible penalty, although there are exceptions. One exception that might add value to your gift: After a five-tax-year holding period, up to $10,000 (lifetime limit) of earnings may be withdrawn tax and penalty free to pay first-time home-buying expenses.

Growth Potential 

Withdrawals from a Roth IRA aren’t required during the account owner’s lifetime, so the money in the account can potentially continue to grow income-tax free until the account holder needs the funds. A Roth IRA can be passed on to future generations and retain its tax advantages, although beneficiaries must generally take annual distributions. 

Before you give a Roth IRA for graduation, consider whether your graduate is mature enough to appreciate your gift.

* This hypothetical example is for illustrative purposes only and is not representative of any particular investment. Your returns will be different.

Source: DST

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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