The springtime rites of passage are here: baseball, post season basketball and “pomp and circumstance.” College graduation ceremonies are starting to take place, and maybe you’re wondering, “What gift should I give my new college graduate?” An electric razor, an iPad, a security deposit for an apartment? Here’s an idea: How about helping your kid become a millionaire? That’s right, a millionaire!
It’s actually easier than you think. First, set up a Roth IRA for your college graduate. Then, make certain that you or your graduate (if he or she’s landed a job) fund it by contributing $3,500/year. After 45 years and assuming the investment gets a 7 percent non-guaranteed return, the account will be worth a little over one million dollars. Mind you, that’s one million tax free dollars for your young graduate at retirement.
A brief primer on Roth IRAs: one must have earned income to contribute to one. So if your college graduate is living at home, not working and doesn’t find employment for several years, he or she can’t do a Roth. Conversely, if they earn a small amount of money–say $3,500–they are eligible for a Roth IRA, and you (the parent) can make the contribution from your money. I suggest, though, that your child contributes a portion of the money to have “skin in the game” and ultimately takes over 100 percent of the contributions.
Many people will say, “Let’s wait until my child is more mature and start the contribution 10 years from now.” However, what most people don’t realize is that waiting 10 years at the same contribution level and the same 7 percent return results in an account worth about $500,000. In other words, waiting ten years and missing $35,000 in contributions cost your kid a half million dollars! Ouch. In my business, we call that the time value of money.
So as you’re pondering a graduation gift, you may want to consider giving your child an investment that will give them security and peace of mind through their golden years.