Graduation season is right around the corner and nearly 2 million students are expected to walk across the stage to claim their bachelor’s degree. If you’re planning on giving a gift to your child or another special grad, money’s always a popular choice. Instead of just handing them an envelope full of cash, consider one of these alternative graduation gifts instead.
1. A starter emergency fund
Everybody needs to have a little money stashed away in the bank as a buffer against life’s financial storms. When you’re fresh out of college and you’re on the hunt for your first job, having that cushion can keep you from ending up in debt if an unexpected expense pops up.
We recommend having an emergency fund of three to six months’ worth of expenses, but it’s up to you to decide how much seed money you want to provide. If they don’t have anywhere to keep it, steer them towards an online savings account since these tend to charge fewer fees and pay a higher interest rate than brick and mortar banks.
If you’re giving money to one of your children, setting up a joint account might make sense if you plan to continue adding money to their savings. At some big banks, including Chase, you can’t make cash deposits into accounts that don’t belong to you.
2. A CD ladder for long-term savings
In addition to an emergency fund, grads also need to have separate accounts for other goals, like saving for a down payment on a home or money for a new car. That’s where certificates of deposit can come in handy.
A certificate of deposit is an interest-bearing savings vehicle that’s designed to be used for the long-term. When you put money into a CD, you agree to leave it alone until it matures. Once it reaches the maturity date you can cash it out, along with the interest you’ve earned.
Setting your student up with a CD ladder makes it easy for them to keep earning interest until they need to use the money. For instance, you could invest their graduation cash in five CDs with 6, 9, 12, 18 and 24 month terms. When the first one matures, they can roll it over into a new term if they don’t need it. The longer the terms you choose, the more interest their savings will earn.
Tip: If your grad pulls money out of the CD before it matures, they’ll have to pay a penalty which is usually equal to six months’ worth of interest.
3. Roth IRA
When it comes to saving for the future, millennials overwhelmingly realize how important it is to get started early. According to a 2014 survey from Transamerica, 70 percent of millennials are actively saving in their employer’s 401(k) or another retirement plan. Gifting money for a Roth IRA can give your student’s fledgling nest egg an extra boost.
A Roth IRA is funded with after-tax dollars, which means there’s no deduction for contributions but withdrawals are tax-free. That can work to their advantage later on if they’re earning a substantially higher salary once they retire.
Even if they can’t max out their Roth every year right away, you’ll be doing them a big favor by getting them started now. For example, let’s say you give them $1,000 to open an account and they put in another $1,200 a year. If they start saving at 22, they’ll have nearly $340,000 in their account by the time they’re 65, assuming a 7 percent annual rate of return.
Tip: Single graduates who earn less than $30,500 for 2015 may be able to get a saver’s credit on their taxes for some or all of their IRA contributions. The income limit goes up to $61,000 for married couples who file joint returns.
4. Individual stocks, mutual funds and bonds
In addition to funding a retirement account, young adults should also be looking at investing if they’re serious about building wealth. Gifting them with individual stock shares or money to invest in mutual funds or bonds is a smart way to help them get ahead of the game.
Sites like Oneshare and GiveAShare offer hundreds of stocks to choose from if you want to buy individual shares in a particular company and don’t mind receiving paper certificates. If you want to invest more than just a few dollars, Betterment allows you to purchase stocks and bonds and transfer them directly into your recipient’s online account.
If you prefer to get them started with mutual funds instead, you’ll want to shop around and find the best brokerage so they’re not paying a ton of fees on their investment. Keep in mind that if you want to gift mutual funds, you’d have to buy them and then transfer them to the recipient. If you don’t want to fill out all the extra paperwork it might be easier just to give your grad the money and guide them towards the right fund.
Be aware of the gift tax rules
Offering up money as a graduation gift can potentially impact your own tax situation so you want to be clear on what the rules are. Generally, the gift tax applies when you give someone money in excess of the annual exclusion limit. For 2015, you could gift up to $14,000 to someone without triggering the tax.
There’s no cap on the number of people you can gift that amount to so if you have multiple students graduating, you can make gifts to each of them. If you’re married, you and your spouse can gift up to $28,000 jointly per student. Knowing what the limits are can help you plan your gift-giving strategy so that it doesn’t result in any tax headaches.
If you’ve got a student who’s on the verge of graduating, which of these financial gifts are you most likely to give? Tell us how you plan to get your grad off on the right foot in the comments.