Graduation Gifts That Make Cents
It's May and with it comes the annual rites of high school and college graduation.
It's an exciting time in the life of a graduate to be sure, and one that affords his or her family and friends the opportunity to congratulate and celebrate them with a gift.
I recall those times fondly, but as I look back, I think with amusement of the lifetime supply of pens, money clips, umbrellas and other assorted gifts that I received. No, seriously, I really do still have some of those things that have yet to be used, I received so many!
As a financial planner, I can't help but wonder if maybe there aren't some gifts with much more lasting value and that would help the graduate on to a more solid financial future. Here are some thoughts on that.
U. S. Savings Bonds – many people, hard as they try, simply cannot decide upon a gift for someone, so they punt and give money. Of course, I don't know of anyone that doesn't like that.
But in a variation of that you could try U. S. Savings Bonds. Bonds can be bought in electronic format in amounts from $25 to $10,000 (they will even give you a gift certificate), and they earn interest.
They also encourage a savings habit as they have to be held at least a year, and if cashed before five years, there is an early withdrawal penalty. So an incentive is there to save.
You can get more information and buy these bonds at www.treasurydirect.gov. Come to think of it, I still have some savings bonds that I received as graduation gifts. Maybe I ought to check into that!
Roth IRA Contribution – for parents or grandparents wanting to really make a difference, a Roth IRA makes a great graduation present of lasting value! Contributing to a Roth IRA can give your graduate a huge head start on building tax-free retirement funds.
Your graduate will need to personally open the Roth IRA, but you can give him or her the money to contribute (up to $5,500), even sending it directly to the account. One caveat though, to qualify the recipient must have income from a job during the year, but the money can go in now even if the work doesn't start until later.
For instance, let's say your son will have a job after graduation and will earn $4,000 before the year is out. You can make up to a $4,000 contribution to the Roth now as a gift. If for some reason he ends up earning less than the contributed amount, he will have until October 15th of the next year to withdraw the excess (plus earnings) without penalty, but still will have what's left to build a nest egg upon.
Life Insurance – what? Life insurance? Isn't that a bit morbid? On the contrary, the purchase of a life insurance policy on your child may make good financial sense. You might be surprised how small of an outlay it takes to buy a nice size policy for a young person.
For instance, Pete Pallone of Pallone Financial Services in Heber Springs, showed me an illustration where a $250K Indexed Universal Life policy could be obtained for an 18 year old male for as little as $720 per year, or for a one-time lump sum payment of just under $11K that same policy could be purchased (costs for females are even less).
"When you buy permanent life insurance on a child, the child benefits from the fact that you are locking in a premium while they are young and healthy." says Pallone. "Many people don't understand how difficult it can be to purchase a life insurance policy at an affordable rate once even common health issues arise such as obesity or high blood pressure."
529 Education Plans – for high school students, a contribution to a 529 plan account may still be valuable even though college is right around the corner. For starters, even contributions made close to the time funds will be needed will earn tax-free income while held in the account waiting to be used for qualified education expenses. And, there is the added benefit that a contribution up to $5,000 per contributor may be deductible for state income tax purposes, subject to specific state rules.
Lastly, here's a great, and practical, tip from John Barnes, Sr. VP at Raymond James in Little Rock and a 20 year member of the Pulaski Technical College Board of Trustees. He likes debit cards as gifts to college students to teach fiscal responsibility. States Barnes, "No college student should go to college with a credit card account or checking account. Debit cards can be loaded monthly, and the student forced to live within the agreed amount."
Word to the wise!
