Giving the Gift of Retirement: Small Sums, Lifetime Assets

By James O'Brien.

Want to make a difference in your high-school senior's life, one that will grow into something even more significant as time goes by?

Here's one way. Give the graduation gift of a retirement starter account. You're not only saying something meaningful about a young person's future, right now, you're creating a lesson that could blossom intoa discipline that lasts a lifetime.

The notion is as uncomplicated as forming a good habit. With even a modest initial amount, a starter retirement account stands to promote a positive relationship between your gift's recipient and the concepts of savings and investing.

With that in mind, let's look at some simple ways that you can spend $1,000 (or less) to create a beginning retirement fund, one that stands to grow many times over before its receiver finishes his or her working career.

Gifts to Grow On: Starter Retirement Options

What can be complicated on a practical level, when it comes to giving a starter account as a gift, is choosing the investment vehicle itself. What follow are two options that retirement gift-givers can consider.

• UGMA/UTMA Account: Often associated with college savings, these can work as a starter retirement instrument as well. By establishing a brokerage account under the Uniform Gift to Minors Act or the Uniform Transfer to Minors Act  the version that applies will depend upon which state your giftee calls home  a parent, grandparent, or guardian can create a retirement starter account with negligible impact on taxes for all. The IRS won't tax you, the giver, for a gift as small as the one we're considering because gift taxes typically kick in at $14,000 , and income tax for the receiver doesn't apply to the first $1,000 in the account. The next $1,000 is taxed at the minor's rate  usually 15% until age 19, or 23 if he or she is a student. Anything beyond $2,000 is taxed at the parents' rate until the recipient reaches age of majority  ranging from 1825 years old, differing by state. As the giver, you appoint a guardian to oversee the account (it can be you). Control transfers to the receiver at age of majority.

• Roth IRA: Want a specific retirement-only vehicle that can be established at a young age? A Roth individual retirement account allows a gifted investment to grow tax free for as long as 40-50 years. The key to this vehicle is that your young person needs to have earned income during the year that contributions are made  including the first one, your contribution that starts the account. The recipient's income determines the contribution cap, especially at lower levels. In our modest-gift model, you just need to know that the contribution limit is dollar for dollar for annual earnings less than $5,500 . That is, if your nephew is the giftee and he earned at $1,000 mowing lawns over the summer, then the contribution limit for starting the account that year is also $1,000. When your recipient reaches age 59-and-a-half, he can make withdrawals from the account on a penalty- and tax-free basis. In this regard, the penalty works to deter the recipient from taking it before retirement, whereas an UGMA/UTMA account comes without that incentive.

So, how much does your gift stand to grow?

Think of it this way: create one of the preceding accounts in the amount of $1,000 for your young person at age 17, and, in our example, if the annual returns are set considered to be 7% for 60 years (we're figuring a 25% tax rate on the individual, though our UGMA/UTMA account-holder might get a few years reprieve) it would still work out to nearly $30,000 at the end.

And that's based on not contributing another dime. Which is probably unlikely, especially if your recipient sees how the account can develop over time. Even at the most conservative end of the contributions spectrum, however, say your receiver put in just $500 per year - he or she would have nearly $250,000 waiting at age 67.

In both cases, we figured results using one of the numerous online retirement-returns calculators. Using the same kind of tool, you can figure your own account endpoints based on different timespans and contributions.

These considerations bring in one of the other powerful kinds of returns that come with the gift of a retirement starter account  the opportunity to teach and learn. That is, with copies of statements on a monthly or quarterly basis, you can further enhance your gift by reviewing investments and growth together and/or with a financial advisor. At this point, you're illustrating the engine that is compound interest, and perhaps also introducing the concepts of company research and how stocks perform over time.

The retirement gift: it is a promise on the future, and when added to the good habits it helps to reinforce you are most certainly changing your recipient's future for the better.