Think outside the gift box – Giving a Roth IRA to a graduate

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What if your gift to a graduate was potentially worth tens of thousands of dollars in a couple of decades? That’s that kind of gift you can give with a Roth IRA.

Graduation parties and open houses fill our social calendars during the month of June. So do trips to the store for congratulatory cards, and trips to the bank to fill those cards with cash gifts!

What if your gift to a graduate wasn’t something with Ben Franklin’s picture on it, but potentially worth tens of thousands of dollars in a couple of decades? That’s that kind of gift you can give with a Roth IRA.

How do I give the gift of a Roth IRA? Here are six points you should consider before giving such a gift.

First, the graduate must earn income during the year, at least the equivalent of the annual contribution to the Roth IRA.

Second, the age of your graduate is important. If the grad is a minor you can open the account for them; if the grad is 16 or older, they must open the account with Catholic United themselves, but you can provide the money to fund it (keeping in mind the first point about income).

Third, plan the funding of the Roth IRA. After the initial minimum deposit, determine how the Roth IRA will be funded in the future. Will the graduate fund the annuity themselves, or will you provide the cash? Don’t forget that Roth IRAs can be funded with a monthly electronic funds transfer (EFT) from a bank account.

Male college graduate with parents. Shutterstock

Fourth, know the terms of the Roth IRA. Unlike many companies, Catholic United offers Roth IRAs with no account fees or maintenance charges. Roth IRAs do come with surrender fees for five to seven years, depending on the type of Roth IRA you choose. Your local Sales Representative can explain these to you.

Fifth, review the illustration together. Your graduate might not understand, and therefore not appreciate, this gift of deferred income. As a culture, we are very focused on instant gratification, but a Roth IRA illustration is a good way to show young adults how money can grow steadily through regular contributions and interest payments. Use the illustration that comes with the annuity to see how the money will grow. Review the principles of saving and compound interest with them. For example, a Flexible Premium Roth IRA purchased with a $2,500 initial contribution and a $300 minimum annual contribution thereafter will have a guaranteed cash value of more than $10,000 in 20 years.*

Sixth, Roth IRAs come with tax advantages that your grad can use in the future. Withdrawals can be made from the account tax-free and without federal penalty to help finance a first-time home purchase or to pay for higher education expenses that qualify under federal guidelines.** Again, take time and the surrender fees into consideration. Roth IRAs are designed to be long-term savings tools, not regular savings accounts.

There are certain limits and restrictions to a Roth IRA, including income requirements, income limitations and annual contribution limits. Your local Catholic United Sales Representative can give you the right guidance on how a Roth IRA will provide your graduate a long-lasting and meaningful gift.

*Assuming an annual percentage yield of 1.5% and no withdrawals are made from the account. Catholic United IRAs are individual retirement annuities. ** Withdrawals are subject to contractual surrender charges for the first five to seven years, depending on the type of contract purchased. Federal and state penalties may also apply in certain situations. See the contract and disclosure documents for details. Form 11A-1. Catholic United Financial is not permitted to give tax or legal advice. The information given is based on our understanding and interpretation of laws and regulations currently in effect. You may wish to consult your personal tax or legal advisor with questions about your specific situation.

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