4 Helpful Gifts to Help Young Adults Improve Their Financial Future

Finding meaningful gifts for young adults can be challenging. What can you give them that’s impactful, useful, or has long-term benefits? No, not gift cards. Instead, here are four gift ideas to help young adults build a sturdy foundation to start their new independent financial journey.

1. The gift of student loan payments

According to a study by TD Ameritrade, 30% of millennials will delay moving out of their parents’ homes. The main culprit – student loans. Can you think of a more appropriate gift for a young adult? Not me.

Help empty the nest

Why not pay some of their student loans? Whether you give one month or all twelve, this gift to a young adult will allow them to save their income for retirement, a car, or to move out of your home! The gift of student loan assistance may be a gift to yourself as much as your young adult.

Student loans are a long-term drag, often paid back over ten years or more. Any assistance via gift to help pay them off sooner will have significant positive long-term benefits.

A note of caution: Don’t help to the detriment of your own finances or retirement. Taking out loans or withdrawing from your 401(k) to pay off their loans will help them but hurt you. I know you may want the kids to leave, but don’t go overboard. Take a measured approach, so everyone wins.

2. Retirement gifts for young adults

The earlier you start, the better, so why not help young adults with traditional or Roth IRA contributions? The limit for 2022 is $6,000 for young adults ($7,000 for the not so young adults 50+).

To make any traditional or Roth IRA contributions, the young adult must have earned income. Please note, however, if their earned income passes certain thresholds or if they are covered by an employer-sponsored retirement plan, it may result in certain restrictions. Let’s break it down.

Traditional IRA

When employed and covered by a retirement plan, the first step is to encourage them to participate in the highest amount possible. At a minimum, it should be enough to get a full match if their employer provides one. If covered by a retirement plan, and they also contribute to a traditional IRA, then…

If single with modified adjusted gross income (MAGI) of:

  • $68,000 or less, you may deduct the full contribution amount
  • between $68,000 and $78,000, you may take a partial deduction
  • More than $78,000, then no deduction is allowed

If you’re married and filing jointly and your MAGI is:

  • $109,000 or less, you may deduct the full amount
  • between $109,000 and $129,000, you may take a partial deduction
  • more than $129,000, then no deduction is allowed

Roth IRA

The Roth IRA isn’t dependent on being covered by an employer’s retirement plan, but does have income restrictions.

If you’re single and your MAGI is:

  • less than $129,000, you may make the full contribution
  • between $129,000 to $144,000, a partial contribution
  • more than $144,000, no Roth contributions are allowed

If you’re married and filing jointly and your MAGI is:

  • less than $204,000, you may make the full contribution
  • between $204,000 to $214,000, a partial contribution
  • more than $214,000, no Roth contributions are allowed

Gifting traditional or Roth IRA contributions to a young adult is a great way to provide a gift that will produce years of growth that can result in significant retirement benefits.

3. Set them up with a financial plan

Young adults often don’t know what they don’t know. So how can they be ready to be financially prepared adults? They risk making uninformed financial decisions, and it could cost them. Designing a plan and strategies to prevent missteps, reach goals, and develop good financial habits will pay dividends (literally!) later in life.

The perfect time for the young adult

Although some may disagree, the best time to gift a financial plan for a young adult is after they’ve been working for a few years and have a better grasp on their career and life goals. A bright-eyed and bushy-tailed college graduate starting their first job could certainly use some important recommendations, but I don’t think an in-depth comprehensive financial plan is necessarily beneficial. In fact, it may even be too much for a young adult to wrap their head around.

Allowing the young adult a few years to grow, learn, start to become more independent, and most importantly, start to envision their future – that’s when a financial plan can be effective.  The young adult has more buy-in with the financial plan because they can picture the results.

Check out the Certified Financial Planner Board of Standards, The National Association of Personal Financial Advisors (NAPFA), or the Financial Planning Association (FPA), to connect with a trusted fee-only, fiduciary, CERTIFIED FINANCIAL PLANNERTM professional (just like us, hint, hint) who will create a plan for good financial habits.

4. Health Savings Account loophole

There’s a unique loophole that allows families to contribute to both their child’s HSA at the higher family rate of $7,200, while still funding their own HSA at the family rate of $7,200. There are three conditions to use the loophole:

  1. The family must be on a high-deductible health care plan.
  2. Your child must still be on your health care policy. Remember, parents can keep their children on their health care policy until the child turns 26 years old. 
  3. The child cannot be a dependent or file a joint return. Bear in mind, parents may claim their children as dependents provided they are a qualifying child, under 19 years old, or are a student under 24 years old. 

A limited loophole

This strategy is only available to families for a limited period. Most children don’t claim themselves until they are age 22, give or take. Once a child reaches age 26, they can no longer be covered by their parents’ health insurance. So this strategy is a thread-the-needle one limited to 3 or 4 years. Once they are on their own health care plan, their HSA contribution will be limited to $3,650. 

How it works

When a child is no longer a dependent on their parents’ tax return, they cannot use their parents’ HSA for expenses. However, since the child is still covered under their parents’ insurance, they can open their own HSA and contribute $7,200, the family contribution amount, just for themselves. That’s a crazy loophole.

It doesn’t matter who makes the contribution, the child, or their parents. However, only the child can take the contribution deduction since it’s their account.

Contributing an extra $7,200 to an HSA for a child for 3 or 4 years can add up. Imagine the benefits – either their own medical expenses, their future family’s, or if they really play their cards right, retirement medical expenses in 40 years – that’s a lot of years of compounding!

If you want to learn more about the benefit of an HSA check out 7 Ways an HSA Can Help You Now and In Retirement

4. Young adults need estate plans too

Estate planning isn’t only for the old, I mean, mature. Everyone, including young adults, needs to be thinking about how their assets will be distributed, or their wishes adhered to, in the event of a tragedy.

It also doesn’t have to do with net worth. You want to make things easier for the ones you love. That could mean avoiding probate or tough medical decisions. No need for anything complicated, just a few necessary pieces of paperwork to ensure a difficult situation isn’t made worse.

A young adult (or anyone) should always have a durable power of attorney and a health care proxy. Someone who can make health care and financial decisions in the event a person is incapacitated. 

Once a young adult has their first job, they need to think about beneficiaries regarding their company benefits, such as a 401(k) and life insurance. Everyone, not just young adults, needs to make sure they have primary and contingent beneficiaries named on each account. 

Yes, a young adult should have a will, even if they don’t have many assets. Otherwise, the court will decide who gets the assets. 

I’m leery of online do-it-yourself estate planning. There could be issues overlooked. Just spend a little extra for the personalized guidance of an estate attorney. 

Make gifts for young adults count

Cash and gift cards are the go-to gifts for young adults. They are certainly helpful, but instead, you can choose to make a more significant impact on their financial well being. You can make financial gifts for young adults that are more meaningful for both you and the recipient. 

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