Got Graduation Gift Money? Here’s Why a Roth IRA Is Such a Lucrative Place to Stash It

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Put Your Grad Money to Work for Your Future Self

If you’re a new high school or college graduate receiving gifts of cash and checks, now’s the perfect time to make your money work for you. Instead of spending it all now, consider stashing some in savings. Even better, if you’ll earn income this year, you can invest some in a Roth IRA to take advantage of a rare chance to grow your money tax-free for years—or even decades.

Why Roth IRAs Are So Powerful for Young People

A Roth IRA is a special investment account that offers tax-saving benefits, helping you build long-term wealth for retirement or a first home. What makes a Roth IRA stand out is that it lets you invest and grow your money tax-free. With a savings account, you must pay taxes every year on the interest you earn. But you never pay taxes on what you earn in a Roth, even when you withdraw the money.

Contributions to a Roth IRA must be made with after-tax dollars—meaning you’ve already paid or you will pay any taxes you owe on the money you put in. For instance, the money in your paycheck may already have taxes deducted from it before it ever hits your bank account. Or if you have, say, freelance income, you’ll pay income tax on that every quarter or at the end of the year.

Roth tax rules are different from those of a traditional IRA or 401(k). With a traditional IRA or 401(k), the money you contribute is deducted from your paycheck before taxes are taken out, but you pay taxes on the money when you withdraw it—including on any of the account’s earnings.

Roth IRAs can be especially lucrative for young people because if your taxable income is below $11,925 (for single filers) in 2025, you’re in the 0% tax bracket. That means you owe no tax this year.

In practical terms, this allows you to contribute to a Roth IRA without paying any taxes upfront. Yet, all the benefits of tax-free growth and future withdrawals still apply. This allows you to escape taxes entirely on your Roth contribution. And over the years, that tax-free growth could accumulate into substantial wealth.

How to Use Graduation Gift Money for a Roth IRA Contibution

In 2025, you can contribute up to $7,000 to a Roth IRA, as long as you have at least that much in IRS-reported earned income (i.e., paycheck income). If you earned less, you can contribute up to the amount you made. Graduation gifts don’t increase the contribution limit, but you can use your graduation money to make your Roth contribution (up to the IRS limits).

For example, if you make $9,000 in 2025, you can contribute up to $7,000 toward a Roth IRA. But any portion of that $7,000 contribution can come from graduation gifts.

However, it’s important to note that contributing to a Roth IRA is a limited-time opportunity. Each year that you’re eligible, you can contribute up to the amount of your total income (or up to the $7,000 cap), but this resets annually. If you don’t contribute the full amount in a given year, you can’t carry over the unused portion to the next year. It’s a “use it or lose it” opportunity.

You can make your Roth IRA contributions at any time during the year and in as many installments as you’d like. Plus, you can contribute up until the April 15 tax filing deadline the following year. Then each year you earn additional paycheck income, you can contribute again, if you choose.

Roth IRAs Are a Long-Term Investment

Keep in mind that a Roth IRA is a retirement account, so there are restrictions on withdrawals. You can access your money at any time, but you’ll face taxes and penalties if you make any withdrawals before you’re 59½ years old. An exception is that if you’ve had a Roth IRA for at least five years, you can withdraw up to $10,000 penalty-free for a first-time home purchase.

Ideally, it makes sense to contribute to a Roth IRA with money you can afford to leave for decades, allowing your tax-free earnings to build wealth over time. But if you need to access your Roth funds earlier—for a home purchase or other important need—you can always withdraw the contributions you made.

Combining Short-Term Savings With a Roth IRA Is a Smart Graduate Move

If you’re unsure how to use your graduation money but want to ensure some is saved for the future, consider combining strategies. For example, you could put some of your gift money into a top high-yield savings account for easy access, or open one of the best nationwide CDs for money you don’t need for a while. Meanwhile, you could allocate a portion of your grad gift money to a Roth IRA—turning your graduation funds into a gift that keeps giving for years to come.

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