Back in 2020 I wrote an article titled, "How to Leave a $1 Million Legacy to Your Children or Grandchildren with Only $10,000."
How about we improve upon this outcome by several million dollars?
I can’t remember the last time I thanked our Congress, but after coming up with a novel idea to the new rules around the Secure Act 2.0, maybe we all should. There is now a tangential approach that can feed into our original strategy.
First, let’s point out the original strategy is a powerful tool for parents and grandparents to help set up the next generation. This new idea is one that can be layered on top of the original game plan that can dramatically improve the outcome.
Let’s quickly recap what the original article laid out:
The approach calls for setting up a custodial Roth IRA Account for your child/grandchild. The idea is to contribute $10,000 into a custodial Roth account by the time they are 18 which, when properly invested, it could grow to just over a $1M over the course of their lifetime. And when the money is taken out during retirement, they pay zero taxes on the million-dollar gain. (Link to original article here).
There is one caveat to this strategy, the child/grandchild must have what the IRS considers “earned income” to be able to contribute to any type of retirement account. And as such, the account cannot be opened and funded until they are of working age. Still a great plan but doesn't allow tax-free investing until they are of working age. Even with this caveat, it allows the possibility of turning $10,000 into $1,000,000.
Now let’s improve upon it.
This is where the new strategy comes in and complements the original. The Secure Act 2.0 that was recently passed by Congress is the vehicle to do the early lifting. It now allows up to $35,000 to be rolled over from a 529 (education investment account) into a Roth account. So, what this new law does, it now allows you to get funds invested much earlier, and therefore there is more time for the money to grow.
Here are the simple steps:
*An additional benefit: Gifted money from family and friends can now be turned into retirement savings.
Doing some ‘time value of money’ calculations with this earlier starting point now allows the portfolio to grow to over $4 million dollars.
Using the Secure Act 2.0 now improves the original outcome from $1 million to $4 million dollars.
-Paul R. Rossi, CFA
*Keep in mind there are additional details that investors/parents/grandparents need to understand before implementing this or other strategies.